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Your charity's return on social investment

Originally published: Janurary 2017. | Last reviewed: April 2018.

Social investment means using repayable finance to achieve both social and financial return. It isn't a grant or a donation: the investors expect to get their money back, usually with interest — and expect to see a positive social impact, too. Some investors may be willing to offer more favorable terms to a charity or social enterprise because they believe in the potential benefit to society. So, would-be investees must be able to clearly articulate their social impact and explain how they'll measure it.

Are charities allowed to seek social investments?

The short answer: it depends. Raising equity financing, relatively new in the nonprofit sector, is only an option for certain legal structures (such as a company limited by shares, a community interest company limited by shares, or an industrial and provident society). Charities can, however, take on loan financing in certain cases. You'll need to check that your governing documents allow this.

Generally, social investment is relevant for charities that trade, because this means income is being earned and that borrowed money can be repaid. Not all charities are allowed to trade, however. Again, it depends on your legal structure.

Whether it makes sense to take on social investments depends on many factors. For example, a new enterprise may prefer to establish the business gradually and make a small profit each year, which can be reinvested to grow organically. An organization creating a new product, on the other hand, may find it far more difficult to do business if they're unable to pay up front for equipment or materials to get started.

Are charities allowed to make social investments themselves?

Legislation in the U.K. passed in July 2016 now allows charities to invest under certain circumstances. The government has published interim guidance on this, which will be reviewed in 2017.

Who typically invests in charities and social organizations?

The U.K. has one of the world's most developed social investment markets in terms of the range of products available and the number of social investment funds and advisers. According to Big Society Capital, the value of social investments outstanding at the end of 2015 was at least £1.5 billion. Seventy percent of this money went to charities and social enterprises with some sort of asset lock (in other words, where company assets may only be used for the good of the community).

Social investment has grown in recent years, according to Big Potential, because less grant funding is available and because more social organizations are trading rather than depending solely on donations. There has also been strong government support to promote social investment — for example, a tax break through the Social Investment Tax Relief scheme for individuals investing in a registered social sector organization.

Types of social investors include:

  • Social banks and mainstream banks
  • Social investment fund managers (or social investment financial intermediaries)
  • Venture funds
  • Trusts and foundations
  • Angel investors
  • Ordinary individuals (including through crowdfunding)

What is a social impact bond?

A social impact bond is a social investment in the form of a contract between local or national government, investors and service delivery organizations. Investors provide the funding to enable a front-line organization to deliver a project. If the project achieves the expected results, the government repays investors. The government is incentivized by the potential savings — for example, investing in a project that reduces reoffending rates is ultimately more cost-effective than paying for continued or higher crime rates down the line.

What are the benefits of social investment?

Social investment offers various benefits compared to grant funding. Here's how Big Potential describes these benefits in their guide to social investment:

  • Investors are likely to be more flexible than grant funders about what you do. If you find your business plan isn't working, an investor is likely to be happy if you change your business model to one that's more likely to succeed.
  • Investors are more likely to want to get actively involved to support your organization. This can be useful, especially for start-ups.
  • Social investment tends to be less restricted to particular projects and outcomes than conventional grant funding, giving your organization freedom to use the funding most effectively.
  • Social investment can help organizations increase their effectiveness by requiring them to improve their financial and business processes, and to be very clear on their priorities and objectives.

Compared with traditional loan financing, social investors can be more flexible on repayments, and may have a better understanding of the social sector than lenders looking only for financial return. For borrowers, the support that certain types of social investors provide before and during the investment — such as help to strengthen a board or business plans — is highly valued.

And the drawbacks?

Most obviously investments must be repaid, so your project or activity needs to generate a large enough surplus to provide a return for the investor and support your own sustainability, as well as having a social impact.

Winning over investors can also be challenging. Many organizations struggle to prove they're investment-ready, though there's an increased awareness of this and some targeted support is available as a result.

For many social organizations, familiarizing themselves with a new sphere and adapting to a new language can be daunting. The bar to raise investment is higher than to secure a grant, points out Matt Black for Good Finance, which has implications for borrowers: "While charities and social enterprises are generally used to talking about their social impact for funders, social investors will go further, carrying out a stringent set of tests to ensure you meet the grade. This involves extensive reviews of your business plan, governance, and social impact measurement approach, as well as thorough financial stress-testing." All this can help improve your operations and processes — but it takes effort, hard work and time.

Where can I get more information and support?

  • Social Investment Explained is a good starting point for understanding all the issues around social investment.
  • Good Finance provides a range of information on investment and finance for charities and social enterprises.
  • Knowhow Nonprofit has a number of articles on social investment, including top tips for trustees.
  • Big Society Capital produced a package of resources in 2016 (Get Informed: Social investment for boards), which includes tools and online material, events and mentoring.
  • The Big Lottery Fund's Big Potential program provides grants to pay for the sort of professional advice you might need to access social investment funds. Big Potential also has a diagnostic tool to help you check if you're ready for investment.

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MissionBox editorial content is offered as guidance only, and is not meant, nor should it be construed as, a replacement for certified, professional expertise.

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Writer/editor focusing on all things nonprofit and social enterprise. Youth media trainer. Storyteller through words and pictures.