Power to make social investments

Charities (Protection and Social Investment) Bill [Lords] – in a Public Bill Committee at 7:15 pm on 5 January 2016.

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Question proposed, That the clause stand part of the Bill.

Photo of Rob Wilson Rob Wilson The Parliamentary Secretary, Cabinet Office

I am sure that everybody is getting bored of the sound of my voice by now. [Hon. Members: “No!”] That was half-hearted—try a bit harder.

Clause 15 introduces a new power for charities to make social investments. It is the first time the term “social investment” has been defined in legislation. I will briefly address the merits of social investment and why the Government have decided to bring forward the power of social investment for charities. Traditionally, charities with money to invest have taken one of two approaches. On one hand, they may invest the funds to maximise the financial returns from their investment and then spend the financial returns on furthering their charitable purpose. On the other hand, they may spend the funds directly to further their charitable mission. Social investment is different because it involves investments that do both.

A social investment furthers the charity’s mission and also generates a financial return, meaning that the capital can be recycled again and again, contributing to a sustainable model and reducing dependency on grants and donations. In the right conditions it can enable a greater long-term impact than traditional financial investment models, and there are further benefits from a focus on measuring and reporting on the outcomes that have been generated.

The UK already has the world’s most developed social investment market, having introduced the world’s first social investment bank and social investment tax relief. Last year, I launched Access, the new £100 million social investment foundation that will help organisations to become social investment ready. We have pioneered the use of social investment bonds and payment by results for delivering public services. There are now 32 social impact bonds in the UK, which is more than in the rest of the world put together.

My right hon. Friend the Chancellor of the Exchequer announced in the spending review that the Government would expand support for social impact bonds by allocating £100 million over the current Parliament to tackle issues including homelessness, poor mental health and youth unemployment. Despite growth over the past few years, the social investment market is still developing. It is estimated that charities currently have only about £100 million of social investments out of a potential investable asset base of about £80 billion, which indicates the scale of current activity and the future potential.

In response to concerns raised by the social enterprise sector about barriers to making social investments, the Government asked the Law Commission to undertake a review of charities’ ability to make social investments and whether the law should be clarified. The Law Commission found that most charities were able to make social investments under existing powers—a combination of their financial investment power and their power to spend in pursuit of their charitable mission. However, the Law Commission recommended introducing a new power of social investment to put the matter beyond question and send a strong positive signal to the sector. That was strongly supported by charities and social enterprises on consultation, and clause 15 is that new power.

The new power will make it easier for charities to make social investments, particularly by reducing uncertainty and transaction costs. The definition of social investment used in the Bill has been deliberately drafted to be as wide as possible. It covers a spectrum from investments that are mostly intended to further charitable purposes but involve some return of capital, through to those that are primarily financial but have a small mission benefit. Neither the furtherance of the charity’s purposes nor the financial return is required to take precedence. All that is required is that the elements of both a social and a financial return exist. The trustees will need to consider the combination of the mission benefit and the financial return together for a social investment to be made in the interests of the charity.

Let me offer an example of the practical benefits of stimulating social investment. Hackney Community Transport is a social enterprise that delivers a range of transport services from London red buses to social services transport, from school transport to park and ride, and from community transport to education and training. It reinvests profits from its commercial work into further transport services or projects in the communities it serves. In December 2014 it raised £10 million from investors, including social investments from charities such as the Esmée Fairbairn Foundation. HCT intends to use that capital to fund growth, purchase new vehicles and depots, improve infrastructure and deliver greater impact for the communities that it serves and in which it operates. I am sure that all Members will agree that it is a fantastic social enterprise and an excellent example of a social investment by a charity that both delivers on its charitable mission and delivers a financial return.

We do not seek to claim that the power of social investment will solve all the problems faced by charities, but it will make a positive contribution by giving them certainty that they can explore the model as a tool that can help them to increase their impact. It fits with the wider Government aim of supporting the flow of investment into charities and social enterprises. Those organisations have huge expertise in their areas, along with an unwavering commitment to helping some of the least fortunate in our society. Supporting them in their numerous missions has been a consistent aim of the Government, as it was of the previous Government. I am pleased that the new power will take a small but meaningful step in that direction, and I commend it to the Committee.

Photo of Anna Turley Anna Turley Shadow Minister (Cabinet Office) 7:30, 5 January 2016

I thank the Minister for setting out the views and values behind the clause, which we welcome. Social investment is an important part of the fabric of our community and voluntary sector. We have tabled no amendments to the clause, and we recognise that it will make an important contribution.

As the Minister set out, the Bill is the first attempt to define in statute social investment, which is

“the use of repayable finance to achieve a social as well as a financial return.”

Community and voluntary sector organisations are playing an increasingly large role in society. As such, demands on the sector will be higher than ever. However, the third sector faces a chronic lack of investment. Many organisations are constantly in a state of fragility and vulnerability, and many are urgently seeking the next source of funding rather than investing to create a sustainable and robust social business. The climate of cuts, particularly in local government, as well as increased pressures and demands on many of the services that community and voluntary sector organisations provide, mean that they are facing a difficult climate. Any opportunity to look at new and innovative ways of raising finance are therefore to be welcomed.

Often, when funding comes it is unsuitably packaged for the purpose. It might be aimed at short-term projects or something specific, with many strings attached. It could come with unrealistic expectations and may not always support the core aims and objectives of the charity. Social investment is growing in response to those needs and challenges. Done well, it could not only create more capital for the sector but help to build long-term capacity and develop a movement towards early intervention and prevention, which the Opposition welcome as part of our approach to public services. That could result in a stronger third sector that is better able to play its important role in society.

The Bill’s helpful explanatory notes give examples of acts that might constitute social investments, and the definition is welcome. Such examples include a charity for the support of homeless people letting out housing at a low rent; an overseas development charity investing in fair trade tea production; a charity for the advancement of medicine making a high-risk investment in a medical research company; a diabetes charity investing in a company that is developing foods intended to reduce the impact of diabetes on sufferers; or a charity for the reduction of reoffending investing in a social impact bond to fund a project that supports individuals leaving prison. Those are all worthy and important aims and objectives, and we support efforts to put a social investment framework into statute.

Nevertheless, it is important that we continue to see the funding of the community and voluntary sector as diverse and variable. We do not want a one-size-fits-all solution to the funding crisis in the charity sector, as not all charities will be able to make social investments. Some charities need to be able to take risks and fail, which is in the nature of any charity or community organisation. Because of the kinds of people that they support and deal with, or because of their aims and objectives, some community and voluntary sector organisations will have to spend money just to manage or prevent decline or difficult scenarios. We must ensure that charities that support such social investment, which may never have a financial return, are not starved of the finance and support that they would traditionally get through a grant-based model.

The clause sets out an important framework for social enterprise, which we support and welcome as an important new means for charities to gain income and to be longer-term and more strategic in their approaches. It gives charities the reassurance that they need to feel empowered to undertake investment. Definitions will continue to change and evolve, but in the meantime, this is an important regulatory framework to encourage and support social enterprise.

Question put and agreed to.

Clause 15 accordingly ordered to stand part of the Bill.

Clause 16