Beats | November 4, 2019

Lessons from the U.K.: Seven ways to catalyze social investments in high-impact enterprises

Cliff Prior
Guest Author

Cliff Prior

ImpactAlpha, Nov. 4 – Social enterprises and nonprofits can reach into complex areas, target underserved markets and work over the long term to achieve lasting results. Impact investors need a robust pipeline of such organizations dedicated to delivering deep social impact.

“Social investments” in such enterprises are a subset of impact investments that are intentional about creating impact by targeting and supporting social enterprises and nonprofits that deliver measured and lasting positive social impact, while providing financial returns, according to the U.K. National Advisory Board on Impact Investing.

As impact investment grows within mainstream finance, and the meaning of impact shifts, social investment can be counted on to deliver deep impact in communities. We need to ensure and grow an intentional, flexible capital supply towards the most vital social issues and maximize impact by through connections along the spectrum of capital.

Over the last 18 months, the U.K. National Advisory Board on Impact Investing has identified seven levers for deepening the impact of social investments and attracting needed capital. The working group, including representatives from Big Society Capital, Bridges Fund Management, Triodos and the Impact Management Project, has issued “Re-visioning Social Investment,” a call to action to grow social investment.

In some sectors, we have seen social investors pave the way for the mainstream, as has been seen in affordable housing and clean energy for communities. It is possible for social investors to recreate this in other areas of social challenges. First, we must unlock the potential of social investment.

Deeper impact

1. Catalytic capital. A key area is the provision of more flexible and catalytic capital which can support mission-led organizations to grow and scale. There is an unmet demand for capital accepting disproportionate risk. Organizations that operate in new or underserved markets tackling difficult social issues need time to understand the demand, the economics and path to scaling, and to build their reputation. While grants can help enterprises validate and establish new business models, in the development stage, catalytic capital plays an important role in attracting and unlocking the additional investment capital – be it equity, debt, or a combination of both – needed for growth. And without catalytic capital, mainstream investors will be starved of new impact categories.   

2. Coordinated capital. When they do not have enough on their own, social investors must bring in other sources of catalytic capital alongside. This could be achieved by partnering with philanthropic foundations, and expert development partners. Alternatively, they could open new pools of mission-led capital: previous examples have been seen with local authority pension funds, donor-advised funds, university, hospital or foundation endowments, and retail crowdfunding.

3. Tax incentives. Measures on tax breaks, guarantees and other subsidies could attract additional investors, creating positive returns while making finance affordable to front-line organizations. Tax breaks are a well-recognized tool in the support of early-stage growth enterprises. One U.K. example is Social Investment Tax Relief, which aims to encourage investors into early-stage, high-risk, high-growth charities and social enterprises. It has been limited by low cap levels and multiple exclusions. But with the right amendments, it has the potential to become a vital measure in helping enterprises tackle important social challenges which will save public money and improve the lives of people in need.

4. Public policy and procurement. Market side developments such as government procurement or policies can assist deployment, as more social enterprises win contracts and customers. These are already used in many countries, for example in social housing through rent subsidies, and the creation of social enterprise opportunities in regulated sectors, and subsidies for research and development-based enterprises including tech for good. Improvements in government procurement, such as the U.K.’s Social Value Act, would also assist, by allowing more scope for social mission organizations. 

5. Training advisors. We must also look at education, that can break through the perceived and real barriers putting up obstacles for people wishing to put their money into social projects. Training programs for financial advisers must include better information on the compelling characteristics, principles, practices and outcomes of social investment. This will equip them with the tools that they need to better advise their clients, removing one of the key barriers to increasing the capital supply for social investment.

6. Evidence base. As an industry we must provide improved impact reporting and more case studies. These are essential in showing both mainstream and retail investors the deeper impact that can be achieved if they chose social investments.  

7. Culture shift. Most of all will be a cultural and behavioral change on impact in the minds of the public, which will push through to the investment industry, forcing radical change. We already know this is happening: ESG investing is well on its way to becoming the new normal, we’ve also seen growing numbers of retail savers in social banks, community share and social bond issues. 

High demand

We know that there is demand from the public to put more of their savings into social purpose, a demand that is not yet being met. This was recently confirmed by the U.K.’s Department for International Development’s survey, “Investing in a Better World,” the largest and most comprehensive study of the demand for sustainable investment opportunities in the U.K. It found that 68% of U.K. savers want their investments to consider impact on people and planet alongside financial performance. This shows it is more important than ever for more social investment to be undertaken, creating more opportunities for the public, capitalizing on this opportunity. 

The impact of social investment has already been significant. Examples range from housing vulnerable people to prevention of harm, tackling poverty, improving lives in disadvantaged places, building resilience in the social sector, to growing ambitious tech for good. We must remember that actions speak louder than words: for many people, social investment is understood by example. 

This is a movement gathering pace – an unstoppable movement which will build a better society, and a vital component of the impact economy which mainstream investors depend upon for the flow of impact enterprises. Social investing is the tool which uniquely can reach both the tougher social challenges and create catalytic growth for the future.