Is social investment the future?
Money, or the lack of it, is on everyone's mind. The question of how to build the Big Society in the most austere public spending climate in the post war period is a good one, and social investment could well prove part of the solution. Current low rates of return on investment and widespread unease about the financial services industry, combined with the social impacts of the recession and spending cuts, are all cited as reasons why investors might be more willing to forego some financial return in order to invest in a product that delivers social benefit.
What is obvious is that the balance of funding in the VCS will change. Less money is going to come from statutory sources and the impact of funding cuts, particularly at local government level, is already being felt.
Whilst the cuts in government spending are in large part a response to the UK's significant deficit problem, I don't think that state funding at current levels will return as the economy returns to stronger growth and the fiscal position improves. The pain is going to be at its most acute in the short term, but the changes in funding patterns are permanent. We need to work together, and quickly, to find alternative sources of income. The gap that's going to be left is most likely to be filled, at least in part, by two sources - increased giving and philanthropy (which is already the biggest single source of income and will become proportionately even more important) and through the growth of social investment.
There is already a well established, though small, social investment market in the UK and this will be bolstered by the Big Society Bank, which has the potential to secure considerable wholesale capital for the sector. In advance of the Government's social investment strategy to be published later this month and the Budget next month, we're thinking about what government, the VCS and the social investment and mainstream commercial financial institutions should be doing to secure the future of sector funding. Some of the following ideas should be considered:
- Recognise the limitations of social investment. Whilst undoubtedly part of the solution, this is a long term project and there is a real need for government to support the VCS through the very challenging transition ahead. For example, many funding streams will either be reduced or terminated at the end of March, with the Big Society Bank not even operational until at least Q3. Extending the scale and scope of the Transition Fund would be a good place to start. Social investment may well be part of the future, but surviving present challenges is the focus for many NCVO members.
- Additionality: ensure that money going into social investment is additional to, and not instead of, charitable giving. Ensuring that tax reliefs attached to social investment are not perceived to be superior to those that apply to charitable giving will help. Social investment requires a likely surrender of at least part of a financial return to promote a social good - but that isn't the same as a charitable donation and the distinction must be clear.
- Improve the levels of financial capability and investment readiness in the VCS. Surely it's worth investing small amounts of money through grant funding to ensure that the large sums that will potentially flow through the Big Society Bank are put to good use?
- Clarity and simplicity on what's already out there: for a start, government should look to extend the scope of community investment tax relief (CITR) and revisit the guidance to ensure that it's as well understood as possible. Is the current range of exempted activities sensible or proportionate, or likely to promote the further growth of the market?
- Big Society Bank: setting up the Bank and drawing down funds from unclaimed assets is incredibly complex. However, early communication with the sector to establish the amounts of funding available, the identity of a Chair and a routemap from here to the Bank becoming operational would give confidence and hope to many in the sector.
- Access to finance from mainstream institutions will remain very important. The VCS is not alone in struggling to secure loan finance from the banks but this process could be facilitated by government working with the sector to tackle myths around the perception that investment in the VCS and social enterprise is necessarily a high risk proposition.
- Build on what works. Investors are likely to respond to social investment products that look and sound straightforward, familiar and trustworthy. This particularly applies to the majority of people with some money to invest, but who may not have access to sophisticated advice or an appetite for a product that sounds incredibly complicated. Social investment products that blend financial and social returns are more likely to be succesful if they are packaged in familiar terms - for example a 'Community Investment ISA'.
There is no doubt that social investment has great potential and, if harnessed in the right way, could prove an increasingly important source of funding. I'm looking forward to seeing suggestions from government and how we can work together to stimulate the market - though in the current climate it's going to have to be about more than tax breaks.
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James Allen, Head of Public Services and Partnerships and Head of Compact Voice blogs on public services reform and financing, challenges for the VCS and the Compact.