384.The Government has been keen to promote social investment as a new way of financing charity work. Social investment is any investment activity which has an expectation of both a positive social outcome and a financial return, which would usually be below the market rate. It can take the form of loans, equity, ‘quasi equity’ (where the lender takes their returns as a proportion of the organisation’s future revenue), overdraft facilities or Social Impact Bonds (SIBs).
385.The Government has sought to grow the market for social investment through a range of initiatives and incentives, telling us that “social investment brings new finance into the social sector, and many of those who have accessed social investment have also increased their impact by scaling up their services or creating new services that wouldn’t have otherwise been commissioned.”
386.Announcing its social investment strategy in 2016, the Government said that “the UK is widely recognised as the most advanced social investment market in the world”, having created the world’s first social investment tax relief and the first ever social impact bond. They had the ambition to have a SIBs market “worth more than £1 billion by the end of this parliament.”
387.The Government also established Big Society Capital, an independent financial institution, to grow social investment in the UK by making and arranging investments to charities and social enterprises, as well as to promote the social investment sector and encourage engagement from investors and financial institutions. The Office for Civil Society told us that Big Society Capital and private match investors had made £587 million new investment available for the social sector through intermediaries. £195 million of this had been drawn down and was in use by charities and social enterprises.
388.We heard that social investment was a useful tool for charities in the right circumstances, and that it had the potential to grow considerably both as a source of charity finance and as a means of engaging more people in financial support to the sector. Geoff Burnand from Investing for Good told us that the potential scale of social finance compared to grants was much larger, “so the opportunity of getting those funds into the market is pretty significant, if you can do it. It can also represent less challenging capital, it can be more patient.”
389.Sir Harvey McGrath of Big Society Capital told us that “the market is there and it is growing. It is part of the toolkit. It is not a panacea.” He said that while social investment would continue to grow in importance, it would continue to be a relatively small element of charity income because “the business models of many charities simply do not support repayable funding.”
390.Dr Beth Breeze from the Centre for Philanthropy at the University of Kent said that social investment was not new: “Collaborative philanthropy and associational philanthropy are called by new names like crowd funding and social investment.” Andrew O’Brien of the Charity Finance Group said that “the sector was borrowing consistently between £1 billion and £2 billion over the ten years before ministers discovered social investment and decided they wanted to make it a term.” He added that the vast majority of the charity sector was working in areas of market failure, “so the idea that you can commercialise those services and try to generate a surplus that could pay an investor is in most cases quite limited.”
391.Jonathan Jenkins from Social Investment Business told us that while the Government had been very supportive in creating the social investment “ecosystem”, there had been less of a focus on how to provide money that had “more relevance to a greater selection of frontline deliverers.” This point was echoed by the Charities Aid Foundation, which argued that the majority of social investment demand was for simple repayable finance, and that a “finance first” view of the market might result in a proliferation of products for which there is little demand. Social Enterprise UK similarly noted that while social investment had “considerable promise”, it had yet to live up to expectations and said that it was “not a replacement for grants or income from other sources.”
392.The Minister for Civil Society Rob Wilson MP told us that social investment “is not there to displace other forms of finance, such as voluntary income, trading or grants. It is not there to replace that.” He added that the most important benefit of social investment was that it could be continually reinvested, as a sustainable form of finance. He said that he believed the Government had promoted social investment “in a balanced and proportionate way, and a way that, over time, charities will find more and more attractive.”
393.Social investment has potential to improve the range of financial options for some, though not all, charities. As the market grows and matures, there needs to be a continued focus on improving its accessibility to investors and charities alike.
394.To date, social investment has largely been associated with larger loans and has thus been perceived to be less accessible or appropriate for small- and medium-sized charities. During our roundtables in Cardiff and Manchester, a number of small charities told us that social investment was of no interest to them, either because it was seen to be high risk, because interest rates were prohibitively high, or simply because it was not applicable to their organisation.
395.Cliff Prior from Big Society Capital told us that:
“The biggest gap is for smaller amounts of social investment going into smaller and younger charities, but there are a number of problems. The transaction cost may be just as high as a much bigger investment, so it becomes somewhat unviable. Newer organisations are inherently more risky, so the price goes up.”
396.The NCVO said that “smaller organisations may experience difficulty in accessing social investment due to the higher cost of borrowing smaller amounts.” Karl Wilding told us that “it is probably very difficult to [lend] sums below £150,000 or £200,000 because the cost of doing the deal is too high.” Jane Wilson from City Healthcare Partnership said that they had found that “often you can only have one bite at the cherry, or one opportunity” to obtain social investment and suggested that it needed to be more accessible and equitable.
397.To seek to remedy these issues, the Government set up Access: The Foundation for Social Investment (the Access Foundation) to make it easier for charities and social enterprises in England to access social investment. The Foundation has £45 million to commit and recently opened its first fund for lending to charities and social enterprises in south west England.
398.The Access Foundation told us that:
“Blended finance is helping to make social investment more relevant to charities and social enterprises by connecting the varying objectives of investors with the current needs of social organisations. It’s helping to make sure that supply of social investment matches demand from charities and social enterprises. The principle of blending finance is to mix together a number of sources of capital, each investor with their own objectives and requirements, and create an investment product which better meets the needs of charities and social enterprises.”
399.Cliff Prior from Big Society Capital explained to us that the purpose of blending grant with the loan was partly to “blend into the deal to the charity”, and partly to cover the transaction costs incurred by investment intermediaries, who may otherwise have been put off facilitating the loans by their small scale relative to the cost of the transaction.
400.Jonathan Jenkins from the Social Investment Business explained that, as a social investor, they were “working alongside grant givers, because they have done their due diligence already; they have sunk costs in what they are doing, and we might be able to support that.”
401.The Minister told us that:
“we have set up the Access Foundation, with a big endowment, and it is there to support charities, to grant funds if they have problems getting to scale, to give the support that they need to get to the point where they can take on these types of contracts. We have put mechanisms in place to make sure that the support is there, if they want and need it.”
402.Cliff Prior of Big Society Capital told us that, in addition to blended finance, social investment tax relief could be a useful tool for mitigating transaction costs for smaller loans. He told us that “a tax relief giving investors a 30% return—a 30% tax break—means that a deal that would be too expensive because of the transaction costs can come right down.”
404.Another challenge to the potential of social investment for smaller charities is their capacity to receive investment. Lord Hodgson of Astley Abbotts told us that “many of us feel that social investment is a real opportunity to scale up the funding available to charities, but it requires charities being prepared to make the changes necessary to take the money on board.” Rebecca Bunce of the Small Charities Coalition told us that “most people do not even think of going to social investment, because they do not have the skills to be able to consider that as a model.”
405.The Access Foundation told us that “managing repayable finance is a new proposition for many organisations in the sector. It requires business planning, systems and skills for managing impact and financial information, robust governance and strong leadership amongst many other things.” They noted that charities and social enterprises needed greater skills and capacity in relation to leadership, governance, data analysis, impact management, finance and business modelling, and risk appetite.
406.The Institute for Voluntary Action Research (IVAR) referred to the results of a survey conducted in 2013, which found that most charities using social investment only approached one investor. Charities also reportedly found the social investment market to be “opaque and confusing”, and did not usually compare loan terms, interest rates, or lender experience in the sector. IVAR added that “charities do not know, and it remains difficult to find out, what range and type of finance different lenders provide and which to approach for particular needs and in particular circumstances.” They noted that the nature of marketing and promotion by social lenders made it difficult for charities to differentiate between lenders, products and offers of support.
407.The Office for Civil Society acknowledged that “there are barriers for social enterprises and charities to take on investment from capacity and capability to knowledge, skills and awareness.” It stated that it continued to take “extensive” steps to improve the investment market for social sector organisations, including enabling charities to purchase capacity building support through the £14 million Investment and Contract Readiness Fund, and through the £10 million Social Incubator Fund, which supported incubator organisations that provide finance and advice to social start-ups.
408.Caroline Mason of the Esmée Fairbairn Foundation gave a different perspective, telling us that “the social investment market I do not think really understands the absolute fabric of the social sector.” She observed that investment needs differed between different sectors and that “you probably need to know quite a lot about the underlying context in which those charities operate, and I think many social investors do not.” Ben Jupp from Social Finance Ltd said that it was “worth putting in the time to make sure there is an aligned interest between the needs of individuals and communities, the right interests of local government and central government, and those of investors.” Caroline Mason concluded that charitable organisations were in many cases having to balance grant funding, contract funding, trading revenue, volunteering time and donations along with social investment, “so their blend and mix is complex.”
409.Cliff Prior expressed concern that, while a significant amount of money had been put into investment readiness in recent years, the same did not appear to be the case for future years. He told us that “the concern is that most of those programmes are ending. With over half a billion in the last 10 years, the only thing we can identify in the next few years is £25 million. So there is a risk there.” The Access Foundation informed us that it would be looking at investment readiness, and that it had been granted an endowment of £60 million from the Cabinet Office to spend over 10 years on funding future initiatives. They told us that “we believe that helping more charities and social enterprises to be investment ready in this way will increase the demand for and effective use of social investment from the sector.”
410.The social investment market is unlikely to reach its potential unless further resources are put into the investment readiness of smaller charities. We welcome the endowment granted to the Access Foundation for this purpose. The Government must continue to monitor this issue and provide additional resources to support charities to ensure that they are not left behind as the market expands.
411.Another challenge with the social investment market was that of the financial expectations of investors. We heard that high interest rates deterred charities from engaging with social investment, and that in some cases charitable organisations had taken on unsustainable levels of debt.
412.Locality told us that “some members who accessed debt finance have found themselves heavily, and in some cases unsustainably, indebted. Social finance intermediaries have found they need to charge high interest rates to reflect risk and their own running costs and as elsewhere in the financial market place finance for the most innovative new projects is limited.”
413.Andrew O’Brien told us that members of his organisation found social investment to be “frightfully expensive. It is more expensive than going to a high street bank, and that creates an issue. Why would you go to a social investor when you can get the money cheaper elsewhere?” He added that, in his experience, private investors were not necessarily engaging in the market for philanthropic reasons:
“When I first started looking into that space, I thought private investors assumed they would not make the same level of return they would get in the private sector but were doing it for social good reasons, but it seems now that we are not only trying to deliver very complex services; they want to make even more money on them. That is a tension we need to resolve fairly quickly.”
414.Geoff Burnand agreed that “the cost of financing that comes through the wholesale lenders can be expensive—too expensive.” He also argued that the cost of capital from Big Society Capital was “unrealistic for this market”, and that this “is a significant drain … on the way this market could develop.”
415.Peter Holbrook of Social Enterprise UK told us that there were “a number of environmental conditions” which meant that higher rates of return were currently being sought from social enterprises than from private enterprises. These included that many social enterprises were seeking small loans, the transaction costs for which were the same as for larger loans, and that this was borne out in the cost of capital. He noted that the Government, the sector and intermediaries were trying to simplify transaction processes so “that products can be taken directly off the shelf rather than every transaction being created from a bespoke perspective.” He added that the market was maturing partly through initiatives such as crowdfunding and community shares, which involved a retail offer to individual consumers who were willing to take higher levels of risk or accept lower levels of return, rather than to institutional investors.
416.Tim Jones of Allia told us that high rates of interest for social investment loans often came about because the nature of the market was different to that of other providers of finance and capital to the sector. He said:
“You have to deal with the costs of the intermediary, their overheads, their governance structure, what their requirements might be, and make sure that the pricing covers that. You have to deal with the price of your capital and the regulatory regime within which you operate … the effective rate of interest can be rather more than they were hoping for because of the structure of the supply that is coming to them.”
He also noted issues related to the securitisation limit for bonds that he described as “very high”, and added that the costs for charities could be “prohibitive.”
417.Sir Harvey McGrath told us that, while there were some investors who were willing to lend below market rates, “there is a huge swathe of the mainstream market that will not. As this market evolves, we are working with a clearing mechanism that will bring together those various elements and, over time, will bring down some of those costs that, for some organisations today, do look high in absolute terms.”
418.We welcome the measures being taken in the sector to seek to reduce the transaction costs for social investment and to promote the market to a wider range of investors who would be willing to accept lower rates of return. Government and sector leaders should do more to address the reasons for high transaction costs and work to bring them down. Investors should also be encouraged to have more realistic expectations of the potential for returns from social investment.
419.Social Impact Bonds (SIBs) are outcome-based contracts between public and private sector bodies. The public body agrees to pay for interventions on the basis that improvements in social outcomes will be delivered. The private provider pays for the intervention upfront, and is repaid by the public body on condition that significant social impact is achieved. Often, private providers will contract charities to carry out the intervention, while retaining the financial risk.
420.The Office for Civil Society also told us that its Centre for Social Impact Bonds works across Government to encourage other departments to develop and commission SIBs. This has included working with the Department for Communities and Local Government on an outcomes fund for SIBs to support rough sleepers into stable accommodation, and with the Department of Health’s Work and Health Unit to develop a SIB fund supporting people with mental health problems into work.
421.We heard evidence, however, that the advantages and potential of SIBs may be more limited than the Government has suggested. Geoff Burnand told us that “it is a mystery to me why you would look to develop a new market with a very complicated product”, adding that “it is incomprehensible to mainstream investors and broadly irrelevant to many front-line, smaller organisations.” Social Enterprise UK told us that “even the strongest advocates of SIBs admit that they will never be relevant to the vast majority of charities and social enterprises.”
422.Peter Holbrook also informed us that SIBs “have received a disproportionate amount of government attention, government resources, and investment focus.” He added that, while SIBs were appropriate in certain circumstances, there were other forms of social finance that could be equally effective as well as being cheaper and similar, but that the Government had “become a hostage to their own fortune in some respects. They have developed this totem, the social impact bond, and are now committed to achieving success with it.”
423.Sir Harvey McGrath of Big Society Capital told us that, of the £1.5 billion in the social investment market, only around £15 million were in SIBs. He added that “the concept is one that is potentially very significant” but that “it is a young market and one that is finding its way because these structures, as you can imagine, in terms of agreeing those contract terms, are difficult to negotiate; they are difficult to monitor.”
424.RSM UK told us that, while SIBs could be an “exciting way of raising funds to enable a scaling up of activity”, they rely inherently on a beneficiary making a cashable saving and being able to transfer part of that saving to an investor. Since the required outcomes were usually only realised at a point some time in the future, it was very difficult for public bodies to commit to SIBs. They suggested that a way to encourage greater use of SIBs would be for the Government to underwrite the lending.
425.Social Impact Bonds can be a useful tool for both charities and the public sector in reducing the cost risk of particular interventions. However, they are only relevant where they produce a saving that can be transferred to a private investor, and that limits their potential contribution to the mix of alternative finance options for charities.
426.The expectations placed upon Social Impact Bonds have yet to materialise and we believe the Government’s focus on them has been disproportionate to their potential impact. While the Government should redouble its efforts to make them work better, future public funding should be reoriented towards financial products with application to a wider range of charities and beneficiaries.
502 NCVO, ‘What is Social Investment?’: [accessed 14 March 2017]
503 Written evidence from Office for Civil Society, Department for Culture, Media and Sport ()
504 Cabinet Office, Social investment: a force for social change, 2016 strategy (March 2016): [accessed 14 March 2017]
505 Written evidence from Office for Civil Society, Department for Culture, Media and Sport ()
507 (Geoff Burnand)
508 (Sir Harvey McGrath)
509 (Sir Harvey McGrath)
510 (Dr Beth Breeze)
511 (Andrew O’Brien)
513 (Jonathan Jenkins)
514 Written evidence from Charities Aid Foundation ()
515 Written evidence from Social Enterprise UK ()
516 (Rob Wilson MP)
517 Note of roundtable discussion in Manchester, Appendix 6, and note of roundtable discussion in Cardiff, Appendix 8
518 (Cliff Prior)
519 Written evidence from National Council for Voluntary Organisations ()
520 (Karl Wilding)
521 (Jane Wilson)
522 Written evidence from Access: The Foundation for Social Investment ()
525 (Cliff Prior)
526 (Jonathan Jenkins)
527 (Rob Wilson MP)
528 (Cliff Prior)
529 (Lord Hodgson of Astley Abbotts CBE)
530 (Rebecca Bunce)
531 Written evidence from Access: The Foundation for Social Investment ()
533 Written evidence from Institute for Voluntary Action Research ()
535 Written evidence from Office for Civil Society, Department for Culture, Media and Sport ()
536 (Caroline Mason)
537 (Ben Jupp)
538 (Caroline Mason)
539 (Cliff Prior)
540 Written evidence from Access: The Foundation for Social Investment ()
541 Note of meeting with Greater Manchester Centre for Voluntary Organisation, Appendix 6
542 Written evidence from Locality ()
543 (Andrew O’Brien)
545 (Geoff Burnand)
546 (Peter Holbrook CBE)
548 (Tim Jones)
550 (Sir Harvey McGrath)
551 NCVO, ‘Social Impact Bonds’: [accessed 14 March 2017]
552 Written evidence from Office for Civil Society, Department for Culture, Media and Sport ()
553 (Geoff Burnand)
554 Written evidence from Social Enterprise UK ()
555 (Peter Holbrook CBE)
556 (Sir Harvey McGrath)
557 Written evidence from RSM UK ()