Sound investments in solid causes

Investing in social enterprise businesses offers corporates a viable alternative to charitable donations, as Rob Langston discovers

Impact investing in social enterprise has taken centre stage in the sustainable and responsible investment arena in recent years. Governments, investors and charities have worked towards establishing a more effective regime to facilitate investment in what has been a huge growth area.

In its recent socially responsible investment study, the European Sustainable Investment Forum found impact investment in Europe had grown to more than €20 billion (£15.7 billion) in 2013, up from €8.8 billion in 2011 (£6.9 billion). Impact investing in the UK alone is thought to have risen above £1 billion.

“Unlike a charity, a social enterprise is able to offer a limited return on the investment made by their investors, which is appealing for many businesses,” says Nicky McConville, corporate partner at law firm Blake Morgan. “The businesses can invest knowing that, if it were not for their financial support, the community groups would not be able to deliver their projects.”

Andrea Sullivan, head of corporate social responsibility for Europe, the Middle East and Africa at Bank of America Merrill Lynch, says: “Corporations have a significant opportunity to act as enablers – supporting early-stage companies that have a social purpose by providing them with access to investment and skills. We look for innovative initiatives that we think will lead to saleable solutions.”

Growth in impact investment has been partly driven by tax incentives, new structures and the ease with which corporates can invest, compared with the sometimes laborious processes involved in setting up a charity.

Elizabeth Davis, partner and head of the charities team at Blake Morgan, says corporate giving to social enterprises, both charitable and non-charitable, has been made “fiscally attractive” through social investment tax relief, which is available for investments made or capital gains arising from April 6, 2014 to April 5, 2019.

TAX RELIEF

Investments can attract 30 per cent tax relief on income arising from a qualifying social investment or capital gains relief on disposal of qualifying social investments held for at least three years.

Appetite for impact investment remains strong. Highlighting the growing role of intermediaries, ClearlySo, which raises impact investment for business, funds and charities, revealed earlier this month that it had raised a further £800,000.

“The difference in attitude between this and previous investment rounds was palpable, and reflected the change in how the social impact investment sector is seen in general,” says Rodney Schwartz, ClearlySo’s chief executive. “Previously, the investment could have been seen as ‘soft money’ – and many of our investors were friends and family taking, at best, a long-term view.”

Unlike a charity, a social enterprise is able to offer a limited return on investment, which is appealing for many businesses

Matt Mead, chief information officer at Nesta Impact Investments, says: “We are helping to fill a gap between investors’ traditional desire to drive investment returns and those wanting to ensure their money goes to a good cause. Philanthropy has traditionally filled the latter role, but I would argue that impact investing can deliver on both counts.”

Products, such as tradeable retail charity bonds and the launch of the Social Stock Exchange, have married familiar market structures for corporates with impact investing.

“Investment in social enterprise is a popular activity and we have seen businesses, private equity houses and even pension funds interested in supporting and participating in these community schemes in order to deliver their own corporate and social responsibility objectives,” adds Ms McConville.

Earlier this year, a City of London Corporation report found the most popular sectors for social investment included employment, training and education; income and financial inclusion; housing and local facilities; physical health and conservation of the natural environment. Projects on a local and national scale were more popular than more internationally focused investments.

Indeed, the range of opportunities for impact investors appears to be growing, while charities are also embracing fresh sources of capital.

“Many large service-providing charities are increasingly involved in bidding for high-risk, high-value contracts which give rise to short or medium-term funding requirements,” says Ms Davis. “Investment by corporates who are willing to accept a limited return on their contribution to projects that provide socially beneficial impact is welcomed.”

CHALLENGES TO OVERCOME

However, despite the surge in interest surrounding impact investment more recently, there still remain several challenges for the sector to overcome.

“There is now a broad agreement that investments that deliver a social benefit are an important progression in creating a healthy economy,” says Bank of America Merrill Lynch’s Ms Sullivan. “However, for the market to deliver systemic change to global issues, as a sector we need to work to mitigate the risks around the commercial elements.”

Flagging interest in the UK, one of the key proponents globally of impact investment is also concerning.

“One depressing note is that despite undisputed UK leadership in this field, massive support by both this and the previous government, and the stated support of the City of London Corporation, UK-based large financial institutions have been appalling laggards in this area,” says Mr Schwartz.

Yet the outlook for impact investing seems positive. Ms Sullivan concludes: “We are gradually seeing an increasing blurring of the lines between investment and philanthropy, as social impact financial models become more mature and parties from across the sector collaborate further to overcome the current financing challenges.”