Nick O’Donohoe

Could a global equivalent of an ‘arms race’ be forming as countries vie to build social impact investing markets? Eight countries have developed ambitious proposals for developing and deepening their social impact investment markets, spurred by the G8 social impact investment taskforce. Last week, a group of leading impact investors in the US released the first report which escalated a host of policy proposals to ‘up the game’ and grow the local social impact investment market.

The report’s recommendations indicate a shift in emphasis from purely innovating to pursuing greater scale in the social impact investing market. The UK is correctly seen as a leading innovator, but as in many other cases the US often excels at taking these ideas to scale.

The US proposals have two clear implications for the UK. Most importantly, they demonstrate a deepening commitment from another G8 country to a growing movement that aims to deploy capital to solve important social issues, albeit from a different starting point. Secondly, the US Advisory Board’s recommendations provide interesting policy proposals that could create value in the UK as well.

The report builds on many of the major strengths in the United States:

1. The US has a relatively long history of supporting small business ventures in deprived areas, using a variety of tools – from the guarantees provided by the Small Business Administration (1958) to the investment capital directed through the Community Reinvestment Act (1977).
2. Foundations have about $1 trillion in assets, making them a significant source of mission-aligned investors relative to many other countries (including the UK), where the public sector is one of the most obvious investors in social outcomes. The tradition of philanthropy also helps.
3. The state-level delivery of social services (as opposed to the centralised federal level) often serves to create policy ‘laboratories’ delivering unique approaches to public and social services with emphasis on innovation. State budgets are often many times larger than those of UK local authorities, allow each state to scale approaches without the support of federal budgets.

Despite these unique qualities, several of the proposals in this week’s report parallel policy developments in the UK. On the demand side, the group aims to stimulate purchasing from the federal government by launching pilot procurement programs that explicitly preference contractors with positive social impact – very similar to the UK’s Social Value Act. And, like the UK, the US Advisory Board is proposing to fund a centralised ‘Pay for Success Fund’ that would commission SIBs within and across government agencies.

On the supply side, the Americans are attempting to adjust rules for investors: both pension funds and foundations. This focus parallels many first movers in the UK, from the local authority pension funds’ ‘Investing for Growth’ initiative to the co-investments that Big Society Capital has made with some of the UK’s largest foundations.

But a few new proposals could create value in the UK context and are worth considering:

• Historically, the US has successfully deployed the use of guarantees as a way of channelling private capital into investment funds, most notably the Small Business Administration’s recent commitment to provide guarantees for up to $1 billion for impact investment funds. Could the UK could roll out similar programs for impact investment funds?
• The US Advisory Board has highlighted the role of impact investing in international development, and has proposed an expansion of OPIC[1] powers to generate greater impact in emerging markets. Perhaps the UK could build on this to better link development finance and social finance to develop funds to address social issues both domestically and across the globe sharing the lessons along the way?
• The White House has established the Social Innovation Fund, which has provided about $600 million in grant capital to allow non-profit organisations to scale their impact. Could the UK support high-growth organisations through a greater focus on venture philanthropy?

Further, the report highlights how finance can play a bigger role in the big social challenges the UK is facing. In education, the US’s transition to charter schools has leveraged in $2.7 billion of private capital to fund the construction of new school facilities. In housing, the Low-Income Housing Tax Credit has helped build 2.6 million affordable homes by crowding in private finance to address critical shortages in housing capacity. Clearly successful policies can’t be directly replicated from abroad, but there clearly is greater potential for more creative use of finance at addressing the big issues of our time.

The UK has learned a great deal about building a social investment market over the past few decades, not least with the establishment of Big Society Capital. Whilst we are certainly no slouch in the global race for social investment, we are always keen to learn from other countries’ ambitions and efforts. We look forward to sharing the UK’s approach to social investment with the broader community in September when the final report of the Social Impact Investment Taskforce will be released. In the meantime, let the spirit of healthy competition continue.

[1] The Overseas Private Investment Corporation supports US businesses in foreign countries by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds.

Nick O’Donohoe, Chair of the UK Advisory Board to the G8 Social Impact Investment Taskforce. He is also CEO of Big Society Capital.