Best to borrow? A charity guide to social investment
New Philanthropy Capital
This is an exciting time for social investment. The current and previous governments have worked hard to stimulate the development of the market, and support is coming from a growing number of grant-makers and philanthropists who want to generate social as well as financial returns. The loan portfolios of social investors in the UK are now worth more than £500m. At the same time, demand from charities for social investment is increasing. Government spending cuts and a decline in voluntary donations are hitting charities hard, and social investment is seen by some as a way out of this funding fix.
What is social investment?
Social investment is the provision of finance to charities and other social organisations to generate a social return. It is a relatively new form of finance, as charities primarily rely on grants, donations and their own reserves to survive. Many charities are coming to social investment for the first time and are wondering whether it is right for them. There is some guidance about social investment available, but much of this is written for investors or social enterprises. At NPC, we have found no practical, straightforward guidance for charities about the subject. We have therefore produced this guide to help charities learn about social investment, find out about its opportunities and risks, and work out whether it might be right for them.
Should my charity take on social investment?
Social investment has the potential to deliver real benefits for many charities. It can help them to scale up their services, develop new projects and smooth out uneven cashflow. For the disability charity Scope, social investment helped to build new residential facilities for adults with complex disabilities. The children’s charity Barnardo’s used investment to set up three new social enterprises, with surpluses generated by these enterprises being used to support Barnardo’s services for disadvantaged and vulnerable young people.
But while social investment is a valuable tool for some organisations, is not the answer for all charities. Social investment has to be repaid, so charities need a reliable income stream. Investment cannot replace the income that charities receive from donations and contracts.
Investment also involves risk. Failing to make repayments may put the charity under financial pressure or, at worst, could force it to close.
So charities need to think carefully first before taking on social investment. They need to understand the risks and, through good planning and risk management, take steps to mitigate them. They need to be clear about how the investment will create social benefit and improve the lives of their beneficiaries. Charities also need to have support from their whole organisation, especially the board of trustees.
Social investment may not be a cure for all charities’ funding problems, but it can be a useful tool to help charities achieve their missions. For charities that are confident of a future income stream and have considered the risks fully, social investment can be an effective way to enable them to do more for the people they help.
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