Three pioneering research reports which address significant gaps in the evidence base for the development of the social investment market and shine a light on how the market can be developed also show a strong appetite for social investment among high net worth individuals.

The research by the National Endowment for Science, Technology and the Arts (NESTA) examines investors’ interest in social investment (Investing for the Good of Society: Why and How Wealthy Individuals Will Respond’ conducted by The Fairbanking Foundation and Ipsos MORI) and the demand for capital amongst social enterprises (Understanding the demand for and supply of social finance: Research to inform the Big Society Bank’research conducted by New Philanthropy Capital), and is critical to understanding what is required to develop the emerging social finance market, and the catalytic role that the Big Society Bank could play in this. It also publishes ‘Twenty catalytic investments to grow the social investment market’, which details a portfolio of 20 proposals for innovative social finance products developed through its Big Society Finance Fund.

Joe Ludlow, a 2010 Clore Social Fellow who has led the research says: “The research is very encouraging and we were surprised by how positive individuals were about social investing and their understanding of it as a third way to invest, distinct from giving and from commercial investment. What we need to know is where the third pot of money is coming from – the aim would be from commericial investments; we must be careful not to cannibalise giving.”

Antony Elliott, director of The Fairbanking Foundation, says: “The research clearly shows that there is an appetite from wealthy individuals to deliver the types of capital required by social enterprises. Products designed to address the motivations of this sector of investors could go a long way to unlocking a new source of capital and help build the social finance market.”

The Investing for the Good of Society research shows:

• When considering making social investments, two thirds (67%) of wealthy individuals with £100k+ to invest are likely to invest in a financial product that benefits society as well as giving a comparable return on their money
• The potential for a low return is not a barrier to involvement for many wealthy individuals. When asked about their motivations for investing in social finance products, a third (39%) of those with £50k - £1m to invest were found to have an active interest in the market.
• The top four factors that were found to be more motivating to this group than other investors were -being able to be personally involved in the project/ cause/ charity, being able to visit the project/cause/charity, liking the idea of social investment, knowing that their money may come back to them so that they can re-use it for another social investment
• Wealthy individuals (with £100k+ to £1m to invest) under 40 years old are more likely than those over 55 years old to be receptive to social or ethical investments

The portfolio of 20 proposals for innovative social finance products developed through its Big Society Finance Fund, demonstrate the kind of products and services that a thriving social finance sector could enable. Four of these products have been selected to receive a total of £1.2m investment from NESTA and Panaphur, which will act as a catalyst to leverage in private investment to support social enterprises.

The four are:

• Fair Finance– to provide accessible, affordable and responsible financial services to the financially excluded
• Finance South East and Resonance– to invest in social enterprises that will deliver substantial growth and appropriate profit to meet investor requirements
• Impact Assets– a fund designed to drive capital to maximum  environmental, social and financial investment impact 
• Charity Bank– to support large charities and social enterprises to deliver their mission more effectively.

The portfolio of 20 shows the transformative, multiplying role that the Big Society Bank can play for individual intermediaries, but also the social investment market as a whole, says NESTA. Within the proposals there is at least £12m of investment that could be made within the next six months, and over time this would catalyze at least five times that sum in additional investment it says.

The amounts currently needed from a funder such as the Big Society Bank are estimated to be c£350m, demonstrating that social investment market is a small ‘emerging market’.

 Sir John Gieve, who chaired NESTA’s Big Society Finance Fund selection panel, says: "NESTA has demonstrated in a very tangible way the exciting potential for the social finance market. For the first time we can see how, with the right type of finance and  support, we can help social enterprises to raise the finance they need in ways that appeal to  the growing numbers  of investors who are looking for investments with a social pay off."

Stian Westlake, director of policy and research at NESTA, says: "Social enterprises are critical to addressing some of the major challenges faced by society but unless we urgently get the right type of finance to them, their potential will not be realised. We know that the emerging social finance market has a critical role to play in connecting investors and social enterprises and today’s research is a big step towards understanding how this market can thrive."

 Key conclusions from the reports are:

• The ‘mass affluent’ could be an important source of new investment for social ventures
• It will be difficult to meet the needs of the emerging social investment market and deliver rates of return on capital that might be considered ‘market-rate’ or commercial
• Therefore ‘a development bank’ is needed to focus on developing the infrastructure of the emerging social investment market, catalysing the intermediaries to raise capital from a breadth of investors – commercial institutions, charitable foundations and individuals and thus allowing them to develop a greater degree of sustainability whilst meeting the needs of social ventures.

Iona Joy, Head of charity analysis at New Philanthropy Capital, says: "The market for social finance needs investment to develop, and one way of achieving this is via existing social finance intermediaries. ‘Patient’ capital funding for intermediaries’ own balance sheets would increase their ability to raise funds from investors and depositors, and to lend more onto charities and social enterprises. This investment would make intermediaries more sustainable. Funds are also needed to help charities and social enterprises become investment ready. While these investments may not yield good financial returns immediately, they will help to generate social impact and financial returns in future."

The three reports are available to download at www.nesta.org.uk:

Philanthropy UK will be looking at the potential for social investment in its summer magazine publishing May/June.