Social investment as part of charity finance
At the moment there is a conversation going on in the charity sector about charity finances and the potential opportunities social investment can deliver. This is within the context of a belief by some that social investment is a "once in a century" opportunity, in the same way that 100 years ago the real first flood of money and contracts came from the government at the time of the First World War.
Whilst it might be a once in a century opportunity for some, it won’t be applicable for everyone. Social investment requires careful consideration.
A canvass of charities last year to gauge their views on social investment found that 20-25% of charities are ready to go for it, 60% are inquisitive but equally concerned about what the change will mean, and 20% will not go on the journey.
Demand for social investment
This followed a report from the Charities Aid Foundation in March 2014 which looked at demand for social investment. Whilst 71% of the organisations CAF surveyed said they thought social investment would be appropriate for their charity, just 57% said they were confident they could generate income to pay back the finance, and only 30% of trustees said they had a favourable view on repayable finance.
So with many charities and trustees still pretty uncertain about how social investment and finance will work for them, what is the case for it?
With the intense competition for fundraising income, the downturn in government grants, the failure of some high profile charities and the continued pressure on overheads, charity finance models are being tested as never before.
Grants and government funding are down by 25%, and according to the latest NCVO's Almanac there is a predicted £4.6bn shortfall in voluntary sector finances by 2018/19. With greater demand for services, charities must also consider the sustainability of their financial strategies, their impact and whether they can operate to the necessary scale.
Given that the financial outlook isn’t likely to change any time soon, could social investment provide the best alternative solution?
A social investment and social finance model using a balance of donations, grants and repayable finance can start to address some of these key challenges, but this is still a fledgling market.
However, a recent survey has highlighted that the next five year period will see a pronounced shift in charity financing models, away from grants and donations and towards borrowing and investment models. The survey quantified this as a 10-12% shift away from donations and grants, and towards social investment models.
Barriers to growth
One barrier to growth has been the fact that some boards are risk averse and not ready to take on repayable finance. However, it is said that a shift is beginning to take place with more trustees beginning to see social finance as an enabler rather than a risk. But there is the need for boards to have greater financial capability so trustees can ask the right questions, put in place the best business models and approach the investment in the right way.
Another key issue is the fact there is still too much complexity and hype in the market that needs to be demystified before charities and businesses are truly able to talk to each other effectively and build the social investment market together.
Jonathon Jenkins, CEO of the Social Investment Business, has picked up this issue. He has said that whilst there is no shortage of people who want to invest for a social purpose, when he gets bankers and charity leaders in the same room, although they are willing buyers and sellers, they simply don’t speak the same language and things can fall through.
He points out that there is "nothing rocket science about social investment", that it shouldn’t be intimidating, but it isn’t the best route for everyone. Nigel Kershaw, chair at Big Issue and Big Issue Invest, has echoed this view and said that not all charities can use a business solution for social change, and they shouldn’t be under pressure to go down the social investment route.
However, it is generally agreed that improved "understanding" is key. The survey endorsed this and highlighted that only 45% of all charities say they have a clear understanding of social investment.
Sara Llewellin, chief executive at Barrow-Cadbury Trust, argues that time should be taken to build understanding so that charities can decide if social investment is a useful tool for them or not. She argued that sometimes taking that time to understand can pay real dividends in the long run as different business models will emerge as a result.
Key questions for charities
Charities need to carefully consider their appetite for risk and what risk means for them. However, there are many other practical questions to ask too including, what finance do we need? Why do we need it? Are there alternative ways of getting finance or raising money? Would a loan or crowdfunding be a better option?
What kind of financing will make the most impact? Which investors should we use? What advice should we seek and are there intermediaries we should be talking to? Will the social investment be part of a balanced funding mix? When will we will be able to repay it? How much will it cost? Will we need to change our business model to do it? What will the impact be and how will it enhance our mission? How will that impact be measured for investors?
For some charities, it is clear that social investment is already enabling them to be financially sustainable, to work to the required scale and make a genuine impact for their beneficiaries. However, it is not a silver bullet that will be right for everyone and, as discussed, there are some barriers yet to be overcome.
But in this era of financial austerity, social investment does provide a real opportunity for charities. What’s needed now are further conversations between charities, government, the investment community and academics that will lead to collaboration and action to grow the market and help greater numbers of charities benefit.
