Social investment is starting to transform the way that parts of our economy work.
Social investments include loans and shares into organisations whose principal purpose is social. They have grown by around 20 per cent a year for the last five years, according to Big Society Capital, the organisation that helps social enterprises and charities to raise finance. It estimates there is now £1.5 billion invested into social-purpose organisations, £427 million of which was new investment last year alone.
The market is set to get a huge boost from social impact tax relief (SITR), which some are calling the Government’s best kept secret. SITR started in April 2014 and helps individuals invest in social-purpose organisations by offering tax breaks, including 30 per cent income tax relief, on loans or share investments.
The relief has so far assisted 30 deals worth £3.4 million in total - a tiny fraction of the overall social investment market. But experts agree that SITR deals could become worth over £1 billion in five to ten years.
Examples of SITR projects include The Freedom Bakery, which trains prisoners in artisan baking skills to improve their employability. It raised £48,000 through SITR and pays investors 1.75 per cent interest.
Others include community-based football team FC United of Manchester, which raised £270,000 and pays 2 per cent; and Headliners UK, which raised £75,000 to help young people in deprived areas and pays 6.5 per cent.
Making a social investment usually requires financial advice. There are currently only three small funds that invest in SITR projects, so most investment is still done directly into small, single organisations, and the market is so young that track records do not exist. The risk is high and investors may not get their money back. Most therefore see it as a primarily philanthropic exercise, or a ‘smarter way of giving’, though that may change as the market develops.
John Ditchfield, partner at ethical adviser Castlefield, welcomes developments in this field but warns that some organisations seeking investment might be new to the concept of commercialisation - for example, in dealing with investors’ needs, providing strong, transparent accounting systems, and in managing capital.
Gavin Francis, managing director of Worthstone - which supports financial advisers in this market – disagrees. ‘When you set up a passion-led business, the willingness to make it happen is incredible. The sector is attracting phenomenal expertise and talent. Top professionals are prepared to take lower salaries or fees because they want to be involved.’
The Government clearly agrees. To boost the market further, it has committed to expanding current limits on the SITR scheme substantially. This should attract more and larger funds into the market and open it to the mass affluent via investments in diverse portfolios of well-monitored social projects.
Cliff Prior, chief executive of Big Society Capital, says that despite its current limitations, social investment is expanding quickly because since the credit crunch, society has realised we need a more inclusive economy.
‘Charities, social enterprises, investors, institutions and companies are all becoming more familiar with social investment and how to get involved. It is increasing here and around the world. For example, in America, social crowdfunding is becoming popular. In France, one million people have opted into a social pension scheme. That French model has removed barriers to investment and shows how far social investment can go.’
Tim Cooper is a freelance financial journalist