Using social investment to achieve departmental policy objectives

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Why you might want to use social investment, and how we can help

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Social investment is an important tool in public service provisionIt can help finance new ways of tackling social problems

St. Mungo’s are a charity supporting people who are homeless or at risk of homelessness.

Through a Social Impact Bond, St.Mungo’s raised money from social investors to run new services which aim to improve housing, health and employment outcomes for a group of 800 people who move in and out of rough sleeping.

If the services are successful, this will lead to cost-savings for DCLG, who will use up to £5m of the savings to pay back investors.

Avante Partnership is a charity supporting 2,700 people in the South East of England. Its mission is to improve dementia care outcomes by reducing loneliness, helplessness and boredom.

Working with Triodos Bank, Avante is raising £5m from social investors through a charity bond. This will allow Avante to fund a new 75 bed care home and make improvements to its existing homes.

Avante will pay back 5% interest per year and the original investment in full after 5 years.

The Greenway Centre is a business hub in Bristol. It hosts a wide range of activities for community groups, from employment and training courses for adults to exercise classes for ex-offenders.

The Greenway Centre received a low-interest loan from a social investor called Pure Leapfrog to install a set of solar panels on its buildings.

This has enabled the organisation to reduce its operating costs and generate an income to keep services affordable for the local community.

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You don’t have to be a financial expert to use itSocial investment has a wide range of applications, which will be familiar to policy makers

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Unlocking marketsSocial investors can invest for lower returns and higher risk

For example, taking on more financial risk in an investment in social housing, enabling more commercially minded investors to put money in.

If these are successful, mainstream investors will often scale them up

Social investors are people who invest their money to have a measurable social impact, alongside a financial return. This can create pools of capital and expertise to support policy interventions, and reduce public funding requirements in the long-term. There is around £1bn of social investment available in the UK.

It is particularly relevant to policy makers looking to innovate, create sustainable public service markets, or support new policy approaches.

Funding R&D Social investors are willing to finance new approaches to social issues

For example, investing in organisations who take a more rounded approach to reducing reoffending than many local services are currently able to.

If these approaches are successful, government can then scale them up

Supporting PbR and open policy

making

Social investors are especially interested in deprived areas and outcomes-based service delivery

For example, providing working capital to organisations in payment by results schemes, or creating funding pools for local authorities to tackle a range of social issues in one geographic area.

This can prevent lack of identified funding being an immediate barrier to policy interventions.

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Is social investment an option for your policy?It needs to meet three broad criteria to be in scope

1. Are you trying to tackle a social issue?

2. Are there socially minded organisations well placed to

act on the issue?

3. Is there a revenue stream that supports them?

These can cover issues for both individuals and communities, such as NEETs, fuel poverty, ill

health and re-offending.

These groups typically have a social mission embedded into their structures. e.g. charities,

CICs, social enterprises.

This means someone is willing to pay for the services. This can

include you, service users, the general public and so on.

Social investors want to invest in positive social outcomes, often

aligned with Government policy.

Social investors are interested in these, due to their frontline

experience and focus on achieving more than profit.

There needs to be sustainable business models for investment

to take place.

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Defining the social issue Identifying organisations and the kind of support they need Finding revenue streams

What measurable outcomes are you looking for in this area?

Departmental Business Plans set out social policy objectives and measurable indicators of progress.

How much does this issue currently cost you?

Departments’ analytical and finance teams and the Centre for SIBs cost unit data can help to build up the cost-benefit calculations of social

investment programmes.

Do the organisations need scale?

There are many social investment intermediaries who are providing affordable finance for successful organisations looking to grow.

Do they need business support?

The Investment and Contract Readiness Fund gives high-potential ventures funding for business

support to enable them to take on investment.

Do they need incubation?

The Social Incubator Fund supports social start-ups to get up and running.

Can government pay for the service?

There is excellent social value guidance for procurement professionals and local

commissioners on how to buy goods and services from socially minded organisations

There are resources that can help Some which you use every day, and others which you might not have heard of

Can government pay for the outcome?

Social Impact Bonds enable policy makers to commission an innovative intervention,

on an outcomes basis. The Social Outcomes Fund provides top-up funding for Social Impact Bonds that produce savings for a number of public sector organisations.

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And a specialist social investment team in the Cabinet OfficeContact us if you would like our help in seeing how social investment can support your work

Cabinet Office supportCO have a dedicated Social Investment and Finance Team

We can support departments to scope social investment projects; work with the social investment sector to develop new mechanisms and leverage additional external investment. More detail on our work is available here

We also have a globally recognised Centre for Social Impact Bonds, which has expertise and funding to help departments set up SIBs

The team is part of the Cabinet Office Government Innovation Group. This group promotes new approaches to public service delivery

Examples of our recent work

Financial inclusionPartnering with DWP and HMT to bring in new sources of funding from Foundations to help increase people’s access to affordable credit

Community artsWorking alongside DCMS and the Arts Council to run a programme supporting community arts organisations to become investment ready

DementiaSupporting DH to identify ways in which social investment can support HMG efforts to tackle dementia, as part of the UK’s G8 commitments

Rough sleepingAssisting DCLG and the GLA to evaluate the impact of a £5m social impact bond focused on 800 people who move in and out of rough sleeping

Local growthSupporting BIS in connecting with Local Enterprise Partnerships to identify options for how social investment can support European funding

How we can help

Contact us at: SocialInvestmentandFinance@cabinet-office.gsi.gov.uk

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ADDITIONAL BACKGROUND INFORMATION

• 1: How departments are using social investment to support their goals

• 2: Background on Government’s support for the social investment market

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Many departments use social investment to support their policy goalsTo innovate, to diversify supply chains and to strengthen existing policy implementation

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•£75m Impact Fund to foster the impact investment market for development finance

• Consultation into development social impact bonds

• Guaranteed a bank loan to Divine Chocolate to support poor farmers in Ghana

•Social Enterprise Investment Fund invested more than £100m in over 650 social ventures

• Funding towards investment and contract readiness

• Trailblazers programme looking at social impact bonds

•£30m Innovation Fund enabled 10 social impact bonds to support NEETs

•‘Rehabilitation Revolution’ involves multiple pilots, including:

• Social impact bond at Peterborough prison to reduce reoffending

• Community Shares Unit provided support and advice to enable communities to raise equity finance through community share offers.

• As part of its Community Energy Strategy, promoting existing social investment opportunities in the CE sector.

• Establishing a working group of HMG-, community energy- and social investor stakeholders, which aims to further support community energy projects’ Access to Finance.

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Policy makers can tap into a growing social investment landscape … The UK has the most developed social investment market in the world

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Trusts and FoundationsEndowments

Big Society CapitalWholesale investors investing in social

investment finance intermediaries

Mainstream investorsInvestment banks | pension

funds | endowments

Trusts | Foundations | CSR |

PhilanthropistsGrants

Social Investment Finance Intermediariessocial banks | non-bank social investors | service providers

Loan, equity and quasi-equity finance Business and investment readiness advice and support

Structuring and brokering investment

High street banks

Mainstream banking services

Social sectorImproving people’s lives, strengthening communities and contributing to economic growth

Individuals and Communities throughout the UK

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E.g. 10 social investments

... where investors are looking to support social outcomes ... Social investors target social impact - they often accept reduced financial returns to achieve this

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Private corporations

Investment institutions

Charitable foundations

Companies are looking to support social outcomes that develop their business. They are also seeking greater, and more measurable impact from their Corporate Social Responsibility programmes.

For example:

Individual investors

Many finance institutions are looking to use social investment to diversify their investment portfolio and the investment options that they can offer their customers.

For example:

Foundations are using social investment to support their charitable mission. They both socially invest endowments and also the money they would have given as grants.

For example:

Increasingly, individual investors are looking to invest savings in a way that supports them to grow in value, but also support jobs and community projects.

For example:

Investing for

financial and social

returns

E.g. Social Bond issues Social Cash ISAs

E.g. UK Social Bond Fund

e.g. Ignite programmee.g. Finance Fund

e.g. Impact Investment Fund e.g. Impact Ventures UK

e.g. Local social investment fund

...they employ over 2 million people...

… making use of a vibrant UK social sector …Social enterprises make up 15% of SMEs and contribute £55bn to the UK economy

Social Enterprise Definition

The enterprise must consider itself to be a social enterprise; a business that has mainly social or environmental aims

It should not pay more than 50 per cent of profit or surplus to owners or shareholders

It should not generate more than 75 per cent of income from grants and donations. Therefore, it should not generate less than 25 per cent of income from trading

It should think itself ‘a good fit’ with the following statement: ‘A business with primarily social/environmental objectives, whose surpluses are principally reinvested for that purpose in the business or community rather than mainly being paid to shareholders and owners’.

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There are 180,000 social enterprise SME employers, representing 15% of SME employers; Including sole traders, the total number of SME social enterprises is 688,000;

The sector employs over 2 million people, including half a million sole traders;

They’re estimated to have total annual incomes of £163 billion a year; and contribute £55bn billion to the economy in Gross Value Added.

The full report can be accessed here: https://www.gov.uk/government/publications/social-enterprise-market-trends

...and contribute £55bn to the UK economy.

£55bnGVA

SE, 55%

SME, 43%

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Outcomes-based commissioning Investment readiness modelsLending modelsTesting innovation and allowing VCSE organisations to take part in PbR contracts

Investors are very interested in models than link social to financial performance

1.Social Impact Bond: Departments can commission a Social Impact Bond - a mechanism through which private investment provides the working capital VCSE organisation requires to run a service through a Payment-by-Results contract.

2.Innovation Fund: set up a fund that specifies a menu of outcomes sought and invite bids to achieve these through SIB(s).

3.Social Outcomes Fund: a fund through which Departments can offer a top-up to local commissioners doing a SIB.

Cabinet Office has a dedicated Centre for SIBs that can advise on both setting up individual SIBs as well as broader Innovation Funds

Providing accessible finance to successful enterprises looking to scale

Investors are often interested in matching government funds

Big Society Capital: BSC invests in Social Investment and Finance Intermediaries who provide appropriate and affordable finance and support to social sector organisations. SIFIs have to find match-funding to access BSC’s investment.

Loan guarantees: Guarantee a bank loan for a high-potential social sector organisation or investment platform

Social Enterprise Investment Fund: Provide a mixture of grant and loan funding to VCSE providers who are running effective services and looking to grow.

Cabinet Office can help advise on ways in which these funds have greatest impact

Providing grant funding to build markets and diversify public sector provision

Investors often require organisations to have greater capacity to take investment

Invite bids for grant funding from social incubators; organisations supporting social sector start-ups to become sustainable

Provide funding for a specific call-out through the existing ICRF programme, that provides grant funding to social ventures with potential to access over £500,000 social investment or public sector contracts worth at least £1m.

Social Incubator

Fund

… and draw upon a variety of tried and tested toolsDepartments can use these approaches to develop their own targeted programmes

Investment and Contract

Readiness Fund

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ANNEX

• 1: How departments are using social investment to support their goals

• 2: Background on Government’s support for the social investment market

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INCREASING THE SUPPLY OF CAPITAL INTO THE MARKET

SUPPORTING DEMAND FOR

CAPITAL BY GROWING THE INVESTMENT

‘PIPELINE’

CREATING AN ENABLING

ENVIRONMENT FOR ACCESSING THAT CAPITAL

Creation of Big Society Capital Social Value Act Investment Readiness Programme

• Diversify investor base • Impact on growth

• Support global agenda

• Open up markets

• Support capacity building

Our policy framework focuses on supporting supply and demandUnderpinned by a targeted effort on building the right infrastructure for the market

Policy aim

Examples

Current focus

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WHAT THIS MEANS: BIG SOCIETY CAPITAL

BSC is a wholesale fund, set up in April 2012. It is independent of government.

Invests directly in social finance intermediaries rather than social ventures, to catalyse growth of the market.

Capitalised with £600m of funds: £400m from dormant bank accounts, and £200m from the UK’s largest High Street banks

Acts as cornerstone investor, developing financial products and funds that aim to provide risk and working capital to the sector

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£10m Fund for early stage social ventures Money dispersed via social incubators

Up to £15k of investment and other support

£10m Fund for growth social ventures Ventures jointly apply with a support provider Grants of £50k - £150k for capacity building

WHAT THIS MEANS: CAPACITY BUILDING

SOCIAL INCUBATOR FUND

INVESTMENT AND CONTRACT READINESS FUND

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WHAT THIS MEANS: SOCIAL IMPACT BONDS

In Payment by Results, the provider only gets paid on outcomes. This makes it hard for smaller organisations which may not have access to up front finance

This can be overcome if investors provide working capital, receiving any outcome payments that are achieved

Therefore in a SIB all financial risk is transferred to investors, and new sources of capital have been made available

Cabinet Office support includes a Centre for SIBs and a £20m Social Outcomes Fund

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WHAT THIS MEANS: SOCIAL VALUE ACT

Came into force in January 2013

All public bodies are required to consider how the services they commission can improve the economic, social and environmental well-being of the area

Based on the observation that given the complexity of social challenges it is important not to rely on one measure alone (such as financial performance)

So, for example, a local authority might employ a social enterprise to do construction work. As this social enterprise employs people who have recently left prison, it has a high social value

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WHAT THIS MEANS: UK AS A GLOBAL HUB

NEW INFRASTRUCTURES THAT ENABLE A GLOBAL MARKET

othe first global social stock exchange was launched in London in June 2013, with a market cap of over £1 billion

othe UK hosted the first G8 forum on social investment and is leading the debate on outcome measures

Pioneering products that DRIVE capital & innovation

osuch as the social impact bond, the charity bond and the first listed products available for retail investors

oin 2012 there were two social enterprise funds over £10 million; in 2014 over ten

BUILDING THE WORLD’S LEADING SERVICE INDUSTRY

oglobal social investment leadership of specialist legal, accountancy and banking services

oin particular, a strong cluster of social investment financial intermediaries. This is creating new export markets for the UK

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