As the UK’s Financial Conduct Authority calls for input on the regulatory barriers to social investments, we take a look at the growing interest in the market.
It is rare to see the Pope commenting on investment but he had something to say about a report led by the British government into Social Impact Investing (SII) – or investing with the aim of generating a social, as well as a financial return. “It is urgent that governments throughout the world commit themselves to developing an international framework capable of promoting a market of high-impact investments and thus to combating an economy which excludes and discards,” he said.
Making an impact
His comments reflect growing interest in the field. Research by JP Morgan and the Global Impact Investment Network, for example, showed $10.6bn of SII1 in 2014 and this is expected to have risen 16% to $12.2bn when the final statistics for 2015 are collated. The UK has established itself as one of the leading countries in the field. Richard Speak, Head of Enterprise Advisory at Social Finance – a corporate finance house for social impact investment – says that in the UK there is about £1bn of investment, of which £600m is in specialist banks like Triodos and Unity Trust and £400m in social investment funds.
Activity in the UK has been spurred partly by two government initiatives. The first was the decision to use unclaimed deposits in high street bank accounts to establish Big Society Capital as a wholesale bank for social enterprise – providing up to £600m for investment at one stroke. The second was the introduction in 2014 of a tax incentive, Social Investment Tax Relief, to encourage funding of this sector. This allows investors to deduct 30% of eligible social investments against their income tax bill, up to a maximum of £1m. Currently, however, the maximum that can be invested into a social enterprise fund under European rules is £275,000, so anyone able to invest the maximum would have to spread the funds over a range of projects. The government is, however, hoping the limit will be increased to £5m next year.
Financing social good
Impact investing covers a wide range of sectors: JP Morgan’s research showed that housing, microfinance and other financial services accounted for over half of all investment globally. In the UK, projects have ranged from schemes aimed at reducing recidivism among prisoners, through solar generation to reduce fuel poverty, to financing hospices and end-of-life care. Investment can be made through equity or debt: there are, for example, 31 social impact bonds in the UK where the returns are based on the impact achieved, such as placing children in foster care or reducing social isolation.
Speak points out that private investors can access SII in three ways: through crowdfunding schemes; community benefit societies, run for and owned by local communities, the majority of which are renewable energy schemes; and through Social Investment Tax Relief funds such as the recently launched £3m Bright Futures Fund.
Understanding the risks
While prospective investors are likely to be driven by ethical and social motives, they should also be aware of the risks involved. Many of the projects are untested and their principal aim will be to deliver a social objective, rather than a profit. There is generally no recognised exchange for anyone wanting to exit their investment and, if selling is possible, it will likely only be by matching buyers and sellers, so will be difficult to assess what price can be achieved.
But Speak points out: “One trend which we have seen is that philanthropists do not just want to give their money away: they want to use their skills and expertise as well, such as acting as social angels.” Social Impact Investing is a way of putting funds to work for mutual benefit. As Sir Ronald Cohen, a venture capitalist and one of the leading players in this area, said in a report for the government: “Impact investment is emerging as a new unifying force in dealing with social issues, driving innovation and prevention to improve lives. It harnesses the forces of entrepreneurship, innovation and capital and the power of markets to do good. One might with justification say that it brings the invisible heart of markets to guide their invisible hand.”
The value of investments can fall and you may get back less than you invested.
Any tax allowances or thresholds mentioned are based on personal circumstances and current legislation which is subject to change.
This information is for illustrative purposes only and is not intended as investment advice.