Social impact bonds are incomprehensible to most investors and irrelevant to most charities, and government has focused a disproportionate amount of resources on them, a committee of peers was told yesterday.
Geoff Burnand, chief executive of Investing for Good, which helps charities access the bond market, was giving evidence to the Lords Select Committee on Charities, which is taking evidence on the state of the charitable sector.
“It’s a mystery to me why you would look to develop a new market with a very complicated product,” he said. It’s incomprehensible to mainstream investors and broadly irrelevant to front-line smaller organisations.
“I don’t think they were designed by market practitioners. I think they were designed at a policy level. I’m sure they have their place but it’s a very narrow place.”
Peter Holbrook, chief executive of Social Enterprise UK, also said he had reservations about social impact bonds.
“The challenge has been the hyperbole around social impact bonds, which have got a disproportionate amount of resources,” he said. “It’s a single tool which have served certain markets very well. Not all social investment roads lead to the social impact bonds. There are many other forms of finance which can be more useful.
“The government has developed this totem, the social impact bond, and is dedicated to achieving success with it.”
Caroline Mason, chief executive of Esmée Fairbairn, also told the committee that SIBs carried with them an expectation that philanthropic investors would underwrite private or public sector risk.
“I don’t think that’s a good use of charitable money,” she said.
When asked why government had dedicated so much resource to SIBs, panel members suggested that it was because they were new and interesting.
"We all tend to like new shiny things especially if they’re not well understood,” Holbrook said.
He said more attention should be given to investment in other areas, such as retail investment and community shares, instead.
The comments echo those made in written evidence by the Social Investment Business, which said the government's target of £1bn of social impact bonds was unrealistic.
Big Society Capital too expensive
Those giving evidence said that another major problem in the social investment market was that money from Big Society Capital had too high an interest rate, which meant that charities and social enterprises were forced to borrow money at too high a rate.
“Their cost of finance is unrealistic,” Burnand said. “If they are turning out their money at 4 or 5 per cent and they’re doing it through intermediaries who also have to make a living then the end cost for borrowers is 8, 9 or 10 percent and that’s why the market isn’t growing.”