Opinion

New money for new work

Finance | Tania Mason | 1 Oct 2009

There is a real sense that the time has finally arrived when the concept of social investment could really take off. As well as a critical mass of vocal exponents approaching it from different but complementary points of view, there are a number of themes of recent times converging to provide crucial momentum.

Firstly, there is a pressing need for new sources of finance for charities and their social enterprises. This is both to take up  the slack that will be caused by a future reduction in state spending and to allow resources to be applied in new ways so that desired results can be achieved rather than ever-increasing resources being soaked up by the consequences of failure in public policy.

There is also a growing recognition that replication of really effective interventions  is so much more powerful than constant innovation with its associated high failure  rate.  By all means take a chance on new ideas, that is core to grant funding values, but when you find a winning formula, what is the mechanism for rolling it out?

Additionally, there is now a real focus on impact reporting and on really identifying what has actually been achieved rather  than simply what resources have been expended. This will be crucial to identifying social return on investment (SRoI) which is a key component of the return social investors will be expecting to receive.

Finally, there have been a few successful examples of venture philanthropy using business development techniques drawn from the private sector. Organisations like Impetus Trust have begun to demonstrate  it is possible to grow social businesses really quite quickly with the appropriate injection  of cash and expertise, albeit without a financial return to investors.

Yes, there are problems to be overcome – fiduciary duty of trustees of potential institutional investors, independent validation of SRoI, a lack of visible channels down which investment can flow and return, not enough in the way of track record – but a continuing flow of successes will go a long way to eroding these blockages and one really big winner could blow the whole thing wide open.

It’s an exciting time to be involved  and we may look back in years to come  and see this as a watershed period which fundamentally changed the way social problems are addressed.

Risk and reward

For the present, the old way of providing investment finance to charities relies pretty much entirely on loans. And most of these  go towards buying property to occupy and operate from. But even this form of secure financing isn’t that widely in place. According to Guidestar data a large majority of charities with income over  £1m have no long-term loans at all and unsurprisingly the percentage of charities with loans slumps to almost zero the further down the income scale you get.

This is probably more a reflection of the risk-averse nature of charity trustees than  a lack of desire at banks to lend to charities.  At the end of the day, this attitude among trustees may be the single biggest barrier  to expanding social finance.The worry is that trustees don’t really understand risk or accept that all economic activity is inherently risky. Or that risk can often be more perceived than real. Or that apparently taking no risk can actually be extremely risky – try leaving all your money ‘risk-free’ in the bank for 20 years and  see what happens to its purchasing power, for example.

Charities will need to embrace risk and master it if they are to grow and thrive in the future. Communicating that with trustees and encouraging them to embrace controlled risk will be key to future success.

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Who's Who: Tania Mason