The growing appetite for social investment and how charities are increasingly making it part of their funding mix
The market for socially responsible investing is growing around the world, but particularly in Europe and the USA. A global survey[i] of investors found that respondents had committed $10.6 billion to social investment in 2014 and intended to invest 16 per cent more – $12.2 billion – in 2015.
The UK is recognised as having one of the world’s most developed[ii] social economies. Big Society Capital estimates it is worth over £1.5 billion spread over 3,500 investments, with a wide range of products available[iii].
This figure is still considerably less than the £2.7bn of loan finance already in the voluntary sector which is supporting the purchase of property and trading activities. But, there is a real interest and growing level of excitement about social investment.
Shift in charity funding models
A new research report from Cass Centre for Charity Effectiveness entitled, ‘Social investment as a new charity finance tool: using both head and heart’ highlights the major shift in charity funding models, away from grants and donations, towards social investment and more borrowing over the next five years.
60 per cent of all charities surveyed were positive about social investment, with 17 per cent saying it could even transform their business models. The research estimates this shift towards social investment will account for approximately 11 per cent of funding, equivalent to around £4bn–6bn capital for the sector.
At the same time, the investment market is witnessing the birth of a new kind of funder, one who wants to be philanthropic but also be viewed as a social investor rather than a giver. This opens up opportunities for charities who can align the motivations of investors with their causes.
However, the research also found that one of the main barriers to charities using social investment as a funding tool is their lack of understanding about it. Some charities also feel conflicted or uneasy about using borrowing or investment tools and some have ethical concerns. These barriers will need to be overcome if the market is to continue growing.
Defining social investment for charities
Whilst the social investment concept is easy to understand, it can be difficult to clearly define. In its simplest form, it uses more “commercial-style” investment tools to fund charities. The intent is to use any such investment to create both a social and a financial return.
Charities must pay the capital back, either without interest, such as in a repayable grant arrangement, or with interest to compensate for the investor’s risk. Social investment includes all forms of investment and repayment finance from loans, mortgages and simple borrowing, through to peer-to-peer lending and social impact bonds.
In recent years, UK charities have seen a significant increase in demand for their services, set against a more difficult fundraising environment for both donations and grants. Social investment can move charities away from grants and donations to create a more stable funding model.
Take for example, a charity who is looking towards digital. It could use social investment to pay for this investment; potentially opening its doors to new clients, or allowing it to undertake a new line of business.
Social investment not a ‘silver bullet’
While our research indicates a growing appetite for social investment we’ve found that many charities would not borrow for working capital, fundraising or even for property. Equally, many would not borrow to start a new social enterprise.
Charities are concerned about how they will create a revenue generating model to pay back any such investment, if they use investment. Many are stuck in a grants and donations mind-set and are concerned about the ethics of borrowing.
40 per cent of charities said that social investment will bring little or no change to their organisations or they are openly negative about it.
Social investment is not suitable for all charities and is not a silver bullet to ease all funding issues. It takes time, effort and clear understanding to implement it. There is a danger that some charities may embrace it as a panacea for the reduction in grant funding without proper consideration. However, get it right and it is a powerful new tool for growth and ensuring future viability.
There is also the issue of winning hearts and minds. A 2014 CAF survey (In demand: the changing need for repayable finance in the charity sector) found that while 71 per cent of organisations saw social investment as appropriate, only 31 per cent of trustees has a favourable view on repayable finance. Cass Business School has been working with Big Society Capital and others through its ‘Get Informed’ campaign to help Trustees learn, grow and use this new tool.
Much of the noise about social investment has been from publicity around social impact bonds. Whilst these can seem complicated, small-value loans are one of the most powerful investment tools that can help charities grow and leverage their funding. A mix of grants, donations and social investment funding is now seen as the future for many.
Charities want money that is affordable and will help them build sustainable and predictable income streams. Given this, perhaps demand for social investment will grow most strongly where there is alignment with these objectives.
For organisations to start to think more positively about social investment and start to use it they must get a better understanding of it. Therefore, developing training and mentoring programmes is crucial, as is addressing trustees’ risk aversion towards social investment.
It’s also been shown that having social investment champions in an organisation can take social investment forward and help others to see the potential. Building capacity in charity finance professionals and trustees will also be key to growth.
Our research shows that we are approaching a tipping point where social investment is gaining sufficient momentum and traction to move into the mainstream and away from being seen only as a ‘niche’ product.
As grants and donations shrink, the ready availability of investment monies (estimated at over $2 trillion) should exert a more pronounced force on the charity world. However, there are concerns that if charities do not start to take up the opportunities, then investors will go elsewhere.
It’s therefore important to build the social investment market thoughtfully and purposefully for the future, and help charities understand the potential for social investment to be a prominent part of the social funding landscape.
Cass CCE has also launched a free social investment guide to help organisations learn more about social investment and decide if it is right for them.