Charities and social investment

Charities and social investment
Institue for Voluntary Action Research


This study explored the challenges, risks and opportunities of social investment for charities in England and Wales. We focused primarily on the knowledge and experiences of charities that have received or made investments as well as intermediary organisations engaged in this field. In addition, the study drew on charities’ and intermediaries’ views about the development of social investment in the future.

We present our conclusions under five headings:

* Charity voice and the significance of charity status
* Simple social investment products and neutral advice
* Collaborative working
* Charities and a successful future social investment market
* Social investment and public trust and confidence in charities.

11. Charity voice and the significance of charity status

Despite increasing policy interest in social investment21, there is still only a small amount of actual lived experience among charities.22 Our literature searches indicate that very little has been published about the first-hand experiences of charities either making or receiving investment, while our findings suggest that the significance of charitable status, including the centrality of charity mission, is poorly understood by some of the organisations making social investments currently, particularly those non-charitable intermediary organisations that have entered the market in the past five to 10 years.

Our findings indicate that some intermediary investors do not consider charitable status to be relevant to the way they organise social investment. They show little awareness or understanding of charity regulation and guidance as it affects both investees and investors. For example, there is a lack of awareness that charities are required to report on public benefit, that charitable foundations cannot make an investment with below market rate of return in omething outside their mission, and that a charity’s mission must be linked to their charitable purpose. In this study, participants suggested that if charities were not recognised as a distinct group regulated in a distinct way, then investment processes might not be tailored or appropriate to their needs.

The charity sector appears to be largely absent from conversations about the social investment market, while non-charitable intermediaries have been actively participating in them. Our study findings suggest that there is little movement between the practical experiences of charity investees and the theories and ideas behind the development of the social investment market. Furthermore, in our study, charities (investors and investees) said that contemporary debates about social investment rarely question whether investment is even appropriate for charitable organisations. Specifically, they suggested that some charitable activities are not marketable and will not attract investment; and that some charities judge that generating a return from work with vulnerable people, such as mental health services users or offenders, is incompatible with their organisation’s ethos and values.  Although these organisations might be interested in social investment, this was likely to be about purchasing or developing an asset for the benefit of their users.

There was widespread agreement that this lack of understanding about the charity experience may skew the development of the market and associated support because the needs of charities cannot be taken into account. It is possible that charity investors, specifically trusts and foundations, could play a role in addressing these issues.

12. Simple social investment products and neutral advice

We learned from charity investees that their motivation for engaging with social investment generally fell into one of two categories: organisational survival, where a loan or other investment helped the organisation to solve a problem or manage a crisis, and strategic change, where investment was used to achieve a significant shift in the organisation’s direction. Many study participants wanted to see intermediaries focussing on ensuring that their social investment products and processes would meet these organisational needs, rather than, as is perceived to be the case currently, on generating a demand for the social investment products and processes that they provide.

Our research findings suggest, therefore, that most charities need simple social investment products that are presented to them clearly and in accessible language.  Many require a simple, standard loan. Study participants mainly agreed that most charity investees do not have the knowledge and experience to select an investment product without advice and they identified a need for neutral advice from organisations that are not social investment market competitors.

However they also said that it is difficult to see who would pay for such advice in the current operating environment of contracting charity infrastructure. Until a charity has actually received social investment, they may not have the resources to pay for independent investment advice and support. Once a loan has been made, the investing organisation receives income which allows them to cover the costs of providing some support. Before the loan is made, the investing organisation is not receiving any revenue, so any support is a cost which may never result in a loan.

Before receiving an investment, charities told us, they benefit from: grants for advice and bespoke support with business planning and gearing up to manage investments; opportunities for peer learning with other charity investees and partnership improvement with charity investors and non-charitable intermediaries.

Our findings suggest that, taken together, these measures might enable charities to choose appropriate and suitable social investment products that offer clear advantages, align with their mission and strategy, can be understood and supported by trustees, and will help the organisation to plan for the long term.

13. Collaborative working

Collaborative working is a familiar theme to the charity sector23. Peer learning, in particular, was seen as a cost-effective method for building skills, knowledge and capacity among both investees and investors. Finding ways to share learning and experiences also makes sense in a field where many of the charities receiving social investment are doing so for the first time and investment organisations continue to innovate rather than standardise their products. Collaboration including peer learning among investees and investors as well as intermediaries could, over time lead to standardisation of some investment products and processes. In turn, this could reduce the cost of social investment advice and legal support.

13.1 Collaboration between charity investors

Study participants suggested that social impact assessment might benefit from the collective knowledge and experience of charity investors. The latter were thought to be more familiar than intermediary organisations with the legal and regulatory frameworks within which charity investees operate (including e.g. trustees being required to report annually on public benefit).

13.2 Collaboration between charity investees

Peer learning between charity investees could also connect chief officers and trustees who, our findings suggested, feel isolated and lack opportunities for sharing knowledge and experience. There was a perception that shared learning could also support trustees to make more informed risk assessments when faced with a social investment opportunity.

13.3 Collaboration between charity investors and investees

We found considerable common ground between charity investors and investees in their shared understanding that governance, mission and strategy are essential to successful social investment. Our study also identified roles for trusts and foundations beyond making investments, in particular their potential to link up organisations that are interested in applying for investment with those that have already received investment to look at the lessons that they have learned.

13.4 Collaboration between charitable and non-charitable organisations

Building on our study findings, it is possible that charity investees and investors may benefit from holding discussions with non-charitable investment intermediaries that focus on areas of shared understanding, such as governance and management.  Here, there appears to be common ground and there may be greater scope for mutual exchange. In other areas, however, there is less agreement. Opinions varied in relation to impact measurement, for example, where intermediaries’ expertise and investees’ skills were both questioned.

Finally, it was thought that trusts and foundations might have a role to play in encouraging and facilitating collaboration. Specifically, they might act as a bridge between intermediaries and potential borrowers in terms of the language and culture of lenders and the language, culture and ethos of borrowers.

14. Charities and a successful future social investment market

Our study participants identified four features of a successful social investment market from the perspective of charities. They are:

* Collaboration between charity investors (e.g. co-investment and shared due diligence) and charity investees (e.g. peer learning to tackle isolation of chief officers and trustees).

* Trust between organisations engaged in market development through better understanding of each other’s culture, roots and terminology. A shared approach to impact measurement would also be helpful.

* Clear communication in simple language about social investment products and processes to demystify them and to enable charities to be strategic in their decision-making about social investment options.

* Awareness of appropriate organisational forms and legal structures for social investment; understanding of the boundaries of charitable status.

15. Social investment and public trust and confidence in charities

This study has drawn attention to the issue of public trust and confidence in charities, and how the growing social investment market may affect this. Charity participants in the research felt public confidence was important and that proper regulation is required to reassure the public. Ethical issues were raised about whether social investment runs counter to the ‘ethos’ of charity, particularly in relation to the distribution of financial profits as a result of tackling a social problem.

We know from the literature24 that we reviewed as well as our own study findings that some charities received social investment through their subsidiary organisation and some of those subsidiary organisations were community interest companies (CIC) or companies limited by guarantee. We found that charity investees and investors perceived as relevant, therefore, the role of the CIC regulator and Financial Services Authority, as well as the role of the Charity Commission. This was linked to their commitment to maintaining public trust and confidence in the charity ‘brand’.

In conclusion, we have learned that, first, social investment decisions, processes and management appear to benefit from attention to governance, mission and objects and charity regulation including public benefit requirements. Second, if these are clearly articulated and accompanied by business planning advice and support, they may provide a framework for charities to be strategic in their decision-making about social investment. Finally, it would be helpful, therefore, for non-charitable intermediaries to understand this framework, and for charity investors to lead the process of learning and sharing knowledge between charity investors and investees and charity and non-charitable intermediaries.

 See full report here