G8 social investment report: What do you need to know?

Last year at the G8, the UK launched a Social Impact Investment Task Force to look at supporting the growth of a global social investment market.

As part of the process, the UK had to produce a national report analysing the development of our own social investment market (PDF, 430KB)  and what next steps are needed to support its growth. The report is useful for understanding how major actors in the UK social investment market see it evolving over the coming years.

Don’t have time to read the full 42 pages? Never fear.

Here are my five key points from the report

1. Supply does not create its own demand

In recent years we have seen an increase in the number of suppliers of social investment, most notably Big Society Capital, and new initiatives such as a Social Investment Tax Relief, to encourage high net worth individuals to invest socially.

However as the report demonstrates while the supply has increased significantly, demand has not. Many voluntary organisations are not investment-ready either because they lack the skills/experience to be able to factor social investment into their plans or they lack the capacity and time to consider it.

The report is right to stress that more funding is needed to help organisations develop the necessary skills and free up capacity to engage in the social investment market. The irony is that although social investment is about borrowing, it won’t succeed without grants.

A key lesson from this report is the need for strategic actors such as Big Society Capital and Cabinet Office to work together to provide grant funding so that the sector is able to build up its capacity and make the most of the supply of social investment that is already out there.

2. It’s commissioning, stupid

At NCVO we have been consistent in arguing that the social investment market cannot grow without improving public service commissioning. As NCVO’s Almanac showed, the sector has found competing for public service contracts tough over recent years and government needs to urgently review the public service market – a key ask in NCVO’s 2015 manifesto (PDF, 1.6MB).

Unless we improve public service markets, voluntary organisations will simply not be able to develop the income streams needed to make a large scale social investment sustainable.

Social investment institutions and social investors need to work with the sector to support reform of public services, to ensure that measures such as the Social Value Act are properly implemented and that commissioners are given the training and support they need to work with voluntary organisations. The report’s identification of this problem is a good starting point and could mark the development of a powerful coalition behind improving public service markets.

3. Putting investees back at the heart of the market

The increased supply of finance for voluntary organisations is welcome, but one of the main reasons that demand has not met supply is that finance has not been in the right form. Often social investment is too expensive, takes too long and is too complicated.

Social investment needs to be shaped with the needs of the charities and CICs at its core.

There has been a lot of discussion recently in investor circles about blended capital; and creating an organisation to distribute blended capital is one of the recommendations of the report.

Blended capital involves mixing grant funding and loan finance to create packages that can help voluntary organisations access the investment they need but in a form that is right for their business model or stage of development.

It is particularly important for start-up charities and CICS or established organisations looking to develop new services or products, where revenue streams are not well developed and there are substantial risks. This kind of capital, more suited to the needs of the sector, is likely to generate greater demand.

The report’s interest in blended capital is welcome, and hopefully this will encourage social investors to work on providing forms of social investment that better meet the needs of the sector.

4. We don’t need a new form of social business

The report refers to “redefining the social business frontier” – which is business-school-speak for creating a new forms of social organisation. The idea is that we need a new form of ‘mission-locked’ social organisation that can adapt to the needs of social entrepreneurs. whilst locking in a social purpose.

But do we need a new form of social business?

The UK already has a flexible form of social business, the Community Interest Company (CIC) that enables people to set up companies with a social mission and retain control. There are now over 10,000 CICs operating throughout the UK and recent changes to dividend caps and share values have given owners and investors even more flexibility.

It also has an asset-lock, which means that assets remain in the community – ensuring that the public and investors can be confident in them generating long-term social impact.

With CIC applications rising year on year, there doesn’t appear to be a case for a new form of social business. What is needed is a focus on supporting existing forms of social organisation, namely charities and CICs, to access social investment.

5. We’ve only just begun…

Rolling Stones magazine’s 405th greatest song of all time is an apt summary of the report and the state of the social investment market more broadly.

Although loans for charities and social businesses have been around since the dawn of the charitable sector, we are a long way away from a fully functioning social investment market.

The UK should be proud in leading the world to find ways to make private capital support social need, but there is no room for complacency.  As this report highlights, the UK social investment market faces a number of significant challenges over the coming years.

However, there is potential for social investment to provide resources for the sector to help it make a bigger difference. We now need to bring together government, voluntary organisations and social investors to work on solutions.

But what do you think?

The Task Force’s recommendations provide a useful starting point for discussing the next stage of social investment. Let us know your thoughts by leaving a comment below.

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Andrew was NCVO’s senior policy officer. He covered issues around funding, social investment, tax and the impact of the economy on the voluntary sector. Andrew has left NCVO, but his posts are kept here for reference purposes.

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