UK Should Seize Opportunity to Become Global Leader in Social Investment

UK Should Seize Opportunity to Become Global Leader in Social Investment

It's accepted that a key obstacle for growth is the banks' unwillingness to lend to SMEs. But not even getting the same attention as SMEs in the debate about job creation, growing small businesses and providing support for start-ups are the problems faced by leaders in the social enterprise sector.

Charities, social enterprises and voluntary organisations are often small and lack the collateral or assets against which to secure loans. So they rely on niche specialist social investors who understand their work and can take the bit of extra time necessary to assess their plans before investing in their organisations. "Social investment" isn't philanthropy, it isn't charity - it is hard-headed investing with the aim of making a financial return but at the same time using your money to deliver a positive social impact; providing a mortgage to a charity that wants to turn a terrace house into a women's refuge, a loan to a special school who want to buy a fleet of adapted mini buses or extended credit to a care home who wants to hire an expert project manager to oversee the establishment of a new drop in centre. All of which - the mortgage, the loan or the credit line - will be repaid with interest.

Funding for the third sector isn't something that's 'nice to have' when the economy is strong, it's something that's more essential than ever when the demand for the services offered by the sector is increasing. Cuts in public spending and the effects of an economic downturn have the greatest impact on the most vulnerable. Charities, social enterprises and voluntary organisations need to - and controversially are sometimes expected to - step into the gaps left by shrinking public services. For that, they need a robust and sustainable financial platform.

But the social investment market in the UK is severely undercapitalised. There are more charities and social enterprises looking for investment capital to help them expand their services to support more vulnerable people than there are investors willing to invest the money. Because they can't access capital in the way they want, civil society organisations are over reliant on whatever annually available grant funding they can secure- which means they can't plan strategically and they have to make their business fit the needs of grant funders rather than the needs of their service users. It shouldn't and it needn't be this way.

There are just over a dozen social investors and fund managers in the UK whose investments to date can be measured in the hundreds of millions rather than billions - but all report that they had many more applications for funding support than they were able to meet. JP Morgan estimated last year that the global social investment market could be worth up to US$1trillion over the next 10 years.

Social investment is ripe to make the shift from the emerging market it is today to the fully developed mature market it has the potential to be if mainstream commercial investors can be persuaded to get involved. The track record established by specialist social investors like CAF Venturesome, Social Finance and The Social Investment Business over the past decade shows that money can be made at the same time as delivering positive social good. A watershed has been reached - there is sufficient political will, performance data and credit track records now available to start presenting an attractive investment proposition or "prospectus" to investors. Pension fund managers, investment banks and high net worth individuals can feel that they can make informed investments in this exciting alternative asset class which offers sustainable financial return, assessable risk and the potential for diversification.

To maximise their potential for creating social benefit, civil society organisations need access to a greater choice of capital suppliers and a broader range of funding products of different types and maturities. So, existing social funders need to work together to help bring about a step change in the size of the social investment market by launching new funds and reaching out to mainstream investors - getting them to allocate perhaps just small parts of their portfolios initially. They need to collaborate as well as compete on carrying on building the investment track record and statistics for this emerging market and they need to build for scale.

The government's plans for a government initiated 'social investment bank' - Big Society Capital - funded by contributions wrought from high street banks via the Project Merlin negotiations is a step in the right direction. But the amounts involved are small compared to the potential funding available to deliver 'Big Society' if mainstream investors decided to make the switch to double bottom line investment - where they are delivered a financial and a social return on their investment.

Not only is this good for investors, the third sector and the vulnerable people they help - it's a great opportunity for us as a nation. This is a new growth enterprise market - and there aren't so many of those around. And our domestic social investment market is part of a global "impact investing" asset class. The UK has the potential to establish itself as a global leader in this evolving field as it brings together two strengths of British society - our long history of a strong charitable sector and as an international centre for financial services. As "shared value" rises up financial institutions' strategic agendas, this could and should be one of the next big things for the UK economy and UK financial services.

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