Trusts and foundations have a unique role to play in developing the social investment market. This opportunity comes at a time when I expect a lot of funders are pondering the lacklustre performance of their investment portfolios. By investing defensively, treasurers may have managed to protect foundations, but they will be struggling to find meaningful returns – meaning less cash for grants.
Allocating some funds to social investment could be a neat solution to creating social impact when resources are scarce, and could help stimulate the market. Several foundations, such as Esmée Fairbairn Foundation and Tudor Trust are already participating; over time we can learn from their experience.
The Charity Commission’s green light to charities (including foundations) making social investments removes uncertainty around the legality of pursuing social investment activities. On the charity side, at NPC we hope that Best to borrow? A charity guide to social investment, published today, can help charities think about social investment, stimulate debate and dispel some myths.
There are numerous obstacles to developing the social investment market, but foundations have many assets which could help:
Understanding charities puts foundations in a strong position to assess investment risk. The risks of social investment are not always well understood by investors, leading to some understandable reluctance to take the plunge. Foundations’ intimate knowledge of how charities are run gives them an advantage when assessing that most fundamental of business risks: management. They may have witnessed a charity’s operations over time, in conditions fair and foul. They will have pored over financial accounts. So although some foundations may lack confidence in assessing business risks, their knowledge of charities takes them halfway there.
Foundations could help charities to get investment-ready. Many charities and social enterprises are simply not yet ready for investment. A lot of foundations already provide support beyond just grants – perhaps they could help good social investment candidates so they are in a position to take advantage of opportunities where appropriate. NPC’s guide aims to help charities determine whether social investment would help them become more effective. We have seen charities use social investment to accelerate the provision of urgently needed new facilities and services. Other charities are using social investment to invest in trading activities which will make them money. Foundations could help by identifying and encouraging charities who might be good candidates.
More foundations participating in the market would help to share risk. When NPC was researching the guide, we were told that it was sometimes difficult to find co-investors to share risk on bigger deals. It was left to a handful of intermediaries to parcel up investments as best they could. If more foundations got involved it would help develop a ‘syndicated’ market among regular investors, where one transaction, with one set of terms and conditions, is syndicated among a group. This problem is also highlighted in Lighting the touchpaper: Growing the Market for Social Investment in England published this week by BCG and the Young Foundation. The report questions why more trusts and foundations are not actively participating in the social investment market. Government currently accounts for 50-60% of investors, and Big Society Capital will also dominate the scene. A greater variety of investors would be healthier for the market.
Foundations could help to improve the evidence base for social impact. Some investors are seeking greater clarity on the social impact of their investments, but this evidence is hard to gauge – another point brought out in Lighting the touchpaper. Investees aren’t always able to provide the necessary proof of impact. Impact measurement for the social investment market is underdeveloped: although metrics exist, not everyone subscribes to them and they do not always address the particular problem a charity is trying to solve. This could be an opportunity for charities to get onto the front foot and drive their own agenda as to what is important, useful and practical to measure. NPC has been helping groups of charities develop shared measurement tools. Improving prisoners’ family ties: Piloting a shared measurement approach explains how this works. But developing measurement systems and tools, shared or otherwise, requires funding: foundations have a role to play in supporting charities to improve their measurement.
This is a challenging agenda for trusts and foundations. It requires an entrepreneurial business-savvy streak which may feel at odds with some cherished values. However, the charity sector also needs to respond to its own financial crisis by diversifying income sources. If charities don’t respond, they may fall behind and lose out on the opportunities that do exist. But charities will need support from funders who know them well, and foundations are well-placed to do this.
Iona Joy is head of charity effectiveness at New Philanthropy Capital, and a co-author of Best to Borrow?