CPD: Social investment – using head and heart

Family offices and high-net-worth individuals are increasingly turning to social investment for its financial and social/environmental gains, writes Mark Salway, Director of Social Finance at Cass Business School

social inv  lrge
Social investment is an easy concept to grab hold of, but difficult to define. Effectively it uses more ‘commercial style’ investment tools to solve social issues.

The key thing is that money is used to create both a social and financial return. The capital is then paid back with a suitable return to compensate for the investor’s risk. Alternatively a ‘blended rate’ is determined whereby the financial return is adjusted for the social return it creates.

In the US it is more often called ‘social impact investment’, and sees its roots in the pioneer spirit of philanthropists who believe that investment tools can help to solve social issues that giving alone cannot. The latest Financial Times yearly report Investing for global impact 2016 shows that whereas three years ago family offices and high-net-worth individuals were learning and taking advice, they are now making their first social investments in their portfolios.

We are starting to see a wide range of mainstream and investment banks (eg, Barclays, J.P. Morgan), as well as social banks (eg, CAF, Unity Bank) growing this market. We are also seeing the creation of new investment funds (eg, Big Issue Invest, Bridges Ventures, Impetus-PEF) which are focused on creating social investments. And the creation in June 2013 and subsequent growth of the Social Stock Exchange, where investments have been launched and are now being traded.

Each social investment must be underpinned by clear metrics (social as well as financial) and an intentionality to be transparent about the social value created, and report openly about this. The difficulty comes with valuing the social return on investment, and as the box on the right shows, this is both complex and open to interpretation.

A range of ways of pricing in this social return on investment are developing, and also a range of different investment tools: equities, quasi-equities, bonds, social impact bonds, crowdfunding and loans.

It is also clear that social investment is breaking down the legal barriers between charities, social enterprises and commercial organisations. Investors are becoming less hung up on the legal form of the organisation they are investing in and are instead becoming more focused on the social return on capital generated.

Examples of investmentsMeasuring social value – the complexity

As an example, consider a well being dug in Africa. The inputs to build the well are bricks, digging, time and labour.

The output from the well is fresh water and better health for the community.

The outcomes from this are that
the community don’t have to walk far for water, so has more time for education and commercial activities and farming.

The impact is greater life choice for communities, and greater GDP.
The Gym Group: One of the most successful social investments to date has been the Gym Group. It provides quality, affordable gyms to local communities and has grown from one in 2008 to over 80 gyms across the UK. It grew through using social investment capital from Bridges Ventures and other social investors who were positive about the health impact.

Hackney Community Transport (HCT): One of the ‘pin-up’ social investments so far has been Hackney Community Transport – a social enterprise that helps communities get about. HCT raised £10m from a range of social and mainstream investors facilitated by impact investment bank ClearlySo.

Clean Team Ghana: Water and Sanitation for the Urban Poor (WSUP) and Unilever teamed up to invest in toilets in slum areas. Local people pay for portable toilets, and the waste is taken away to generate electricity and fertiliser. Commercial organisations wouldn’t take on the risk, and the government didn’t want to fund this.

www.Lendwithcare.org: A crowdfunding platform that allows lenders to lend money to those in the developing world. Initial capital and investment was put up by the charity CARE International UK. It has now lent over £10m to the poorest.

Scope: Was the first charity to raise a retail bond for funds. It raised £2m and was listed on the Euro MTF Stock Exchange Luxembourg to pay for its charity shops.

Progress so far: supply and demandReports to date highlight that currently there are some 3,500 separate social investments across the UK with an aggregate value of £1.5bn, around 47% of those sitting within charities. The market is growing rapidly at 30–40% per annum.

Big Society Capital has issued around 15% of all funds to date, but as a wholesaler does not invest directly and places capital with social investment finance intermediaries (SIFIs) to build the social investment market on its behalf. The market continues to develop and SIFIs have developed funds focused on a wide range of themes – ranging from ex-offenders, adoption and rough sleepers to health and ageing.

The introduction of social investment tax relief (SITR) is also likely to facilitate more people using social investment as a tool. UBS released the first SITR fund in 2015 and others look set to follow.
Social investment is breaking down the legal barriers between charities, social enterprises and commercial organisationsTurning to demand, how is social investment impacting the sector and what is demand looking like? Here there is less research and information. Some research from Cass Business School highlights that charities and social enterprises want more capital and will look to take on 12–15% more borrowing and social investment in the next five years (around £5bn).

However, a recent symposium highlighted that understanding of social investment is the key barrier that needs to be overcome if social investment is going to become more meaningful. There are also some concerns about the ethics of profiting from social issues. If social investment is only seen to generate profit for third-party commercial organisations, it risks alienating social organisations.

Is social investment the future?Will this be a passing fad or a new asset class for investors? We wait to see.

One thing is certain, however: the market is growing and moving forward using head and heart together, as investors and social organisations embrace this new way of working – blending financial and social returns to create something powerful for the future.

Big Society and the refugee crisis

Big Society Capital (BSC), a first of its kind, was originally set up by Britain’s Cabinet Office and launched as an independent organisation with a £600m investment fund in April 2012. The capital came from dormant bank accounts via an independent reclaim fund and four leading UK high street banks.

BSC’s Head of Strategy and Market Development Simon Rowell believes there is a role for social investment to play in providing long-term support and integration for migrants and refugees into Europe – more than one million in 2015 alone – many of whom have been forced to flee violence and instability and now live in poor conditions in refugee camps. This has created an unprecedented set of political and social challenges.

Last September, David Cameron’s Government committed to rehome 20,000 Syrian refugees by 2020, direct from UN camps. In May this year, he responded to public and political pressure to commit the British government to take in more unaccompanied Syrian refugee children from Europe. “This was welcome news for many hoping for the UK to do more to support the waves of most vulnerable across Europe,” says Rowell. “However, serious questions remain for how Britain will achieve these targets, as well as the broader group of almost 170,000 refugees and asylum seekers. How will local authorities cope with this increased need?

In a recent paper, Investing in integration – how can social investment be used to promote integration of refugees and asylum seekers? Rowell has explored if and how social investment could play a role in addressing the needs of refugees and asylum seekers, and to flush out some bigger ideas.

“What is encouraging from my investigation,” he says, “is that there are already emerging examples of innovative financing approaches used to address challenges of vulnerable migrants, some currently being deployed in the social investment market in the UK, but also by our international colleagues. For instance, in Canada the Immigrant Access Fund guarantees loans to migrants to seek accreditation for higher qualifications they would have held in their home country to seek higher wages an better contribute to their new country. In the UK, Commonweal Housing has used social investment to purchase housing for migrants with insecure immigration status and no recourse to public funds.

Further Information:
Mark Salway, Director of Social Finance at Cass Business School.

This article was originally published in the September print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.
Published: 16 Oct 2016
  • Wealth Management
  • The Review
  • social investment

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