Gaps in the ecosystem: how to make social finance flourish

Last month Antony Bugg-Levine, the chair of the Global Impact Investing Network, told delegates at London's Critical Mass conference that in the world of social finance there were “hypers, haters and doers”. Clearly, this nascent market will only flourish if it is the ‘doers’ leading the charge.

In order for these doers to lead the way however, there clearly needs to be greater understanding within the space as to the key barriers facing individuals working in different environments, whether that be in government, intermediaries or social ventures themselves.

At the Yale Club of London's seminar on Social Finance, hosted by the Royal Bank of Scotland (RBS), panelists attempted to take on some of the barriers preventing the development of the social finance market on a case by case basis. 

Dealflow dilemma 

One of the most common criticisms of the social investment space is that not enough capital is getting to social ventures. Mark Cheng, the European director of Ashoka, explained: “While there have been a huge number of funds set up in this space, the constant refrain you hear from fund managers is that there’s not a lot of dealflow. 

“The reason this is the case is that there are so many ideas and enterprises that are dying before the stage a fund would come in with £3-5m – or the kind of investment sizes needed in order for a fund to be economically viable. The capital need of a lot of early stage social entrepreneurs is much lower than that in the £500,000 stage or lower.” 

This level of investment is not an attractive market for institutional investors, meaning that the people who can invest at this early stage are angel investors. However, then arises the challenge of returns. Cheng said: “In the commercial world you have an active network of angel investors, but they expect financial returns of between 15 and 20 times their initial investment because that’s the level of risk they are taking. 

“In many social sector organisations that’s not realistic – returns are possible but are not quite the level where the risk reward matches what a commercial angel demands.”

The solution? In part it is about developing a stronger network of social impact angel investors. According to Cheng the recently introduced Social Investment Tax Relief “could be a real game changer” in terms of creating a more enabling market that would appeal to these less risk averse investors.

Telling the story

Whilst social impact bonds (SIBs) remain a controversial and relatively small element of the social finance market in the UK, momentum around them is increasing, thus providing the case that they should be addressed. SIBs also relate closely to the wider issue of making government procurement practice more generally focus on the social and environmental impact of its purchasing decisions.

How can we get policymakers and those commissioning services to think more creatively about partnerships?

When it comes to SIBs, if this outcomes based contract form of commissioning is to be developed, co-founder of Bridges Ventures Michele Giddens argued for “more education within government to encourage officials to procure in a different way and to feel empowered that they have the technical knowledge to be able to pay for social outcomes, rather than services”.

At another event in London this week hosted by the Impact Investor Club, head of social finance at the Cabinet Office Kieron Boyle offered some valuable advice on how the social sector can work better with policymakers and commissioners. 

“How can we get policymakers and those commissioning services to think more creatively about partnerships? There are no short cuts but policymakers like others respond to stories of where they see things work.

“One idea of how this field can work better with policymakers is to tell easier stories about the impact occurring. Also, it is important not to oversell as well. Commissioners often feel oversold to – only sold the positives of what is happening rather than the full story.”

The full story

Often conversations around social finance seem to focus on social impact bonds and large institutional funds – the headline acts. But, CEO of the Esmée Fairbairn Foundation Caroline Mason told delegates at RBS HQ they’ve “been done to death” and that she’d prefer more notice was taken of the broader spectrum of social finance initiatives. 

Mason explained the land purchasing facility Esmée Fairbairn is operating. “When a piece of land comes on to the open market that is of high environmental or conservation value, we buy it and have arrangements with a number of NGOs where they get given two years to raise the money to buy that land back off us. 

“We charge them a 2% facility fee, plus the legal fees, which they incorporate into their fundraising. We’ve done that 14 times now – it gets cheaper each time as we now have the correct documents to do it and it’s very low risk because the land in this country is not going to go out of fashion very quickly,” she said.

Next up, Mason cites the momentum around crowdfunding as something she suspects will increasingly play a more prominent role in the social finance industry. “If you look at the platform Ethex, since launching in February last year it has raised £1m a month directly from retail investors, which is then put straight into organisations that need it,” she said. This contrasts the often very slow process of raising funds in the way that institutional investors operate.

There’s a trick we are missing in this market and it’s that people get this.

The final segment of the market described was the role of the likes of Charity Bank and Triodos Bank, “which offer ISAs so you can deposit your money and save, whilst getting a pretty good return commensurate of any other bank in the country”. To date both banks have provided millions to charities and social enterprises.

Social finance is by no means a panacea to all the social and environmental issues facing societies, not just in the UK but globally. Welfare, aid and traditional philanthropic giving play a vital role in a number of areas where social finance is not just suitable. Take the refugee crisis, which is dominating news coverage in mainstream media outlets currently.

“Can social finance play a role in emergency crisis situations such as this?” the Yale Alumni panelists were asked. The answer? Essentially no, however it could perhaps play a role in providing insurance policies to people living in areas prone to environmental disasters. 

Concluding discussions Esmée Fairbairn’s CEO stated: “There’s a trick we are missing in this market and it’s that people get this. Ordinary people get this in spades. The problem is that the institutional market just is not shifting and does not get this at all.” The mainstream finance industry is simply failing to recognise the importance of social and environmental responsibility.  

Photo credit: Simon Law