2: Social investment briefing with NPC event round-up
On 22 October BDB hosted a breakfast briefing with New Philanthropy Capital (NPC), a well-known charity think tank and consultancy that seeks to increase the impact of charities and funders.
Jonathan Brinsden, a Partner in our Charites Social & Enterprise Team, introduced the briefing with an overview of the developments in the social investment market, the most recent being the Charities (Protection and Social Investment) Bill, which will give charities a power to make social investments, unless they choose expressly to exclude it in their governing document.
What is social investment?
This area is full of jargon (much of which can be navigated using the helpful Big Society Glossary) and there are various definitions of social investment. Abigail Rotheroe, NPC explained that their preferred definition is:
“social investment is the provision and use of finance to generate social as well as financial returns”
What social investment means, in practice, is that investors often decide to accept or “trade off” lower financial returns for evidence of social returns i.e. social impact.
The vast majority of social investment is provided in the form of debt, including secured and unsecured loans (which make up 90% of the market). Less popular forms include equity (which usually takes the form of shares and cannot therefore be offered by the majority of charities, which cannot issue shares), bonds and social impact bonds.
Who receives social investment?
Any charity or social enterprise that generates income (which it can then pay to investors) can receive social investment.
Social investment can be used to buy assets that generate an income; fund income-generating projects; provide working capital, which can prove particularly useful for organisations paid in arrears for project work; expand services; and provide risk capital, e.g. to support organisations paid by results at the end of a long-term contract.
Who supplies social investment?
Social investors include individual donors, banks (often in the form of standard bank lending), government and also charities and social enterprises themselves, which can make social investments in other charities and social enterprises. In addition, key players in the market are intermediaries (e.g. Big Society Capital, a wholesale financial institution which uses investments to finance intermediaries like Nesta, which then invest in charities and social enterprises).
Social investment can be an attractive opportunity for funders to recycle their money (unlike a donation or a grant, social investment ordinarily enables you get some or all of your money back), invest in innovation and increase their social impact. Social Investment Tax Relief makes social investment particularly attractive to individuals, who, subject to certain conditions and restrictions, can deduct 30% of the cost of their investment from their income tax liability.
NPC explained that those interested in making social investments range from:
- existing funders who are already providing grants or donations to an organisation but then decide to replace or supplement that existing support with social investment; to
- mainstream financial investors whose investments already have some element of social responsibility or ethical investment, who would like to generate greater social impact from their investments.
Views from the sector – what are the challenges?
The social investment market is becoming more structured and transparent and methods to measure social impact (i.e. the social return on the investment) are improving. Together with government support and the expectation of continued low interest rates, these factors should all help to encourage further growth in the social investment market. However, this area still faces challenges, as illustrated by some of the questions raised at our briefing:
- Potential to damage existing funding – There remains a nervousness that social investment will act as a replacement for, rather than an addition to, existing grants and donations and so actually reduce the funding provided to the sector.
- Culture shift for those seeking social investment – The breakfast briefing was attended by a mixture of trustees, charity executives, advisors and donors and a concern shared by many was the internal cultural shift required for any charity considering receiving social investment. A couple of the questions identified by the participants were: Does the Board of Trustees have the right skills set to understand and take advantage of social investment? In order to demonstrate that they are furthering their objects for the public benefit charities will always need to evidence their social impact, but is the process different for social investments and will charities need to measure that impact more precisely (and, if so , how)?
- Governance considerations for charities making social investments – Our experience is that there is often a confusion about where the decision sits within an organisation’s existing governance structure. Should the decision be made by the Investment Committee but query is that the right forum to consider the intended social impact of the investment? Or, should it be made by the Grants Committee but query does that committee have the appropriate skills to consider the financial benefits and risks attached to the investment?
Preferably, trustees should take a more holistic approach to how they use their assets and further their objects and the key point for trustees to consider is whether the proposed social investment would primarily benefit the public (the beneficiaries of the project into which the charity is investing) or create significant private benefit (boost the income of the recipient organisation without having a significant social impact).
6 November 2015