After much preparation and amid great publicity, Big Society Capital (BSC) was launched last year with funding from dormant bank accounts and from the four ‘Merlin’ banks (Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland).
Its mission is to help create ‘a strong, diverse, well-capitalized and sustainable social investment market in the UK, through which social sector organizations can access appropriate and affordable finance and support to grow their impact on society.’ Caroline Hartnell talked to chief operating officer Caroline Mason about BSC’s work so far, how she sees the potential and limits of social investment, and what BSC can do to help fulfil that potential.
You’ve just received an award for services to social investment. [Caroline Mason received a CBE for services to social investment in the 2013 Queen’s Birthday Honours List.] What do you see as the future of social investment, in the UK and elsewhere? What can it achieve?
In fact a number of people such as David Hutchison at Social Finance and Malcolm Hayday, the founder of Charity Bank, also received awards for services to social investment this year so I feel very honoured. It is the first time that social investment has been recognized so I feel that it puts the sector squarely on the map. It’s recognition that finance and business can be used for real social purpose. That perhaps there is an alternative to profit maximization no matter the cost and philanthropy as a way of dealing with the consequences. I believe that the future of social investment is to continue to provide responsible and appropriate finance for organizations and business models that trade well and profitably for the purpose of generating social good.
Does it matter what legal form these organizations have?
Social purpose organizations come in a whole range of different legal forms – charities, social enterprises, even PLCs [private limited companies]. The defining characteristic for truly social businesses is when their core activity is their social purpose – this can range from community energy to health, organic farming and regenerating empty homes. It’s not characterized by an effective CSR function; it’s not because there are one or two pilot projects being funded as an experiment; it’s not because a percentage of profits is donated to a philanthropic foundation – it’s because its purpose as a business is social change.
There is a new concept emerging in the market; the idea of a Trust Engine. UnLtd, for example, has found that many new ventures set themselves up as companies limited by shares, because that’s the most standard legal form and because it provides greater flexibility for raising investment necessary for growth. However, these entrepreneurs also want a recognized mechanism that gives customers, investors and commissioners confidence and trust that the company will continue fulfilling the social purpose that it was set up to deliver. Research and review of existing trust mechanisms is under way to try and establish the essential ingredients for social governance and purpose and how these can then be used by social organizations, irrespective of their legal structure. I think that’s very exciting.
Going back to your first point – that the social purpose must be the core of the organization’s activity. Does that mean that the social return would be more important, or are you not suggesting there should be any sacrifice of financial return?
I would look at it in a different way. I would say that for an organization whose core purpose is social change, sustainability in the long term is critical both financially and socially; in fact, the two are inextricably linked . If your social model is unsustainable, then it is more likely that your organization will suffer from mission drift; we’ve all seen that happen many times. Equally, if you’re not financially sustainable in the long term, the negative social impact is twofold: not only do you stop delivering much needed services or products, but the expectation that you would be there to provide those services has also gone.
So I think it’s important that financial and social sustainability go hand in hand, and that longer-term, intelligent and patient finance exists to support this concept. At its heart, this new type of finance needs to understand and explain the balance between social and financial returns in a very transparent way. If you stray too far either way, then the fidelity of the new model is broken.
In a world where governments everywhere expect to contribute less to the solution of social issues, how much can social investment fill the gap?
That’s an answer we don’t have yet, but we are starting to see how social investment can fill that gap in a number of areas. Social investment can be used as long-term patient risk and working capital to allow charities to innovate and to provide better public services. There has been an increase in communities wanting to own and manage assets and services that they consider critical, so that’s another area in which social investment can fill the gap. Additionally, trading organizations like restaurants and retailers are adding a social dimension to their business model by working with and training the long-term unemployed or homeless people or young people who have fallen out of the system.
So local communities would actually own, say, the local park or the community hall and then generate the income to keep it going?
Absolutely. The community owns it, rents it out to local groups, and gets an income stream. In rural areas, local businesses or sole traders often need a work space, almost like a community business hub that can also be used as a community centre. We’ve seen interest from community-owned seaside piers and swimming pools. Communities need social investment and technical support to be able to acquire the assets and build the revenue streams – they are too high risk and new to attract mainstream lending.
So social investment can lend communities the money to buy their asset and, when they’re ready, they can start to pay back?
Yes, and in the meantime they also own and manage it for their benefit. I think there’s a whole range of opportunities that previously would have been in the domain of local government that can now be run by local social enterprises, charities, community groups and social purpose businesses.
How is Big Society Capital contributing to the achievement of this vision?
The focus during our first year was to establish ourselves in the market and to respond to immediate requests. At our first anniversary we announced four strategic initiatives developed and informed by our learning during our first year of operation. The first is the availability of risk and working capital for frontline organizations. We are working with a number of intermediaries already offering unsecured capital to make this type of finance more readily and appropriately available. The second is the community asset opportunity we have already discussed and how best to meet the potential demand. The third is the development of specialist regional funds: how do we tailor our money to work effectively at a regional level? We are collaborating with the Northern Rock Foundation to develop a long-term social investment strategy for the North-east. Finally, influencing elements of regulation and policy. An example of this is our work alongside the sector to lobby for a tax relief targeted at social investment – a social sector equivalent of EIS (which encourages equity investment in small unquoted companies). The consultation for this has just started.
We are also involved in working with government and sector organizations such as NCVO and ACEVO on standards for public sector subcontracting to social sector organizations. Public services are often outsourced to prime contractors, which tend to be quite big private sector companies, which then subcontract to the social sector. Our aim is to help establish best practice contracts between prime contractors and social sector subcontractors based on a fair distribution of social risk and financial benefit.
Big Society Capital invests in social investment finance intermediaries (SIFIs) rather than directly in social enterprises/businesses. Why is this?
We are precluded from investing directly in the front line; it’s built into our governance. The reason for this is twofold. First, there is a fledgling intermediary market that would have been completely swamped had we been set up to compete directly. Feedback during the government consultation on the set up of Big Society Capital was very clear: ‘You need to capitalize us so that we can then scale and grow.’
Second, there is a general belief that this market will grow and so there will be a need for more sources of capital. So we want not only to capitalize the existing intermediaries but also to start building new ones in preparation for the growth of the market. As the number of community groups and social enterprises increases, we would expect there to be increasingly more places for them to go for social investment.
Where does the Social Stock Exchange fit in?
There is a great deal of talk about the professionalization of the social sector. There is also a real need for the socialization of the private sector. And that is where the Social Stock Exchange fits in. It is beginning to push the need for social impact disclosure and transparency out of the traditional social sector space and into the publicly listed arena. Until now, the idea of having to give evidence of your social impact has been exclusively associated with the social sector. The Social Stock Exchange is establishing the idea that all organizations need to articulate and evidence their social purpose and that reporting on social performance is as important as reporting on financial performance if you want to attract a new type of investor. It is a discipline where the social sector is expert and experienced and is establishing real thought leadership.
Going back to Big Society Capital, is it an organization that is going to grow?
Actually, in financial terms, we can’t grow beyond our current projected balance sheet of £600 million by 2016. This is because our State Aid clearance is limited to this amount. However, what we do expect to see grow is the scale of the social investment market and, therefore, the amount of social change generated as a result of our investments.
Presumably, if the idea is to support other intermediaries, it would make sense for Big Society Capital not to carry on growing indefinitely?
That’s exactly right. We have an increasingly vibrant, growing social finance intermediary market. These organizations are fantastic and have a great deal of experience and knowledge of the financing needs at the frontline of social need. They were to be celebrated as pioneers in social investment long before Big Society Capital came along. Ideally these organizations, with our support and in time, will grow and scale sufficiently to raise capital independently and we won’t really be needed any more.
So Big Society Capital could have a limited life?
I think we’ve probably got ten years, at least, but who knows? If there’s a lot of demand and increased appetite from investors, and we show that social investment is sustainable and can generate enough return for investors as well as generating real social impact, then maybe we won’t be needed in five years’ time. But I think ten years is probably more realistic.
What are your biggest challenges?
We exist in an environment that is changing very quickly, so our biggest challenge is to be nimble and responsive to immediate needs at the same time as keeping an eye on the longer-term needs of the market. I think there’s a frustration that we can’t fund everything and that we can’t invest directly, and so we need to get better at communicating our role and purpose.
Finally, a key challenge for us is to champion the world of social investment to the mainstream financial community, to make sure that the money that sits in mainstream financial service products slowly starts to move towards the alternative. Individual investors understand the concept of social investment, but the machinery of mainstream finance is a bit like a huge oil tanker just beginning to change course.
Talking about social investment again more widely, many people present it as a panacea. Certainly, with regard to the philanthropic sector, there’s a view that grants could become almost completely unnecessary – social investment could solve anything. Are there issues social investment can’t deal with?
This whole market is moving from a model of subsidy to one that is grounded in sustainability and that’s a long journey. It needs to be done very carefully and thoughtfully, and grants are an intrinsic part of that journey. Social investment is just one of the tools in the tool box; it is definitely not the panacea. Technical support, grants and social investment are part of the same package. The percentages change, but it’s a package that needs to be tailored appropriately for the long-term delivery of systemic social change.
Are there areas – like working with particularly marginalized groups, or advocacy, or human rights, where social investment will never be the answer?
I think there are areas where social investment isn’t appropriate and will never be. Social investment is predicated on having a revenue stream that can pay back the money, and there are some areas where that isn’t optimum or necessary.
Is there a role for social investment from investors in richer countries to help solve social problems in poorer countries or doesn’t it work so well on an international level?
I think it does and it can do. There’s a great opportunity for wealthier countries to kick-start initiatives in poorer countries, but to effect real change, these things must be owned, managed and governed by the communities themselves. This builds long-term sustainability and empowerment rather than creating another form of dependency.
1 Project Merlin is an agreement between the British Government and four of the UK’s major high street banks. One of the main aims is to promote lending to businesses, particularly small businesses.