The government has been urged to reform the social investment market by changing the role of Big Society Capital (BSC) and scrapping “ineffective” tax reliefs.
They are two of the recommendations made by Conservative MP Gareth Davies in the report How to Scale Social Investment, published this week by the influential centre-right think tank Onward.
His report argued that social entrepreneurs and investors must “finally accept that some innovations and policies are just not working”.
BSC said in response that it “will be looking” at the ideas in the report.
BSC is ‘fundamentally underutilised’
Onward describes the creation of BSC as “innovative and ground-breaking in many ways” but adds that “it remains fundamentally underutilised and predominantly focused on charities”.
It recommends that the rules governing BSC’s mandate should be changed so that its money can be invested in small and medium-sized enterprises “with social co-benefits”. It can currently only invest in organisations working “wholly or mainly” for social benefit.
Noting that BSC usually loses money on its investments, the report also says it should launch “a dedicated fund management arm” and bring “its own social bond portfolio to market to retail and institutional investors, for a management fee”.
This would make BSC “a revenue-generating organisation”, it argues.
Stephen Muers, the chief executive of BSC, said: “We fully support this report’s call for scaling the social investment market, which is vital to the levelling up agenda and building back our communities after the pandemic.
“There are some interesting ideas in the report on how to further evolve and grow social investment.
“We will be looking at these as we continue to build on the success we have already seen in the UK social impact investment market, which has grown more than six fold over the last decade.”
Reforming tax reliefs and bonds
The report says social enterprises have raised just over £11m thanks to the incentives provided by Social Investment Tax Relief (SITR), which was introduced in 2014. This figure is “underwhelming”, it says, and represents around 6% of the total estimated when SITR was launched.
It continues: “It is my view that this tax relief should be removed in the budget, and government should work with the social enterprise sector to develop alternative policies, particularly around procurement, to help incentivise more trade rather than just investment capital.”
SITR allows an investor to claim back 30% of the value of an unsecured loan to an eligible charity against their tax bill. The relief is only open to individual investors.
Earlier this year, social investment experts successfully lobbied for SITR to be extended to 2023.
The report is also critical of the performance of social impact bonds, which have raised £73m in investment capital compared with the projected £1bn targeted by then charities minister Rob Wilson. This is described as a “remarkable failure”.
Responsibility for social investment policy should be moved from the charity minister and given to the small business minister at the Department for Business, Enterprise and Industrial Strategy, the report suggests.
‘Tens of billions’
Gareth Davies said: “The UK social investment sector has grown substantially in recent years in property investments, liquid social bonds and through lending activities.
“However, so-called ‘social impact bonds’ have failed to raise investment capital at scale and the Social Investment Tax Relief has been ineffective at incentivising investment into the sector.
“A rethink and refocus is needed to truly realise the potential of the social investment market. First, by making clear the difference between philanthropy and investment, and secondly by reframing existing support and institutions aiming at mobilising private capital towards the growing corporate social debt markets.
“If we do this, literally tens of billions in new investment could be raised to help fund the national levelling up agenda.”