Social investing will give a boost to philanthropy

 
Dan Corry
GEORGE Osborne’s Autumn Statement is likely to reveal that things are going to be tough for some years. One consequence is that money to tackle many social issues will be in short supply.

One hope is that the third sector can plug some of the hole created by the deficit reduction plan. But funding for charities is being cut not only as contracts get harder to come by, but also as donations – despite the recent efforts of Finsbury boss Roland Rudd and his “Legacy10” campaign – come under pressure too. So how will charities fund this?

A key thought is that social investment – essentially loans made by investors looking for a blend of a (low) financial return and a social return – is an alternative source of funding. A growing number of investors, including philanthropists and grant-making trusts, are starting to think about putting their money into social investment funds. The government is supporting this emerging market, most notably through Big Society Capital (headed by Sir Ronald Cohen), which will start investing in 2012, with a rumoured £600m war-chest. No wonder many charities and social enterprises are starting to get excited about all this. But can it really work and how much can it achieve?

Many charities are confused by social investment and while it can seem like a great new source of funding they have to remember that it is a loan. Clearly social investment is only suitable if charities have a revenue stream to pay it back – such as opening more charity shops or building new care centres. Charities like Scope and Barnardos are already starting to work in this area and a whole re-offending prevention scheme is being funded in Peterborough through a Social Impact Bond funded by social investors, who get their payback through outcome related payments from the government.

But this is a confusing area, populated by a growing number of intermediaries who speak a different language to the average third sector chief executive, and charities can easily fall into the trap of thinking it is just a grant by another name – which will lead them to take on social investment when it is inappropriate. Potential investors also need to understand what they are doing; while there are some similarities, investing in charities is not like investing in venture capital. The bottom line is not easy to read.

There is also a question mark over the demand for this product. While estimates suggest there may be only around £500m of social investment around at present, the number of charities that are ready to go is limited so far. And the amount of soft money that will come into the sector – at below commercial returns – is very unclear. At this stage, practical advice on all sides is the order of the day and our publication today, Best to Borrow, hopes to fill that gap.

Social investment is an exciting development with great potential, especially where it is focused on charities who want to innovate or scale up. It is however unlikely to be the silver bullet for our times – Osborne will have to look elsewhere for that.

Dan Corry is chief executive of the consultancy/think-tank, New Philanthropy Capital www.philanthropycapital.org