Inside Community Finance 2013 from the Community Development FInance Association is an illustrative document to frame the current CDFI landscape in the UK. In the report the Financial Secretary to the Treasury, Sajid Javid MP, declares that there is still much to be done for the struggling SME.
On balance, however, the report shows the emergent strength of the CDFI movement and offers a road map for the immediate future, built on its past success.
CDFI’s lending to social ventures in the 2012/13 period makes for positive reading…although more is always better (Ed.) The community development institutions lent £13 million pounds to 204 social ventures, the report tells us, This created or protected 1,900 jobs and represented a 37% increase in lending over the previous twelve month period.
Lending to individuals was equally impressive. CDFIs lent £19 million to some 40,600 people, which diverted 29,000 people from higher cost lenders, and saved over £7 million pounds in interest payments for those individuals.
Interestingly, the report illustrates that Community Investment Tax Relief (CITR), providing a tax incentive for those who invest om accredited CDFIs, was not a major driver of capital growth for the CDFI industry. Perhaps the delivery of the Social Investment Tax Relief scheme (SITR) this year will drive more money in from the cold for social based lending?
You can also gain insights into the reach of the various CDFI initiatives in the document.
In 2013, 93% of CDFI business loan recipients had been turned down for finance by a bank. Fifty seven per cent of loan recipients had previously been unemployed.
The report, in terms of potential reach, also has something interesting to say about the engagement of CDFIs and Local Enterprise Partnerships (LEP). CDFIs are hopeful, that with the roll out of the 2014-2020 European Structural and Investment Funds (ESIF), that CDFI/LEP partnerships can become active and effective.
At eighty pages Inside Community Finance 2013 is a lengthy document. But it is structured with data, forecasts and case studies that make the CDFI story a telling one. Whether you are looking for evidence of the CDFI impact at local, region, national or European level – there’s something of interest here.
Ethical business with a social dimension…
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Although it has been around for a month or two now, we thought it was worth revisiting the Transforming Finance film from the pages of The Finance Innovation Lab.
Even at the start of 2014 we are burdened by news of multi-million pound loss making institutions paying multi-million pound aggregate bonuses. The schism between the ‘real economy’ in communities and the netherworld of internal trades in the financial markets is well illustrated in the film below.
The core message of the film is a critique of the current banking environment. Interestingly the voices heard and the opinions expressed are voiced by significant players in the finance innovation sector – what is not heard is the voice of disorganised fiscal radicalism, rather a careful, reflective and pointed analysis of the current financial situation.
The unstated, yet telling counterpoint, to the argument expressed is a positive acclamation of the Social Finance sector. The notion of financial institutions trading with each other, the making of money out of money, seriously impedes the fiscal health of communities and small business.
The delivery of innovation, profit and community welfare in the broadest economic sense is not impossible. We heard about it in this film.
Social Business – the larger market for social finance and social impact
Next month I’ll be making my annual homage south to the ‘Good Deals’ conference in London to immerse myself in all things ‘Social Finance’ (www.good-dealsuk.com ) No doubt there will be a host of new investment vehicles to discover, angel investors to meet and a plethora of organisations looking for exciting investible propositions.
And when I arrive in the throbbing metropolis that is the epicentre for this rapidly developing industry, I’ll be asking one question; ‘When are you going to deal with the elephant in the room and redefine the market for social finance?
The brave new world of Social Finance shouldn’t be confined to expanding social enterprises or transforming charities; the market it simply isn’t big enough. It has to be about a much broader Social Business marketplace defined by an organisations’ ability to make a difference in society and not their legal persuasion.
Organisations and individuals looking to ‘Invest for Impact’ in the Social Business marketplace need to understand that there’s much to be done in terms of helping to shape, develop and widen access to social finance. We need better routes to market through Universities, LEPS and players such as the Chambers and the Federation of Small Businesses. We need well developed brokerage facilities, better physical access arrangements and much wider appreciation that at time when banks are loathe to part with their money, social finance can be conduit to growth, jobs and social impact.
Some would argue that it’s’ easier to socialise the private sector than it is to commercialise the third sector.
Whether you believe that or not, the two markets are not mutually exclusive and social finance needs to expand its horizons and seize the moment. Seldom can there have been a better time to provide finance to businesses that are willing to embed social and/or environmental impact in their operations. We simply need to provide a much greater awareness of the opportunity and the means to help investees articulate the difference they can make in people’s lives.
Celebrating the Good Deals Conference
To celebrate the Good Deals Conference, SEEM are offering a FREE tailored support opportunity for any organisation or individual that is intent on delivering social and/or environmental impact and want to access Social Finance to gear up their operations. To understand more about social finance and how to access it call 0115 900 3299 before 31st October.
Roger H. Moors
Roger Moors is CEO of SEEM (Supporting Social Business) based in Nottingham. With a background in banking, Roger and SEEM broker social finance across the East Midlands and currently hold contracts with a number of intermediaries and funders including the Key Fund and Social Incubator North.
Ethical business with a social dimension…
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Bruce Davis, Managing director of Abundance Generation, recently gave a short talk on the democratisation of finance. Davis argues that traditional sources of finance are dis-empowering, and that we should exercise our right to change and deal with alternative providers of finance that offer more control and flexibility.
(Abundance Generation is a crowd-funding tool, which allows people to invest in UK renewable energy projects – from as little as £5, using debentures as the financial mechanism of choice to secure a long-term commitment from both the project and the investor.)
See the Davis proposition explained here…
Not all viewers will agree with his position on traditional banks, but his emphatic, if slightly downbeat message, does contain some consistent and widely felt concerns.
His principle point is that we all, highlighted in a recent Mining the SEEM article, suffer from financial cognitive dissonance. Younger people, Davis argues, now understand the power of the web to link reflection on finance and action via a web connected keyboard.
We would argue the same for the emerging Social Finance market. New modes of lending and support, available from non-traditional sources, where key information, data and contact is web based.
A key difference to those publishing and marketing in the social finance sector is that there is much screen space and column inches devoted to the philosophy of the lender, always. The core values and social concerns of the proposition are the key message, always available before control issues are highlighted or the rate card is displayed.
Davis sees alternative finance as a cultural issue. Trust, emphatic support of social and ethical principles are always first for him. This is the default presentation mode for the social finance sector, we would argue.
Mainstream banks are now beginning to make changing accounts and money ‘mobility’ an easier option. Perhaps there is a paradigm shift in mainstream fiscal supply starting to emerge. What do you think?
The SEEM Team – thinking about ethical investment and renewable energy
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Becoming generally available from the Cabinet Office in July 2013, the analysis of the social impact market by Maximilian Martin, Status of the Social Impact Investing Market: A Primer, sets the scene well regarding the subtle shape of the market and how a whole new eco-system of investors and vehicles for their capital have emerged, and are still emerging, into this relatively new field.
The world view – from the UK Cabinet Office
We recently published an article featuring the latest report from New Philanthropy Capital, Best to Invest, which we stressed was a primer for the structure of the UK social investment market. You can read more here.
The Martin position paper in this article looks at the broader, global context of the social impact investing model and examines the origins of the market meta-structure across the globe, with some interesting analysis on the developing gap between public demand for new social investment and the ‘public’ finance shortfall in meeting it.
This huge gap, Dr. Martin argues, is ripe for topping up by private capital, or capital from non-traditional sources, which deployed by the social outcome minded investor can transform community landscapes – in both the developing and developed world.
Based on recent studies by Accenture and Oxford Economics, the projected public services world expenditure gap is of enormous proportions through to the year 2025.
The Canadian shortfall estimated is 90 billion US Dollars (USD). the German gap some 80 billion USD and the UK expected need is for an additional 170 billion USD in investment over the same period.
This pan-global approach is interesting, in that the Martin paper shows, that when seen globally, responding to social investment demands can stimulate traditional and mainstream market provider outputs. Martin quotes the example of the French company, EDF, who in 2002 began a programme of investment in Morocco to bring electricity to the 10% of the country’s population with no access. to power. EDF’s innovative partnerships brought dividends in market development, new market creation ideas based on its approaches to the Moroccan market and proved the power of public/private partnerships for them and their shareholders.
The problem they were trying to solve was, according to Martin, the pent up demand generated in all economies by the ‘Bottom of the Pyramid’ (BoP). Martin argues that the efforts of the World Bank, pan global organisations and national governments have failed to eradicate the contentious issue of millions of humans living on less than 2 USD per day.
A tidal wave of human potential – untapped still
Even as early as 2007 we had a clear view of the world from the BoP. This short executive summary from the World Resources Institute gives a insight into the lives of four billion people and the latent economic potential these communities have. (Being lower down the World Bank Pyramid is not, for us, an economic failure, it is a sign of unrealised economic and human potential)
In economies, scale is everything, and whilst veering away from any descriptor of communities as a residuum of society, a deeply negative, high Victorian view of the pryramidal effect of social and economic power and facility, the Martin model also has resonance for local communities in the UK, we would argue.
If innovation and bold thinking about investment, the risk supported and partially mitigated by mainstream government infrastructures, then change and transformation in societies where the median income level is significantly higher than 2 USD per day, where educational and functioning literacy levels in matters economic are that much higher – surely we can use social finance to turn the pyramid upside down?
Read the Cabinet Office primer and let us have your take on the global narrative too!
Sometimes looking over the wall at what your neighbours are doing to the landscape of their garden can give you ideas for your own. In this short article we have looked across the Atlantic Ocean to see how, in the last couple of years, the Canadian Social Finance sector has responded to community and governmental demand for increased active social investment from the private sector.
Encouraging social investment: Canada
Towards the end of 2010 the Canadian Task Force on Social Finance issued a major report – Mobilising Private Capital for Public Good. The Premier of Ontario, Dalton McGuinty, defined the work as being to ‘…help social enterprise and social purpose business adopt social innovation business models; and develop recommendations to enhance public and private sector support for social finance to unleash its full potential in Ontario‘.
The report offered seven recommendations to the burgeoning Canadian sector…
1. The public and private foundations should aim to invest at least 10% of their capital in ‘mission-related’ investments by 2020. They should report annually on their progress.
2. The country should establish an Impact Investment Fund, supporting existing activity and encouraging increases in scale and new fund creation for the sector. Regions with no fund should be encouraged to create one.
3. New bonds and legislative change should occur, to foster and incentive flows of private capital tot he social finance sector.
4. Pension funds should deploy their assets into social investment, with government ensuring that the pension funds are mandated to do so, and to offer pension Funds incentives to balance and mitigate any additional risk.
5. Policy and regulation should change to support social revenue generating activities in the charity and not for profit sectors.
6.Tax incentives for social investing should be exploited, encouraging capital to be channeled to social enterprises offering maximum social and environmental impact with their activities.
7. Business development programmes, training and business support initiatives from central government should be tailored to specifically engage with social businesses and not just ‘mainstream’ SME organisations.
Whilst it can be argued, looking at the Canadian shopping list, much work of a similar nature has been started in the UK. However, the push towards incentivising pension funds, delivering mainstream flexed business support directly to the social sector and the adoption of a very broad and generous tax incentive led attitude to social impact investing would add new dimensions of transformation to the UK sector.
The report, Mobilising Private Capital for Public Good, develops the recommendations above and offers examples and capital forecasts for their deployment. Interestingly, the outputs recommended were assessed in a follow-up report one year after publication.
After a year – what happened? Canada
This action and output summary, Measuring Progress During Year One, shows that some 50 million Canadian Dollars (CnD) of new mission investment had been generated by the private sector. New government and private fund partnerships had created 284 million CnD of additional impact related investment, with some 215 billion CnD of assets under management by pension funds who are now signatories to the UN backed Principles for Responsible Investment.
The follow up report highlights some achievements and illustrates how the Canadian debate is starting to have a transformational effect of the country’s social impact investment landscape. In the final analysis there is still huge opportunity in this dynamic economy to take the social investment message forward.
In concluding the report illustrates a late 2011 survey on SME take up of government backed services for the SME sector. Only 5% of the SME survey clearly identified themselves as having social outcome considerations. 93% of the survey cohort expressed ‘ambiguity and confusion’ over social investment issues. With 2% of the government services used by those surveyed explicitly excluding non-profits and the social sector.
Canada has a long and successful history of not for profit and social impact development. These reports show that even with history, public opinion and buckets of radical thinking there is still much to be done.
Social Finance explained by NPC – clarity and analysis
Published by New Philanthropy Capital (NPC) this month, Best to Invest is a detailed analysis of the Social Finance market, illustrating how investor readiness, sector awareness, governance frameworks and emerging opportunity in the sector have a conditioning effect on present delivery and outcome.
The detailed contents offer insights for both funders and investees when looking at the Social Finance sector. NPC describe the market as being…
…structured around three main players: investors, which include government, trusts and foundations, individuals and corporates; intermediaries, for example Big Issue Invest, Social Finance and Charity Bank; and investees—mainly charities and social enterprises. Investors supply capital to investees either directly or via intermediaries. The investment may take a different form depending on the needs of the investee, the preferences of the investor and the products on offer by the intermediaries.
Best to Invest offers the following four barriers to making social investments in the present market context…
The social investment market is not yet mature – opportunity costs to entry can be high, with opportunities to invest only now beginning to widely emerge.
Good financial returns on endowments need to continue – organisations created in perpetuity need to maintain their levels of income to sustain grant giving as a continued and effective model. Divergence entails risk.
Social investments are often complex instruments – governance is often created in different forms for each investment, whilst organisations may lack core skills and advice professionals in tangential sectors are not yet fully up to speed with sector delivery. (Complexity is well illustrated in our recent journal entry Social Impact Bonds – impactful or not…read more here).
Regulatory and legal context for investment is also changing – which can be a deterrent to trustees and others, who may perceive a lack of investment advice relevant to the project being considered.
NPC tell us there are two kinds of social investors, those who invest for financial return and those who invest for social return.
In the first case there appears to be evidence that the finance first investor is the one who is looking to diversify their portfolio, to include a social element to their market approach. They will, however, still be looking for a near market rate return on their capital.
The second category of investors, those most interested in social impact, NPC tells us, are often willing to sacrifice their return in order to receive stronger social aims delivery, or to make this sacrifice so that the investment basket which may include more mainstream investors, thereby making a more viable social return.
Perhaps this is the future of Social Finance, where the pool of capital is drawn from a mixed swathe of well-motivated investors, each with their own expectation on return? (Although, clearly, this would not diminish any of the complexity arguments in the NPC analysis).
On balance the NPC report makes a strong case for an energised Social Finance market. One which is growing, but which contains elements of delivery, governance and risk that are not for everyone.
Social investment is an attractive proposition for funders. Alongside grants, it can help them achieve their mission by enabling charities and social enterprises to scale up their work, develop new activities, and become more sustainable by developing a reliable income stream.
It can also help funders to maximise their social impact by aligning their investment values with their grant-making values. Social investment makes funders’ money work harder: funders can recycle their repaid funds into new investments, meaning that the same money can create social impact several times over.
If you are interested in the Social Finance sector, or developing a taste for investment in the market, then Best to Invest could be the sector primer you have been waiting for.
The Social Impact Bond is a topical, a la mode form of payment by results (PbR) device, to enable social organisations to deliver services in the public sector.
This short article draws on detail a paper by the Charities Aid Foundation (CAF), Funding Good Outcomes, from the Autumn of 2012 and from a more recent article by Caroline Fiennes, in an issue of Philanthropy Impact Magazine, What the First Social Impact Bond Won’t Tell Us.
Funding Good Outcomes from CAF
The CAF paper makes a good case for PbR, and how with support the social sector can engage with commissioning bodies and, with its focus on outcomes, use the sector’s sensibility and sensitivity to change in a community of interest to achieve potentially profound results.
PbR based on outcomes presents a real opportunity for not for profit organisations to win public service delivery contracts. As the focus is shifted away from the exact nature of the service towards the outcomes produced, there is more room for innovation and greater freedom for not for profits to demonstrate effectiveness in their approach.
The CAF paper looks at several examples of new, or newish, PbR programmes, from The Work Programme, The Youth Contract and the Peterborough Pilot. The paper does recognise the singular and distinctive flaw in some PbR provision for the social sector. Risk, and the inherent pressure of working capital needs as the service is rolled out to accommodate the strictures of the commissioned work.
CAF cite examples where PbR has driven sector players to extinction as a result of this pressure. They call upon the social finance sector to look at alternative methods of capital deployment to accommodate these new service delivery models.
They cite the need for Social Finance to lend to PbR contractors, in order to help sustain the emerging contract.
They call for options which see the commissioning body contracting with the Social Finance intermediary – with the Social Investment Financial Intermediary (SIFI) mitigating risk by calling upon a spread of external social investors to support the contract delivery.
Thay call for SIFI’s to act as underwriters of the contract, providing payment guarantees to well monitored and managed programmes of work. The interesting example they use is the Goldman Sachs model, where a $10 million dollar Social Impact Bond was funded to transform outcomes at Rikers Island Prison in New York.
So, even within the development of new Social Finance modalities, there is the opportunity to be subtle and agile in approaches to contract structure, whatever the scale of the investment, this author would argue.
Philanthropy Impact Magazine – Summer 2013
In the article by Caroline Fiennes, What the First Social Impact Bond Won’t Tell Us, the author looks at the prison system too. This time in Peterborough in the UK.
Fiennes presents an argument, that even with elaborate arrangements in place and the agreement to deliver, the analysis of performance to assess the PbR outcomes can still be a flawed and inherently mis-leading process.
The Peterborough Pilot formal agreement sets out processes to repay investors when the agreed outcomes are reached. So far so good. However, Fiennes argues that assessing the level of re-offending by a target group of prisoners, which the contract uses to trigger repayments, is essentially based on flawed statistical assumptions.
The control group in Peterborough and the individuals receiving the ‘treatment’ are correlated by using a system called Propensity Score Matching. In this case the PSM is of a particularly elaborate kind. Using ten ‘control’ prisoners for each ‘treatment’ prisoner.
Fiennes argues that this methodology…
only ever looks at indicators which are observable, such as age, background and criminal history. Yet is often unobservable factors – such as attitude or resilience – that drive behaviour.
Secondly, the data used is stored on the Police National Computer, which itself is of a very basic nature…where it cannot distinguish whether somebody had problems or a history of heroin use, which obviously would influence their behaviour and the care they need.
The Fiennes paper also argues that it is going to be difficult, even with a ‘successful’ contract outcome, to assess the comparative strengths of the Bond programme, when set against, for example, the good an enlightened and responsive prison governor might achieve, even without the Bond.
Professor Sheila Bird of Cambridge University opines that all of these problems could have been averted, if the the first Social Investment Bond in the UK had been tested against a known intervention with a conventional funding mechanism.
So even having succumbed to the lure of the new, there is much complex reflection needed to justify these new finance tools and to successfully measure their outcomes appropriately.
This does not, we would argue, negate their importance or cease to offer SIFI’s and commissioning bodies examples of financing social outcome, even in areas and communities where the scale of investment and the outcome expected is of more modest proportions.
Below you can see a short video about the recent winner of the Charity Bank Most Innovative use of Loan Finance Award. Reviive is not only a winner, but also exists from the act of two charities coming together with common aims, to create a new Community Interest Company.
Reviive provides apprenticeships and placements for beneficiaries of the organisation, as well as working to generate profits to the two charities who provide the nucleus of the initiative.
A great exemplar of how charitable endeavour, through the use of Social Finance, can be the route to a grounded, effective and successful supplier of goods and services. In this case recycled and re-homed furniture.
Mary Locke, a Charity Bank impact assessment specialist, describes social loans as ‘…the grease that helps the wheel to turn’, but that it is not the wheel itself. The Social Finance borrowers do the work. A wonderfully distinct separation for the charitable sector.
Mary makes the point that in the not for profit sector, unlike in the private sector, it is effectiveness in supporting beneficiaries and the broad range of ‘social mission’ objectives that the loan finance should be assessed against for effectiveness.
The Charity Bank loan to Reviive was £50,000. Social Finance achieving great outputs!
The second part of Lord Young’s report on business, delivered as business advisor to the Prime MInister, focuses on the importance of the micro-business in the UK. A key plank to the development of enterprise and sustainability, whether in the social sector or not, is the long term growth of organisations with less than ten members.
Growing Your Business – a report on growing micro-businesses offers insights into the importance of the sector, and how, as community populations flex and employment rates fluctuate, it is the micro-business that inexorably feeds the enterprise seed-bed activity of the nation.
The report, publish in May 2013, does contain some reference to the social economy, although not significantly, however the index of resources and the layout of strategies for growth are highly applicable to any ambitious social business organisation.
The report focuses on three key strategic areas for enterprise growth…
Confidence – in the small enterprise embracing the belief that they can make it happen. Particularly important in a groundbreaking Social Business.
Capability – Mapping and deploying your key skills, as well as recognising the ones you do not have, is a key factor in growth. The report clearly evidences that asking for external help is a key indicator of business ambition, but also a key factor in growth and sustainability.
Coherence – a belief that support for micro-business, particularly in the social sector, is ‘…designed and marketed in way they understand, trust and can find…’.
SEEM can play a key part in this role, disseminating good practice, articulating the needs of the sector in a language understood across the piece, as well as working with members and partners to stimulate social finance initiatives and growth across all elements of the sector.
Lord Young covers several key areas on marketing issues in this regard. Do the government articulate or disseminate loans and finance information for any sector widely and effectively?
Is public sector procurement significantly focused on a one stop shop approach, and are procurement processes properly understood, both in the social sector, as well as by the public sector when looking back at us?
This ‘single market’ response to all forms of procurement is of particular importance to the social sector, we would argue. Small or ‘social’ does not necessarily mean unprofessional or ineffective. Do local authorities and other major procuring organisations in the public sector still, even in the summer of 2013, fully appreciate the latent delivery capability of the micro-social sector?
The ‘using what we have better’ section of the report is particularly telling in this regard. Exploit your Social Business potential to the full. Talk to SEEM.
is an illustrative document to frame the current CDFI landscape in the UK. In the report the Financial Secretary to the Treasury, Sajid Javid MP, declares that there is still much to be done for the struggling SME.
