What is social investment?
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CloseHow social investment aims to meet the whole spectrum of financial needs of charities and social enterprises through activity additional to grants.
Social investment is any investment activity which has an expectation of both a specified social outcome and an explicit financial return (usually below “market-rate”).
How did social investment emerge?
The majority of financing for the charitable sector typically takes the form of grants for projects, rather than investment into an organisation. Social investment aims to meet the whole spectrum of financial needs of charities and social enterprises.
Over the past twenty years, civil society has moved from being fuelled solely by grants and goodwill to a more sophisticated funding ecology. There are a growing number of funders and investors, using a variety of financial products to support community groups, charities and social enterprises – referred to here as ‘civil society organisations’.
There is an emerging social investment market with a track record, a number of independent players and a body of expertise. This market has emerged in response to the need for civil society organisations to access finance and has a key role to play in growing the civil society:
1. Access to finance: Funding has been difficult to obtain from traditional providers (i.e. high street providers), which is often cited as a major barrier to charities delivering on their mission. Providing access to capital, and choice in doing so, allow organisations to focus on their mission as critical issues such as strategic direction and impact can be forgotten in the incessant drive to secure funds.
2. More resources in the sector: Access to capital provides civil society organisations with greater flexibility, freedom and independence, providing financial room for manoeuvre. This will strengthen resilience.
3. Interaction between sector organisations and the state: Contracting with local or central government often requires access to capital to provide the freedom to engage in the tendering process and bridge between receipts of income.
However, social investment should not be seen as a panacea, but should be combined with grants and other income as part of a ‘mixed economy’ financial strategy.
Diagram one - matching appropriate funding mechanisms to financial needs
This illustrates how different financial instruments should be matched to different financial needs. The shaded area represents the zone of appropriate funding.
Copywright CAF Venturesome
Description of diagram one
The diagram shows two axes, with the vertical axis labelled ‘High change of repayment’ at the top, and ‘Low change of repayment’. Along the vertical axes, from top to bottom, are additional labels as follows: Secured loan (at the top), standby facility, overdraft, unsecured loan, patient capital, quasi-equity, equity, grant (at the bottom).
The horizontal axis is labelled ‘Low risk’ on the left, and ‘High risk’ on the right. Additional labels run along the horizontal axis: ‘Property/asset purchase (mortgage)’ (on the extreme left); ‘Working capital’ (in the centre); ‘Growth capital’ (on the extreme right).
A shaded ellipse runs from the top left hand corner of the diagram to the bottom right hand corner with its centre crossing the horizontal axis. A dotted diagonal line runs along the centre of the ellipse, from the top left to the bottom right. There are short lines with an arrow at each end, at three points in the ellipse: at the top left, at the centre, and at the bottom right.
Diagram two - a spectrum of organisational models
This shows a spectrum of organisational models. Those towards the right expect financial returns, with those towards the left aiming for social returns. The middle represents a range of blended value.
Description diagram two
The diagram show seven equally sized circles running along a horizontal axis, which has arrows at either end, pointing outwards. Each circle is numbered and labelled, from left to right, as follows:
1. Charity with fundraised/grant income
2. Charity with ‘on mission’ trading/contracting
3. Social benefit enterprise
4. Social purpose business
5. Socially responsible business
6. Business generating profits for charitable spend
7. Commercial enterprise
There is a greyed-out box cover circles 2-6. This is labelled ‘Grey area in which organisation are often loosely referred to as social enterprises.’
There is a dotted vertical line between circle 6 and circle 7.
Social investment performance
Social investors do not necessarily believe that any particular model is inherently more (or less) profitable than any other. Nor that any is inherently more (or less) socially impactful than any other. As such, every civil society organisation will ultimately be judged on its actual social impact.
The performance of the social investment funds will play a key role in the future of the sector. For example, CAF Venturesome, has achieved remarkably low default rates on investments to civil society organisations over the last ten years. This indicates that the actual risk of lending to charities is significantly less than that perceived by mainstream banks, which is reassuring and should encourage more investment into the sector. Additionally, 2012 will see the emergence of Big Society Capital, which will use unclaimed assets to leverage additional, private capital with which to capitalise social investment funds. This will help grow this emerging market.
More information
For more information on what social investment means, and how to decide if it’s right for your organisation, please read:
