The Secret (Big) Society

Whatever happened to the Big Society? Once British Prime Minister David Cameron’s flagship idea, it has been so conspicuous by its absence in recent weeks that Third Sector magazine argued last week that it was time to say ‘bye-bye’ to the idea.

Such a judgement by the official organ of the UK charity sector, which yearns still for the days when government was throwing cash at its constituents, needs to be taken with a pinch of salt. Indeed, Mr Cameron should take heart from recent developments in the social investment market that could be a new source of growth capital for nonprofits.

Social investment bridges the gap between charitable giving and for-profit investing through products that offer a financial return and a defined social impact. For philanthropic organisations, social investment is a way to make scarce capital go a lot further, since the capital is protected and can even grow by investing it rather than giving it away. And if the financial returns on social investments can offer risk-adjusted returns high enough to tempt commercial investors then there is an opportunity to leverage substantial quantities of additional cash into fighting poverty, tackling climate change and so on. (The proper balance between financial returns and social impact is sometimes controversial, however, as we have seen in recent controversies about microfinance.)

The foundations for the development of this market were laid ten years ago by the Social Investment Task Force, established by Mr Cameron’s predecessors, Gordon Brown and Tony Blair, the full recommendations of which are now, at long last, being implemented.

The launch of the first social impact bond dealing with rehabilitation of criminals has drawn international attention, not least in America, to the UK as a world leader in social innovation. This socially-useful financial innovation levers private capital into solving social problems and makes government money go further by only paying for results.

A nice idea you might think. But in Britain it has been on the receiving end of some predictable criticism from commentator Polly Toynbee on the left and limited fanfare accompanied the recent launch of some new bonds to help deprived families. It is a surprise and a disappointment that an idea with such a bipartisan heritage is being subjected to full-on partisan criticism.

Another of the Task Force’s ideas has come to fruition in the form of the Big Society Capital fund, a wholesale investor funded with cash from unclaimed bank accounts and loans from mainstream banks (albeit screwed out of the banks under pain of harsher government regulation). So far, it is unclear how Big Society Capital will work out, since it seems to be in listening mode (which is no bad thing). The big question it faces is whether or not social investment can grow from being a government or philanthropy led sector into one that excites mainstream finance.

That evolution is a realistic goal, says a new report Making Good on Social Impact Investment, which argues that if the City of London seizes the opportunity to become a world leader in social investment it would be good both for the City and for society as whole. The report is co-authored by Rupert Evenett, a board member of the Social Investment Business (a quango formerly known as Futurebuilders that is trying to reinvent itself as a pillar of the Big Society), and Karl Richter, one of the creative thinkers in the UK social investment space. Importantly, it also has the backing of TheCityUK, an advocacy and promotion agency for London as a global financial centre.

So is this a sign that social investment is about to go mainstream? The good news, say the authors, is that social investment is “an emerging market that has passed a watershed with sufficient investment track record building to start attracting mainstream investment”. And, they argue, it is an opportunity that the City should take seriously because social investment “can offer investors sustainable financial return, assessable risk and the potential for diversification.” We hope they are right.

The report makes a welcome appeal to public and philanthropic investors to be bold as seeders of this market, rather than simply as providers of social investment capital. It highlights the need for financial innovation, including more work on securitisation, that is essential for creating scaled, liquid markets. Evenett and Richter also draw helpful lessons from venture capital, which was once an emerging asset class, to argue for a social investment trade body, modelled on the British Venture Capital Association, to share market data and lobby for regulatory obstacles to be cleared away.

The elephant squatting in the middle of the room is whether the lords of finance are ready to take over from the barons of the voluntary sector and the mandarins of Whitehall in leading the social investment revolution. The Royal Bank of Scotland, which was so badly run by Sir Fred “the Shred” Goodwin that it had to be nationalised during the financial crisis, recently announced that it is dipping its toe into the water. But its £5 million fund feels more like corporate do-gooding rather than an attempt to explore a potentially significant new line of business. As we argue in ‘The Road From Ruin’, creating an investment industry that genuinely serves the long-run interests of society is going to require some profound changes in the way the City as a whole operates (the investors, too, not just the banks!), to get capital flowing into projects that yield real long term value rather than, as is all too often the case today, unsustainable short-term profits.

Making Good on Social Impact Investment is not going to rescue the Big Society from its critics, or make it a saleable message to voters. But it does offer practical and sensible steps that need to be taken to grow a social investment market that might make Third Sector say ‘hello again’ to the Big Society.