Charities (Protection and Social Investment) Bill [HL] — Second Reading (Continued)

Part of the debate – in the House of Lords at 5:35 pm on 10th June 2015.

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Photo of Viscount Chandos Viscount Chandos Labour 5:35 pm, 10th June 2015

My Lords, I welcome the Bill. I thank the noble Lord, Lord Bridges of Headley, for introducing it with such an excellent maiden speech and congratulate him on his appointment as Minister. I also pay tribute to the work of the noble Lord, Lord Hodgson, and his review and to the noble and learned Lord, Lord Hope of Craighead, and the members of the Joint Committee on the predecessor, draft Bill. I start by declaring an interest as a trustee of a number of charities, as disclosed in the register, in particular as a trustee and past chair of the Esmée Fairbairn Foundation, one of the largest grant-making foundations in the country and also one of the most active social investors. For that reason, in speaking briefly, I will concentrate on the issues relating to social investment.

I thoroughly welcome the clarification of the powers of charities in that respect, reflecting the recommendations, among others, made by the Law Commission. As well as expressing my strong support for the excellent points made by my noble friend Lady Hayter, I will first make a brief comment about the role of charities and the implications of that for the main measures included in the Bill, which is another way of saying what both the noble Lord, Lord Hodgson, and the noble and learned Lord, Lord Hope, have already said.

A few years ago, Bill Gates, on one of his visits to London, was asked how the Bill and Melinda Gates Foundation saw its role and its relationship to Governments—not just its own Government but Governments around the world. Innovation, he said, should lie at the heart of philanthropic activity. Philanthropy could never replace government funding for those in need, so its role had to be to lead the way. If that is true for a foundation with an endowment of over $40 billion, how much truer must it be for all other charities? With innovation, comes risk; and as in the corporate sector, charities must therefore be free to fail. Although I wholeheartedly support measures to ensure that the Charity Commission can act decisively to prevent abuse, this must not be at the cost of discouraging proper risk-taking or of the creation of a risk-averse environment that stifles the vital innovation about which Bill Gates has spoken. The noble and learned Lord, Lord Hope, spoke about the risk of the Bill’s provisions being too specifically restrictive. That is obviously something we should look at, but we should also be looking at and fostering the culture and environment around the third sector.

As the House has heard, the social investment provisions are essentially a clarification. The noble Lord, Lord Hodgson, has already described the UK as a world leader in this area. The Esmée Fairbairn Foundation and others have been able to pursue social investment prior to this clarification, but it is clearly welcome, across the board, that a wider range of trusts and foundations should be able to consider social investment. However, in clarifying this there is obviously the challenge of definition. In general parlance, “social investment” can cover—if I am allowed to use the phrase—a multitude of sins, ranging from quite lightly or negatively screened investment to take out tobacco or, fashionably, fossil fuels, all the way to mission-related investment. The Law Commission report has an excellent diagram showing the range of investments covered by the definition.

The Bill sets out a definition that there are two purposes of a social investment: both,

“furthering the charity’s purposes; and”,

at the same time,

“achieving a financial return for the charity”.

The very helpful notes provided by the Cabinet Office make the point that that return can be negative but cannot be wholly negative, otherwise a social investment is in reality a grind. It may be that in the later stages of the Bill we should look at whether the simple definition—that is the great benefit of its simplicity—needs to be clarified to make sure that it is not interpreted as requiring a financial return that is greater than zero.

It has always been easier to assess social investment where the financial return is low and the social impact high. Of course, it is difficult to measure social impact or impact in grant making. That is the holy grail of the charitable sector, and all the major foundations and trusts work hard to otherwise measure it. None the less, it is clear that if the financial return is 1% or 2%, there must be social impact to justify that sacrifice of financial return. There are those—including Sir Ronald Cohen, who has been one of the most important people in this area—who argue that you can make social investments without sacrificing financial return. While that may be true exceptionally, generally, if it is to be a meaningful definition there must be some sacrifice of financial return in exchange for the social impact. After all, almost everybody in this House would agree that all forms of investment through the financial market can and should be productive in terms of the economy and society—contrary to scurrilous rumours, that is certainly a belief on these Benches. The risk that social investors face when presented with investments where there is a high financial return and relatively low impact is that it may be easy to make poor commercial investments on the grounds of a somewhat illusory impact.

It may be the cynicism of old age but I wonder why the Government have introduced this clarification with this enthusiasm. The smoke signals that seemed to come out of the Cabinet Office during the last Parliament suggested that there was an element of seeing the investments of trusts and foundations as a cow to be milked to try to cover the challenges resulting from the public expenditure cuts being made.

It is hugely important, as the noble Lord, Lord Hodgson, said, that we do not force the pace of social investment. There are two risks if the pace is forced. One is that charities will lose money and see little or no benefit in terms of their objectives or mission. At the other end of the extreme, with regard to instruments such as social investment bonds, based on payments by results, if you chase volume rather than cost efficiencies, it is too easy for it to become another expensive way to finance social welfare—something similar to what we saw with the worst of the PFI.

This is a complex area. The nearly 90 investments that the Esmée Fairbairn Foundation has made over eight years cover every sort of instrument that you can imagine. We are fortunate to have the scale—even though the social investment portfolio is only 3% of the total investments of the foundation, two full-time executives run that programme. That is clearly not a resource that most trusts and foundations can justify. Therefore, in promoting the growth of this market, we have to be realistic about what prudently smaller trusts and foundations can do. There are already a number of social investment funds, and there will be an increasing number. If you have heard the vigorous debate in the investment management world about the trade-off between returns and fees, you can imagine that there is an even more complex debate when trying to assess fees against some mixture of financial and social return.

Subject to those quibbles, I very much welcome the Bill and the facilitation and encouragement of social investment that it brings. I look forward to the further stages of the Bill and its ultimate enactment.