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August/September 2013: Social engineering

Written by Joe Lepper
August/September 2013

David Cameron has described social investment as “a great force for social change” and has boosted the market with some significant changes. But while it offers much to the sector, there are some stumbling blocks ahead, says Joe Lepper


DELEGATES AT the first G8 conference on social impact investing in June were left in no doubt about Prime Minister David Cameron’s desire to see rapid growth in the UK and global social investment market.

In hailing social investment as “a great force for social change on the planet” he announced a package of measures aimed at boosting growth and providing a call to action for other world leaders.

A £50m Community Assets Fund, to provide grants and loans to help support
local community projects has been pledged. This will be launched next year by the Big Lottery Fund and Big Society Capital, the social investment bank set up by the government.

A consultation on social investment tax relief, which the government estimates could generate an extra half a billion pounds in social investments over the next five years, has also started. In addition the world’s first, online Social Stock Exchange was announced.

Investors are also enthusiastic, with around 80 companies and organisations including Deutsche Bank, Morgan Stanley, Credit Suisse and Goldman Sachs
signing an open letter congratulating the PM after his speech and signalling their commitment to growing the social investment market.

Lost in translation
But according to a Big Lottery Fund, Big Society Capital, City of London Corporation and government commissioned report published in July called Growing the Social Investment Market: The Landscape and Economic Impact, much of this enthusiasm has yet to translate into action.

Those social investment and finance intermediaries surveyed for the report said they were only able to meet half of the demand for finance made by social ventures.

Katy Hill, social investment advisor to the City of London Corporation, says there is still unease among investors due to a perception of high risk in financing this relatively new form of investment. “The concept is still relatively new and untested: and if it is something that is unknown, then the perception is there is a higher risk.”

However, Growing the Social Investment Market: The Landscape and Economic
Impact, does note that at least some progress has been made. This found that the UK social investment market grew by around a quarter to total £202m in 2011/12. This involved around 765 deals, which helped fund 340 social ventures, create 6,870 full time equivalent jobs and contributed £58m to the UK economy.

Another report, published in June this year by the Charities Aid Foundation and
called Unlocking the Power of Creative Capitalism Through Social Investment, also laments the lack of rapid growth in social investment and continuing uncertainty among investors.

Regulatory restriction
A lack of clarity around social investment regulation is a key barrier, says this report. While currently some social investment deals fall under the remit of the Charity Commission, others fall under the remit of the Financial Conduct Authority.

Hill says: “The problem is there isn’t a great regulatory structure for social investment’s mixed motive of making money and getting a social return. At the moment in the regulatory environment you either give to a charity or you make money.”

Casey Lord, acting head of Charities Aid Foundation’s social investment fund
Venturesome, adds: “A lack of regulation erodes confidence among corporate investors as they can’t see it currently as a market that is being regulated.” Both Lord and Hill disagree with creating a separate social investment regulator and instead believe a specialist framework can be developed within the existing regulatory system.

This lack of specific regulation also means investors are left confused “as to what social investment actually looks like” says Lord, who adds: “There is a real need for a clear, practical definition.”

Giving investors recent examples of successful social investment deals is key to this. Work is already underway to provide this through a charity and social enterprise focused investment index, called Engaged X. This is currently in development and is set to launch as a pilot this year.

Those supporting it include the City of London Corporation, social investment specialist fund manager Social Investment Business and minister for civil society Nick Hurd.

This has the potential to have an edge over the Social Stock Exchange, which focuses on social ventures by publicly listed companies. The proposed social investment tax relief is another measure that has the potential to dramatically increase the number of deals.

Lord describes it as a “huge opportunity” but warns that if the tax breaks involved are too attractive “it could trump Gift Aid.” She adds: “What I don’t want to see is it cannibalise donations in the sector.”

Charity collaboration
Another barrier to rapid growth of social investment is a lack of understanding between charities and investors of each other’s culture, says Hill. She calls
for greater collaboration between the financial and charity sectors to break through their jargon and better understand how they can help each other.

She says: “Simpler language needs to be used. There needs to be greater recognition of the different cultures. There is a real gap as charities are driven by their mission and City investors are accustomed to dealing solely with financial return.”

But while such measures may help boost investor confidence, NCVO head of policy and research Charlotte Ravenscroft, says more needs to be done to improve charity confidence in social investment. She says: “With proposals around tax relief we have seen a good amount of action to boost the supply-side but what about the demand side? There is a real need to make social investment more accessible for charities and encourage them to get involved.”

She wants to see interest repayments come down and for a greater use of “template funds” which are cheaper for charities and their financial intermediaries to set up. At the moment securing investment to tender for large public sector delivery contracts is still seen as too much of a gamble for many charities, she adds.

Sector support
The government has acknowledged that charities need encouragement to seek social investment. Among support it offers is the £10m Investment and Contract Readiness Fund, which hands out grants to charities and social enterprises for legal and consultancy costs involved in raising social investment.

But Ravenscroft adds: “We would like to see that support made available at an even earlier stage so that there is help for a wider range of organisations to better understand social investment and help them decide whether it is something for them to pursue.”

Dan Hird, head of corporate finance at ethical bank Triodos, says the Investment and Contract Readiness Fund is already helping the bank’s charity and social enterprise clients to access social investment. “We’ve five deals where the client has successfully got that fund. This means that cost of preparing themselves for social investment is not a prohibitive factor for them.”

Hird is still concerned that a number of myths remain about social investment, but believes that greater promotion of successful deals will help allay these. Such promotion would also help to show the tangible results of the concept of social investment, showing how it is transforming lives of vulnerable people as well as delivering a financial return.

“Charities are up for getting involved in social investment. They are looking at the few examples there are in the market with great interest but want to see more. The media wants examples as well.”

Sector deals
Hird says what the sector needs is more high profile deals in the next year or so to promote. “The private sector and charities sees social investment talked about but they don’t know what it really is without those examples. Without them this means that misconceptions, that it is risky or returns are poor, are allowed to develop.”

Among the few, recent examples of social investment is a partnership launched earlier this year between Triodos and Mencap subsidiary Golden Lane Housing to raise money to build homes for people with learning difficulties through a charity bond.

This successfully reached its target of £10m and was oversubscribed, says Hird. Factors in this interest from investors included its fixed yield of four per cent over five years, which allayed fears about risk or poor returns. Another was that the social benefit, of providing housing to vulnerable people, was something that was easy for investors to understand.

Hird says: “Also the charity has a strong track record of buying property, which further generated confidence among investors. As a result we got a lot of mainstream investors interested who may not have even known what social investment was before.”

Another example of a successful social investment deal this year was a £800,000 deal between Nottingham Building Society and Framework, which provides housing for homeless and vulnerable people. Through the deal the building society has lent Framework £800,000 towards completing a £1.1m project to build move on flats in Lincoln and Swadlincote, Derbyshire, that will help homeless people live independently.

The cost of the loan is kept low as it is being offset by savers’ investing in a special Framework savings account, where the lower the interest rate paid on their savings bond, the cheaper the loan to Framework will be. The building society has also waived its administrative and lending fees on the loan, to further bring the cost down for Framework.

Investment results
Framework chief executive Andrew Redfern, explains that the charity looked to social investment after being turned down for grant funding from the government two years ago. “We knew we had to look at other sources of funding when that happened. We started a relationship with the Nottingham as they chose us as their charity of the year. When we had the idea to set up a philanthropic investment we talked to them and they were interested.”

He estimates that over the lifetime of the loan Framework will save around £350,000 in interest repayments. The hope is that the move will give other investors greater confidence in investing in the charity. Already the Esmée Fairbairn Foundation has invested £500,000 in Framework as part of what
Redfern hopes will amount to around £10m worth of social investment for the charity over the coming years.

Of the new flats, six in Lincoln are set to be completed in November. Redfern hopes this will be a crucial event for national promotion of social investment, as “it will clearly demonstrate that there are real people being helped by this form of investment.”

But while social investment is proving crucial to the work of Framework, it is not suitable for all charities, warns Hill. “One of the myths is that it is the panacea of
everything. But many organisation will never be able to access social investment, they may not have sufficient assets or a regular revenue stream so will still need to be looking for other revenue streams,” she says.

She does, however, back Cameron’s assertion that successfully expanding the social investment could have dramatic long-term consequences for society. “If this works out this could end up shaping the way all businesses operate in the future, so that they are all looking to embed social benefit into their business,” she adds.

Joe Lepper is a freelance journalist



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