The government recently kept us all on tenterhooks (or at least that very small number of us who get excited about voluntary sector policy), waiting for their “Giving White Paper: One Year On” update. As I outlined in my previous post, apart from the very welcome news of an additional £40m there was nothing particularly new or eye-catching in this document, so the build up was perhaps a bit unfortunate. It came as something of a surprise to find out only a week later that, with no fanfare at all, the Cabinet Office also released a progress report on their social investment strategy. Indeed, so low key was this launch that I only heard about it via Twitter (despite spending a reasonable amount of my time on social investment policy).
This document is quite a lot more interesting than the giving paper progress report. Not only does it give a useful brief overview of what has happened over the last year in terms of social investment policy (which to be fair is quite a lot), it also gives a clear indication of where the government’s priorities lie in this area over the next few years. There is also a very useful round-up of all the investments made by Big Society Capital so far. I thought I would take a brief look at the key points in the document, and whether there are any outstanding questions or areas of concern. (And just to declare an interest: CAF Venturesome gets two mentions in the report in terms of investments made. Firstly the CAF Social Impact Fund, and secondly the deal with Oxford City Council to guarantee a loan to Arts @ The Old Fire Station).
Big Society Capital
Unsurprisingly, Big Society Capital (BSC) plays a starring role in the strategy update, as it is the government’s flagship achievement in terms of social investment policy so far. One might take some issue with the claim that “within just two years we have set up big society capital”, as this rather disingenuously ignores all the work that has gone on over the last ten years in developing the idea of a social investment wholesale bank funded from unclaimed assets. But, that quibble aside, it is still a big achievement to have actually got the thing up and running, and BSC clearly has huge potential in terms of developing the social investment market.
One of the most positive things in this progress report is the appendix which details investments made so far by BSC. This is encouraging, as given BSC’s importance to the market and its reliance on public money, it is vital that it remains as transparent as possible. In fact, the only slight criticism of the information provided is that there is no detail on the nature of the investment being made by BSC. Obviously there may be issues with commercial sensitivity, but as far as possible it would be good if BSC were able to provide details on how it is structuring deals so that others can benefit from its work through learning as well as investment. At this stage in a nascent market, knowledge sharing is absolutely vital.
Obviously the launch of BSC, with its potential pot of £600m, is the biggest development on the supply side of the market. However, the government has been clear at all stages that BSC cannot exist in isolation, and that to ensure the long-term sustainability of social investment there need to be further supply side developments.
The government’s aim is “to enable and encourage more high-net-worth individuals (HNWIs), charitable foundations and mainstream institutional investors to invest in social ventures. [Also,] to enable individual savers to support social ventures through new social ISAs or pension funds or through new mechanisms to invest in their local communities.” This is an ambitious goal, and needs to be broken down further as it conceals a lot of hidden complexity.
The aims of encouraging HNWIs (presumably those of an existing philanthropic bent) and charitable foundations to invest in social ventures seem sensible. These are the two groups most likely to provide significant new capital at this early stage, as their motivations make the move to social investment a natural extension of existing activities. There are similarities between the approaches needed towards these two groups (in terms of harnessing philanthropic motivations), but there are also a number of practical differences.
Perhaps the most important step in terms of widening the pool of individual social investors is to bring IFAs and wealth advisers on board, so that they can direct clients towards social investment where appropriate. This was a topic covered in an interesting recent report by NESTA.
In terms of increased social investment by foundations, the crucial element is to find ways to encourage Programme Related Investment (PRI). One of the keys here is to develop the expertise of charity trustees and clarify their legal position, so that they feel confident in taking advantage of the environment set by the new CC14 guidance.
Enabling mainstream institutional investors to make social investments seems a bit further off, although could be the making of the market in the long run, as the potential amounts of capital available are vast. The issue here seems to be developing the track record of social ventures and social investment funds to the point where their risk profile is lowered sufficiently to enable fund managers to invest. And this will just take time (and some forward-thinking investment managers!) Social investment will still probably only be seen as a niche or specialist area, but given the popularity of ethical funds, there would certainly seem to be room to grow.
Enabling individual retail investors to make social investments may actually be less difficult than getting institutional investors on board. Perhaps not in terms of the idea of “Social ISAs”, as there still seem to be quite a lot of challenges in terms of developing standardised, marketable products that combine financial and social returns (not least the yawning gap in public awareness of social investment and the existing regulation of financial services).
Where it seems as though things could move ahead more quickly is in the area of crowd-funded or peer-to-peer (P2P) social investment, which is mentioned in the strategy paper update as an area of future focus. It is easy to see how one could build on models like that of Kiva (which enables people to make micro-loans to individuals in the developing world), and develop platforms that allowed individuals to put money into social ventures with the hope of getting some financial and some social return. Crowdfunding has also been in the news in the US, where Obama’s JOBS Bill has recently relaxed restrictions on equity investment in companies in order to make it easier to do crowdfunding. This could be a real area of growth for social investment in the UK too.
A lot of the reports of what has been done so far in this progress report are on the supply side, but it seems as though the government’s attention is now turning towards the demand side, as they recognise the need to ensure that there enough credible investments actually available in the market.
Developing the demand side appears to have two major facets: 1) developing the investment readiness of existing social ventures and 2) ensuring that there is a healthy pipeline of new ventures that could subsequently be brought up to investment readiness. The former is an ongoing task, but there has already been some progress with the launch of the £10m Investment and Contract Readiness fund. This is a positive move, but there also need to be broader developments: for instance, in terms of public service delivery, it is important that where social investment approaches are taken (such as social impact bonds etc) commissioners and social investors factor in the costs of up-skilling the charities and social enterprises actually delivering the services so that in the future they are ready to accept investment of bid for contracts.
With regard to the second facet of developing the demand side, the government announces in this update that it is looking into the possibility of launching a “social incubator” fund to support the development of social innovation hubs around the UK. This sounds like a great idea, as these hubs would be ideal places to develop and test ideas for social innovations in an environment that provides the proper tools and support. That would hopefully lead to a greater success rate in terms of ideas being taken to fruition, and thus a wider supply of investment ready propositions.
Another aspect of developing the demand side is to build on an existing success and support the growth of Social Impact Bonds (SIBs) To this end, an “SIB Centre of Excellence” will be set up, which seems like a good idea. As I have detailed before, I think that SIBs are an extremely clever solution to a particular problem, but that problems may arise if people do not recognise the limits of their applicability. More work to develop knowledge and understanding of SIBs across government is therefore to be applauded. The only proviso is that this should not come at the expense of continuing to look for other ways to address the capital requirement issues that are thrown up by the way public services are commissioned (such as the working capital gap created by Payment By Results approaches).
Legislation & Regulation
The progress note reaffirms the government’s commitment to “reviewing the legal and regulatory barriers to social investment”. This appears to be primarily through the Red Tape Challenge and through the Treasury’s review of barriers to social investment. This is important, because it has become apparent in recent weeks that legislation and regulation are pressing issues when it comes to developing the social investment market. The proposed social investment amendment to the Financial Services Bill that is currently in the House of Lords is vital, because it would introduce for the first time a requirement on the financial regulator to consider the particular needs of social investment. This is crucial because many of the existing barriers come about because the regulator (the FSA) is not able to consider things like non-financial investor motivations or social returns, and if social investments are judged by the same criteria applied to commercial financial products they will almost always fall foul of the rules as currently formulated.
UK as Worldwide Hub for Social Investment
One of the more ambitious goals outlined in the strategy paper update is “to capitalise on the fact that the UK is fast emerging as a worldwide hub for social investment.” It is hard not to admire this sort of boldness, and it does seem as though the UK is well-placed to take a leading role in the global development of social investment. There might be a particular benefit to this at a time when people are increasingly looking for alternatives to the old models of banking and finance that have led to the economic woes the world currently finds itself facing. If the UK is to realise this ambition, then it is vital that we iron out the legislative and regulatory issues highlighted above.
The other crucial issue that is touched on in the strategy paper update is measurement. The main development here is the launch of Inspiring Impact, a joint venture launched by a number of voluntary sector organisations aimed at developing standardised metrics for impact measurement and reporting. Standardising the measurement to some extent is absolutely crucial, as until we can it is impossible to make an informed decision about the trade-offs one may have to make in social investments. Currently there is a real asymmetry between financial returns, for which there are extremely well-developed metrics, and social returns, for which there may not be any credible form of measurement at all. On an individual investor basis, this problem can be overcome, but if the ambition is to expand social investment to institutional investors then it will become crucial to have social metrics that fund managers can assess alongside financial data.
Lastly, and perhaps most interesting of all, is the idea of an “Outcomes Finance Fund”. This would, it is suggested, enable multiple parties to pool their investments in order to address a set of social outcomes that might cut across traditional service areas and departmental silos. This sounds very much like an example of the “collective impact” approach that I highlighted in a blog last year, and it will be very interesting to see how it develops as the potential for this sort of approach seems enormous.
In summary: I would definitely give this a higher mark than the giving white paper progress update. There is a lot of good work going on in terms of social investment policy at the moment, and some of the ideas for future focus in this paper are potentially very interesting. The main areas in which there is perhaps more work needed is in making sure that the legal and regulatory environment is conducive to social investment, and that the development of the social investment market is in sync with broader public service reform. There is certainly plenty to be getting on with!