This article first appeared in Charities Management magazine, no.132, Early Summer 2020 edition. It can also be read here: http://www.charitiesmanagement.com/Magazine-No132/TR3E5/page-6.php
Ten years ago, the Government used £400m from dormant bank accounts to set up an organisation called Big Society Capital (BSC). It tasked BSC with building the market for something new called “social investment”. Over the same period, another financial buzzword had been receiving a lot of airtime: “impact investing”. Certainly, for those plugged into the City, the need to be seen to invest in impact has become ubiquitous.
These two terms – social investment and impact investing - were always poorly defined. Recently they have begun to merge in a way that is potentially even more confusing, especially for a charity new to this world. Most of what goes by the name of “impact investing” has little relevance for charities. This article will try to clear up some of the confusion before showing what may be of interest to charities.
Something called the “spectrum of capital” helps to explain where the two terms come from. On the far left sits full blown, commercial investment. This prioritises profit (or the “single bottom line”) and pays no attention to any social or environmental impact that the investment might have. On the far right are grants. Foundations and other philanthropic givers grant money to socially minded organisations in return for impact only, without requiring any financial return.
Financial and social outcomes
Impact investment and social investment both aim to sit somewhere in the middle of this spectrum and to deliver both financial and social outcomes. This dual requirement, the so-called “double bottom line”, acknowledges what mainstream investors for many years have glossed over: in reality, every investment involves a trade-off.
At one end of the spectrum you trade off all impact for maximum profit and, at the other, all profit for maximum impact. In the middle, life becomes more nuanced and interesting. Investors must clearly articulate their priorities - there is no one definition of “impact” that covers the full complement of issues which any organisation working in the space is focused on.
This lack of definition can appear complicated to charities. But there is an easy to way explain why most impact investing does not apply to charities. Most impact investing involves investing in shares. Since charities cannot issue shares and their structure cannot support private gain, it is easy to see why most impact investment does not apply to them.
Fortunately, however, there is a smaller universe of investors which is designed to invest in charities with repayable finance. Charities will find this a smaller and more easily navigable set of organisations. What is more, the sector has a collegiality and connectedness that comes from a singleness of purpose, which is to offer supportive finance to great third sector organisations of any size. Handily, the sector has its own educational website - Good Finance - which lists every investor and the sorts of work they do.
Range of financial options
These specialist funders offer a huge range of financial options for charities. Having identified them, the next hurdle is to find the right product. In what is still a relatively new marketplace, there is no one-size-fits-all social investment product for charities. It goes without saying that, unlike grants, these investments do need to be paid back. Again, and not to be misunderstood, social investment is repayable finance.
A common myth is that social investment is only good for financing projects involving construction or buying property. Far from it. Common investments include housing for vulnerable groups, providing working capital for charities delivering contracts for commissioners, growth capital for organisations working in local communities, and finance for renewable energy projects. And every investor has done dozens more deals. This may seem off-putting, but the breadth of the offer is ideal for charities as it allows for a bespoke financial solution to be created for the specific need.
This is one of the sector’s USPs: the flexibility to create the right product for a charity. One particularly important facility has proven to be the provision of very short or very long dated investment. Social investors recognise that profit making is neither an ambition nor a possibility for many charities which operate incredibly robustly on the tightest of margins. By the correct loan duration being offered, a charity has time to adjust to the loan requirements and work steadily to repay over time without jeopardising the services it provides.
More resilient and sustainable
The social investment sector aims to support charities to become more resilient and sustainable. Its investments should never therefore put the charity in too onerous position or require it to redirect resources from other parts of the charity’s income. Therefore, it is important for a charity leader to spend time talking to investors. Each investment is bespoke, and a funder seeks to design the right product for the charity.
In situations where a social investor cannot help, usually because of a fund’s specific eligibility criteria, that funder will always try to connect the charity to other investors in the sector whose mandate will allow them to help.
The challenge for a charity is to work through the providers and find the right fit. This is about matching with the right funder as well as the financial product. Think of it as finance speed-dating. You can and should try out several providers to find a working relationship that suits you and your charity.
A good tip is to keep talking to different investors until you find one who makes you feel comfortable. Social investment is as much about the relationship as it is about the money you receive. This is because another sector USP is the support it provides to a borrower charity.
Long term partnership
Unlike your high street bank, a social investor views their investment as a long term partnership which helps an organisation scale and become more sustainable. The result is better outcomes and a relationship that ought to be open and supportive in the downs as well as the ups.
Finding the right partner for the bad times as well as the good is crucially important. Unlike with a mainstream investment, the relationship does not end when the loan is made. Far from it, it is seen as just the beginning. Aside from the regular reporting of finances, social investors also record a charity’s social and environmental impact. However, in many cases they do not impose additional impact objectives. Instead, they utilise the key impact data your charity collects that is relevant to the investment.
Many social investors also try and visit their charity borrowers on a regular basis. This way they can see the impact first-hand and discuss progress on projects. This investment of time and interest pays dividends for both parties when things go wrong. Rather than being a person to avoid, social investors are often the organisation a charity leader chooses to call when they are in a tight spot. Experience shows that there is nearly always a solution and this collaboration improves relations going forward.
Obviously, it can be a fine line between interference and interaction, and the experience is usually determined by the value placed on the contribution of the other party. The social investment sector, like the third sector, is driven by a desire to help their clients.
Many funders seek regular feedback from borrowers on the working relationship and offer to help when they have a skillset that is relevant to a charity’s current needs. For example, it is not unheard of for a social investor to work closely with a charity’s finance team to improve management accounts or reporting processes. This additional support is aimed at helping streamline services and reducing work and stress in the long term.
The current Covid-19 pandemic is an excellent example of collaborative working. All social investors are working closely with their charity borrowers to understand how they might be affected, and how they can flex existing investment or provide additional financial support. There is also a sector wide response – the Resilience and Recovery Loan Fund – which provides emergency loans to charities where appropriate and is designed to work alongside other schemes from the Government and grant-makers.
So, ultimately, what constitutes a good social investment arrangement from a charity's point of view?
- An experience of partnership with a charity by the investor.
- An investment that is right for your needs.
- An investment that helps your charity to scale comfortably and securely.
- A clear reporting process that does not add work and at times even improves your own processes.
- The involvement of someone whose skills you appreciate and who you would like to call in a crisis.
The midst of a pandemic might not seem the obvious time to think about your future, but the social investment sector is heartened to be talking to several charities which are doing just that. Social investment is not for business as usual, it is for coming up with a plan and building it in partnership with an organisation that wants you to do more of the great work you are doing. So, take this opportunity, talk to your board and senior management team, and be bold.