Charities (Protection and Social Investment) Bill

Written evidence submitted by Social Enterprise UK (CHB 01)

1. Social Enterprise UK was established in 2002 as the national body for social enterprise in the UK. We are a membership organisation. We conduct research; develop policy; campaign; build networks; support individual social enterprises; share knowledge and understanding; support private business to become more socially enterprising; and raise awareness of social enterprise and what it can achieve.

2. Social enterprises are businesses driven by social or environmental objectives whose surpluses are reinvested for that purpose in the business or in the community. They operate across a wide range of industries and sectors from health and social care, to renewable energy, recycling and fair trade and at all scales, from small businesses to large international companies. They take a range of organisational forms from co-operatives and mutuals, to employee owned structures and charitable models. Our members come from across the social enterprise movement, from local grassroots organisations to multi-million pound businesses that operate across the UK.

3. We chair the Social Investment Forum, a network of social investment and finance intermediaries (SIFIs) designed to help keep money flowing around the market and ensure it reaches the social enterprises on the ground. In partnership with the Big Lottery Fund we published Social Investment Explained to give interested parties an overview of the UK social investment market. Our Chief Executive, Peter Holbrook, sits on the board of Big Society Trust in an ex officio capacity. We therefore have considerable experience in social investment.

Social Enterprise Uk and the Charities (Protection and Social Investment) Bill

4. Social Enterprise UK’s focus is on the social investment elements of the Bill. We support the aims and ambitions behind the Bill, but believe that as currently drafted it may not fully meet the Government’s own previous stated aspirations for social investment.

5. Social investment is often baffling to many observers and any lack of transparency in the field jeopardises its potential. Any attempt to make social investment better understood, more transparent, and more widely used where appropriate by charities is welcome.

6. We are grateful that the issues we raise below received attention in the Upper House, but despite this airing we feel that the definition of social investment in the Bill is not quite right. Parliament decides many crucial -often life and death- issues and in comparison, and as pointed out in the Lords, debating a definition of social investment may seem like ‘wearing an anorak whilst discussing how many angels can dance on the head of a pin’ [1] . Yet the Bill is the first attempt to define social investment in statute and although there is nothing critically wrong with what is proposed, the definition does sets a precedent which will have an impact on subsequent legislative definitions. It is important to get the definition right.

7. The definition in the Bill was drafted by the Law Commission yet curiously it appears to differ from the Law Commission’s own recommendations.

8. Government, at Report Stage in the Lords, made a number of amendments to the Bill, notably an acknowledgement that social investment may have other results over those on the face of the Bill and a commitment that Ministerial review must commence within 3 years after the Act is passed. Whilst welcome, we believe that Government can go further.

9. We have 3 concerns:

(a) Whether the definition in Clause 15 which was drafted by the Law Commission adequately reflects the Law Commission’s own definition of social investment.

(b) Whether the Bill’s definition of social investment adequately differentiates between financially motivated investment which also happens to be in line with a charity’s social purpose; and consciously / explicitly socially motivated investment

(c) That the Ministerial review of the Act does not explicitly guarantee to explore the relationship between grant-making and social investment.

(A) THE LAW COMMISSION’S DEFINITIONS OF SOCIAL INVESTMENT

10. The Law Commission definition of social investment in its recommendations includes "avoiding financial liability at a future date". [2] The Law Commission’s recommended definition, therefore, does not require a positive financial return.

11. Yet the Bill includes financial return in the definition and defines financial return in as "if its outcome is better for the charity in financial terms than expending the whole of the funds or other property in question".

12. Importantly and perhaps counter-intuitively, zero or negative financial return is not uncommon within social investment or within conventional financially motivated investments! Many investments fail to deliver any financial return as an outcome and this does not preclude them from being considered investments in the first place. In this case, the intent is more significant than the outcome. For example, a charity may want to trial a number of innovative methods of addressing their objects through social investment. Given that the methods are innovative, they will be making them at risk. A prudent financial manager may quite reasonably predict a zero or negative financial return on such social investments. This is still social investment and the new legislation should not preclude this.

13. It is possible that the rationale for a definition which excludes zero or negative financial return on social investment stems from rules on permanent endowments [3] and a desire by the Law Commission to have one clear law for charitable social investments covering all charitable assets. Whilst understandable, this approach will skew the impact of the legislation and unnecessarily limits the freedom of charities to make full use of their non-permanent endowments, for example, to make potentially (financially) loss making social investments.

14. The Government says "We want more social investment opportunities to be available to citizens and the managers of our savings. In the same way that finance flowing to business start-ups is the lifeblood of our economy, so it will be with social enterprises. Change in this market will not take place overnight, but it will be transformative in allowing social ventures to scale up and take on new challenges. We will do all we can to make it happen." [4]

15. In the same document, Government also says: "We do not underestimate the degree of challenge, or the timescale required to realise our vision." [5]

16. The Bill limits social investment in such a way that it could work against the Government’s policy aspiration to "do all that it can to make it [an increase in social investment] happen." [6]

17. The differences between the Law Commission’s definition and the definition in the Bill, and the one we suggest are illustrated below.

A SPECTRUM OF INVESTMENT

Social

Financial

Motivation

Only social intent

Primarily social intent with potential for financial return

Primarily social intent but financial return must be greater than 0

Primarily financial intent with some conscious / explicit social expectations

Only financial intent

Note

Feasibly may be incidental financial return i.e. if grant is clawed back or unspent

Financial return is possible but of secondary importance

Return must be better than granting the money away.

Social expectations in line with a charity’s social purpose in this context i.e. education, the environment or Africa, for example.

May be some indirect or incidental social impact / impact in line with a charity’s purpose

Example

Grant made by a foundation

Foundation underwrites Social Impact Bond at risk

Social investor makes risk capital investment in social enterprise

Investment in the developing world, in a business making useful widgets or through an ethical SRI fund

Speculation on stock exchange or investment via a hedge fund

Law Commission recommendation

Bill definition

Our definition

(B) THE DISTINCTION BETWEEN SOCIAL INVESTMENT AND FINANCIAL INVESTMENT

18. The definition in the Bill fails to sufficiently differentiate between financially motivated investment which also happens to be in line with a charity’s social purpose, and consciously / explicitly socially motivated investment.

19. All investment (including traditional financial investment) has some kind of social impact, much of which can be positive and in line with charitable purposes. It follows that social investment must be something other than traditional financial investment which happens to have a social return. One key difference between social investment and financial investment which produces social return is intention: a social investment is an investment which has significant socially-motivated element.

20. There seems to be no clear answer from Government as to how social investment is to be differentiated from a financially motivated investment which also happens to be in line with a charity’s social purpose. Rather, the Minister offered the suggestion that the "Charity Commission and the courts would be astute to shams; they would look at the substance of a transaction and if it is a financial investment, the trustees would be expected to comply with the financial investment duties." [1]

21. Prevention is better than cure. Resolving this uncertainty in legislation would be better than leaving it to the Charity Commission and the courts.

PROPOSED AMENDMENTS TO THE DEFINITION OF SOCIAL INVESTMENT

Clause 15: The Power to make social investment

Amendment 1

292A (2) "social investment is made when a relevant act of a charity is carried out with a view to primarily -

a) directly furthering the charity’s purposes; while also

b) achieving a financial return for the charity; and

c) the action is intended to be a social investment"

Amendment 2

292A (5) An act mentioned in subsection (4)(a) is to be regarded as achieving a financial return if its outcome is equal or better for the charity in financial terms than expending the whole of the funds or other property in question and may include:

(i) income

(ii) capital growth

(iii) full or partial repayment of the investment, or

(iv) avoiding incurring financial liability at a future date."

Amendment 3

Delete 292A (6).

(C) REVIEWS OF THE OPERATION OF THIS ACT

22. Clause 16 specifies a number of issues the ministerial review must include. It does not currently include a commitment to review social investment, or the relationship between social investment and grant-making.

23. The aim of Clause 15 of the Bill is to clarify the existing ability of charities to make social investments, and in doing so facilitate -where appropriate- social investment. This will either be successful or it will not be successful.

24. If the aim is successful, charities will make more social investments. Government has indicated that it anticipates a doubling of the amount of social investment made by charities [2] . If this comes to pass then it is possible, even likely, that charities will make fewer grants. Whilst there is nothing necessarily controversial in this (charities may well just be using a more suitable vehicle to achieve their charitable objectives) what would appear to be apparent decline in grants by charities is an area of justifiable public concern. In this scenario it will be imperative that Government looks at the relationship between grant-making and social investment to reassure itself, the pubic, and charities that there have been no unintended consequences as a result of the Bill.

25. If there is no increase in charitable social investments, then the Bill’s social investment clauses will not have succeeded and this will need looking at as part of the review, in order to establish what further measures need to be taken to achieve the Government’s ambitions for social investment.

26. Given the purpose of Clause 15, it is remarkable that a commitment to review social investment, and specifically the relationship between grant-making and social investment, is not on the face of the Bill in Clause 16. The Government is proposing what are potentially far reaching measures but not proposing to look at the effect of them.

27. We therefore propose an amendment to address this lacuna.

PROPOSED AMENDMENT TO THE REVIEWS OF THE OPERATION OF THIS ACT

Clause 16: Reviews of the operation of this Act

Amendment 4

"16 (1) The Minister for the Cabinet Office must carry out reviews of the operation of this Act including, on each review, how the Act affects-

(a) public confidence in charities,

(b) the level of charitable donations,

(c) the relationship between grant-making and social investment,

and (d) people’s willingness to volunteer."

December 2015


[1] Both metaphors were used in the Upper Chamber in relation to the debate over the definition.

[2] Social Investment by Charities The Law Commission’s Recommendations, paragraph 1.35

[3] Ibid paragraph 1.61

[4] Growing the Social Investment Market, 2011 Exec Summary https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/61185/404970_SocialInvestmentMarket_acc.pdf

[5] Ibid, paragraph 2.3

[6] Ibid, Ministerial Foreword.

[1] Hansard, 1 July 2015: Column GC208

[2] Rt Hon Matthew Hancock MP, Second Reading, 3 Dec 2015 : Column 564

 

Prepared 15th December 2015