Paul Hamlyn Foundation chief executive Martin Brookes has admitted to harbouring personal doubts about social investment, suggesting there are ethical issues around it that the sector has yet to confront.

The Foundation is one of the original funders of the Peterborough social impact bond, but has not dipped its toe into any social investment activity since. Brookes told civilsociety.co.uk it is conceivable that the Foundation will end up doing more in the social investment sphere after it has concluded its latest strategic review, because social investment is so high on the sector’s agenda currently. But he confessed to “some personal doubts” about it.

“I think there are legitimate questions around the ethics of starting to regard organisations to whom we would normally make grants, as investment opportunities,” he said. “That’s a really important debate to be had.”

To illustrate his point, he cited some work that Pro Bono Economics did for Barnardo’s on the cost-effectiveness of its work on child sexual exploitation:

“That analysis showed that the intervention is enormously cost-effective, so theoretically you could construct a social impact bond around that sort of work. But if I start regarding the donations I make to Barnardo’s not as gifts but as investments, then it changes the nature of my relationship with Barnardo’s.  I think that if you change the nature of a gift into a market-based transaction then it kind of corrupts the relationship.”

Brookes, who joined PHF three months ago, also said he was “slightly struck” by how the social investment market is being driven by the investor side and “there isn’t an ethical challenge or question about it. It might seem a bit esoteric, but nobody is grappling with that.”

High transaction costs

As well as worrying about changing the nature of transactions between funders and grantees from gifts to investments, Brookes pointed out that some of the early social impact bond transactions have been “incredibly expensive to put together” and demand for them among investors is “very questionable”.

“Everyone realises that transaction costs have got to come down, it’s just whether they can come down quickly enough,” he said.

Brookes said the Foundation would undoubtedly be considering social investment options as part of its new strategic review and would probably be encouraged to get more involved – “but I’ve got my questions, around the practical side but also the principle side.

“In my view, the hype about social investment massively eclipses the reality. That doesn’t mean we shouldn’t get involved, but I do have some doubts.”

Using endowment in new ways

However, he also surmised that there are other inventive ways that PHF might use its £600m endowment to help charities, besides social impact bonds:

“There are lots of organisations that need money for cashflow reasons – we could easily put some of our endowment to work underwriting overdrafts or providing working capital. We can use part of our endowment in ways that don’t necessarily dilute the endowment but sweat the assets some more. Social impact bonds are not the only answer.”

Those wishing to take part in the consultation on PFH’s new strategic plan should tweet Brookes @martinbrookes or email [email protected].