Of Ants and Aphids: How can our market make the most of Social Investment Tax Relief?

We are delighted to see that the government has created a level playing field between commercial and social enterprises by setting a rate of 30% income tax relief for the Social Investment Tax Relief (SITR). This is the same level as the rate for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

How can the social investment market utilise this relief?

By working with established commercial players! The social investment and finance intermediaries (SIFIs) are comparatively strong at origination of SITR investment opportunities.  We are comparatively less strong in distribution, however.

The commercial market participants already highly active in EIS, Seed EIS and VCTs are not particularly familiar with SITR.  They tend to call it Social EIS (a better name actually!).

We need to find partners in the commercial world to enable effective utilisation of the SITR.  We have three important constituencies to engage with:

  1. Seed EIS firms: Given that currently the amount on which SITR is available for an eligible investee (c. £290,000) is on the same level as for Seed EIS (£150,000), investment firms in the Seed EIS space have a wealth of experience of how to sell and manage small investments with a tax wrapper.  Notable companies in the Seed EIS space are Jenson Funding Partners, Mercia Fund Management, and Oxford Technology, to name only a few.  We need to team up to combine origination with distribution.
  2. EIS firms: Whilst Seed EIS is only a couple of years old, EIS has been running for almost 20 years by now, and the market is estimated to be just short of £1 billion in size.  Highly regarded players in this space would include big firms like Octopus Investments, but also smaller managers like MMC Ventures and Ingenious Media. With the amount eligible for relief increasing through the EU application and approval process, these houses will take note of SITR. We need to team up to combine origination with distribution.
  3. Crowdfunding:  Equity crowd funding sites are the newest category of intermediaries making use of the Seed EIS and EIS tax wrappers.  At the moment there are three authorised platforms with an emerging track record of aggregating funds over the net for enterprises: Crowdcube, Seedrs and SyndicateRoom.  Given that SITR will be applicable to unsecured debt products as well, peer-to-business loan platforms should also take note of SITR.  The tax relief should enable loan platforms to provide an important stimulus (30% upfront discount!) on loans to eligible social enterprises.  Leading names in the loan crowdfunding space are:  FundingKnight, Assetz Capital and reinvestingsociety.com.

In nature, there are many examples of symbiotic relationships, i.e. situations where different species live in mutually beneficial relationships with each other.  For instance, ants milk aphids for honeydew and in return ants protect and enhance aphids’ living environment.

We SIFIs, the ants of the investment world, need to milk the aphids (i.e. EIS, Seed EIS and crowd funding types) for their distribution capacity.  In return, we ants can enhance the aphids’ world by providing more origination deal flow.   Long live mutually beneficial relationships!

By Annika Tverin, Director (and insect enthusiast) at Social Finance

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Our Response to Social Investment Tax Relief Announcement in Budget 2014

As of 6 April 2014, individual investors in small social enterprises can benefit from the new Social Investment Tax Relief (SITR) set at a rate of 30% income tax relief.  This is the same level as the rate for the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).  The first box has been ticked.

Unlike EIS, however, this new tax relief applies to debt instruments (in addition to equity) as the majority of social sector organisations (SSOs) do not have equity capital.  Additionally, the government has recognised that social enterprises tend to have more employees than commercial SMEs and has doubled the size ceiling on number of staff for eligible investee organisations.  The gross assets test remains the same for social and commercial enterprises.

Whilst eligible investee organisations will from April 2014 onward be able to receive tax advantaged investment up to approx. £290,000 (€344,827) over three years, we look forward to the results of the application to the EU for a larger scheme.  We hope that this larger scheme will also reflect the EIS and VCT rules and enable eligible investees to raise up to £5 million over any rolling 12 months. This is the second box to be ticked to create a level playing field.

Lastly—our third tick—relates to indirect investments.  As it is (for the most part) currently used, EIS is a tax wrapper for high net worth individuals.  Individuals with medium levels of liquid wealth may find single EIS-style investments too risky.  An indirect investment opportunity may prove attractive to the broader investing public as diversification reduces risk.  The Treasury is in the process of working out what this indirect investment vehicle might look like.  This is the last and final tick to create a workable ecosystem of tax benefits to expand the growing impact investor universe and create new pools of funding for social enterprises.

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I have been of the opinion for quite some time that it is possible to achieve substantial social and/or environmental impact alongside market rates of return.  To have one’s fairtrade cake and eat it, so to speak.  Not in all situations for sure, but certainly in some areas.  And why not?  As a society we are quite happy for companies – and indeed ourselves (take a look at your pension) – to make profit from things that kill people, tie them to a life of addiction or simply exploit them.  But make a profit from doing something good and helpful?  Tut tut…  Well, we’ve just done our first truly, 100% gen-u-ine, bone fide market rate transaction to add to the growing weight of evidence that will hopefully lay the impact-return argument to rest very soon.  (And it looks almost as good as our Sarah’s now-infamous Victoria-sponge-plus-chocolate-cake-with-white-chocolate-and-raspberry icing concoction, which is really saying something).

Our client, Empower Community, has just bought a portfolio of solar panels on the roofs of over 2,300 social houses in Sunderland owned by the Gentoo housing association.  These panels were installed for free by Gentoo to give their tenants free power and substantial help with the fuel poverty that many of them were and are facing.  Our estimates suggest total annual benefits of £0.5-1m in energy bill reductions alongside a saving of 3,000 tonnes of CO2 emissions.  The tenants we spoke to were certainly delighted with them.  Gentoo will use the money from the refinancing to install panels on another 3,000 or so homes, enabling yet more families to benefit from free energy.

The £10m raised for this transaction came from a large, institutional UK pension fund that demanded market standard terms and conditions.  Given their mandate and fiduciary duties this is perfectly reasonable.  (OK, yes, I do long for and am working towards the day when all investors want or are required to truly consider the impact of their investments and actively seek transactions like this; but we’re not there yet so the pragmatist in me prefers to roll up the sleeves and work from where we are rather than just wait for nirvana to be delivered by someone else).  This deal therefore pays a market rate of inflation-linked return, with strong cash flow covenants, cash buffers, insurance and full security.  No subsidies or cut-corners there.  We’ve also created a financial and legal template for future deals of which, hopefully, there will be many.  The investor likes the social impact of the project and hopefully will feel this is an asset that they can be proud of, but ultimately they bought it because it matches their liability profile and generates the right level of return for the risk.  Just imagine if, one day, we could finance the trillions of pounds of pension liabilities with assets that produced similar impacts to this one?  It’s one of my happy places…

Did the transaction rely on pro bono support?  Nope.  Lawyers, advisors and technical specialists were all paid reasonable fees for their work.

Ah yes, the Loxodonta africana in the room.  The debt is being repaid through the feed-in-tariffs which are themselves a form of subsidy.  So the deal is subsidised, right?  Again, no.  The oil & gas, automotive and steel industries (to name a few) all receive huge government subsidies in different ways around the globe, but no one considers the returns of BP or ArcelorMittal to be anything other than ‘market’.  Feed-in-tariffs were introduced to encourage the necessary switch to cleaner forms of energy.  Whether one likes this or not is a moot point – they are the cash flows which currently define this particular market so they are what the pragmatist has to work with.  You and I are contributing to them through our energy bills and, personally, I would rather see them going towards a transaction like this than lining the pocket of a private developer.

Which brings me to the final point – the sharing of the profits.  During the life of the transaction, over 80% of the profits flow back to the local community – on current estimates that’s over £5.5m – either directly through a local community foundation or indirectly via Gentoo (itself a not for profit organisation).  This is on top of the free energy and will target further reductions in fuel poverty as well as issues such as education, training and employment in the community.

And that’s the cherry on top of the white-chocolate-and-raspberry icing.

By Martin Rich, Sales Director at Social Finance

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Lisbon Calling!

We are delighted to be supporting the Social Investment Laboratory (SI Lab) which launches in Lisbon this afternoon and can be followed on a live stream from 5.30pm (GMT). The SI Lab is a social venture created by the Social Entrepreneurship Institute and funded by the Calouste Gulbenkian Foundation on a 3 year grant. It aims to be a knowledge centre for social investment in Portugal and Lusophone countries, enabling the creation of a nascent social investment market. Speaking at the event will be the Social Finance Chairman Bernard Horn and International Director Jane Newman.

The 3-year strategy of the SI Lab comprises of the following; to create knowledge and market intelligence, catalyse the market creation by identifying suitable infrastructure and identify pilot-projects to test innovative social finance instruments. They plan to publish monthly research notes on specific social investment topics. These will include a glossary of social investment terms in Portuguese and international case studies on market creation, social impact bonds and other on issue areas such as homelessness, children in care and recidivism. The first three editions of these will be published at today’s launch event.

Initial work has suggested the two issue areas of most interest to commissioners are children in care and youth/adult recidivism. The SI Lab is carrying out research and putting together a pre-feasibility study to inform future discussion with these commissioners, with the aim of launching pilot projects in these areas. They are also in the early days of convening a Portuguese Social Investment Taskforce, for which Social Finance has been supporting the development of a strategy and work plan. There is in-principle agreement from key stakeholders to participate in this Taskforce.

The SI Lab team is comprised of Filipe Santos (Academic Director and Professor at INSEAD), Antonio Miguel (formally of Social Finance UK) and Joana Ferreira. The SI Lab benefits from shared services from the Social Entrepreneurship Institute and from close support by the Human Development Programme at Calouste Gulbenkian Foundation.

The SI Lab has convened a prestigious Advisory Board with both national and international experts in the social investment sector: Jane Newman (International Director, Social Finance UK), Marc Ventresca (Professor, Said Business School University of Oxford), Carla Antunes da Silva (Managing Director and Head of UK Banking at Credit Suisse) and Joao Trigo da Roza (CEO of the Portuguese Association of Business Angels).

Social Finance extends its sincere congratulations to the team in Lisbon for all their hard work in launching this ambitious project and we look forward to working together to support the development of a global social investment market.  

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Energise and Teens and Toddlers Social Impact Bonds – The First Year

In October 2012 Social Finance was awarded two Social Impact Bond (SIB) contracts from the Department of Work and Pensions Innovation Fund. Today we are publishing a report looking at the first year of operations for the Energise and Teens and Toddlers SIBs. 

One of our most popular reports to date has been the Peterborough One Year On document, published in November 2011 and sharing our learnings from the first year of the Peterborough SIB. At a time where there is an enormous amount of interest in SIBs, but relatively few live examples, the opportunity to learn from them becomes all the more important and we hope this new report will be a valuable contribution to the existing literature.


For a more detailed look at where SIBs are active in the UK and internationally, check out this blog from Emma Tomkinson

The SIBs outlined in this report came from a DWP initiative to intervene with young people at the age of 14 with the objective of preventing them from becoming NEET (not in education, employment or training) at 18. The DWP have traditionally intervened with young people who are NEET once they reach the age of 18, but the Innovation Fund contracts see a shift in this focus. 

The DWP has identified a number of outcomes against which the contracts will be measured including improved behaviour, school attendance, educational qualifications and employment opportunities. Outcomes payments from the Innovation Fund will be paid over three and half years. Unlike typical social service delivery, the funding is provided at risk by social investors, including Bridges Ventures, Big Society Capital, Barrow Cadbury Trust and the Impetus Trust, whose financial return is aligned to the positive social impact of meeting preagreed educational, training and employment outcomes. 

Energise Social Impact Bond: The Energise programme offers mentoring combined with structured activity days and residential courses designed to foster re-engagement with school, to build self-esteem and to improve interpersonal skills. Energise is delivered by the Adviza Partnership and the programme is managed by Social Finance. The programme combines bespoke and generic activities to address individual needs. It is aimed at supporting more than 1,500 young people aged 14 to 16 who are at risk of becoming NEET over a three and a half year period. 

Teens & Toddlers Social Impact Bond: The Teens and Toddlers programme combines an 18-week intensive intervention with regular support through to GCSEs. The programme is unique because it targets two sets of vulnerable children simultaneously, raising the aspirations of young people from disadvantaged areas by pairing them as a mentor and role model to a child in a nursery who is in need of extra support. It aims to support more than 1,150 young people aged 14 to 16 who are at risk of becoming NEET over a three and a half year period. 

What have we learnt? 

Both projects required a bespoke case management system to track each individual at every stage of their personal journey, and to ensure that they are accessing the appropriate level of support. A common theme across both projects has been the time this has taken to set up, as well as the time required for staff to adapt to a new, perhaps more extensive data capturing system than they were used to.   

Within the first few months we had data that led us to adapt the Energise programme. We saw that the residential course wasn’t having the desired impact and would have further value if it ran for longer, and was more intensive.  

We have also used data to inform adaptations to the Teens and Toddlers delivery model. A decision was made to provide support through to GCSE’s, whereas previously the programme had ended before this milestone. When attendance on this part of the programme began to decline, the intervention was changed to reflect better the needs and interests of young people. The programme now includes activity days and tutoring support in addition to the core service provision. 

The Innovation Fund is testing the following hypothesis – if you identify a vulnerable cohort, and invest in prevention, can you reap the social and financial rewards of diverting this group from requiring acute services? The principles behind this span social issues; diverting ex-offenders from returning to crime, diverting children from entering care, diverting emergency hospital admissions – at a time of budget constraints, the case for investing in prevention is stronger than ever. 

Social Finance is working to develop Social Impact Bonds across a range of social issues. For those working in areas with a consistent lack of investment in prevention, SIB funding may allow for innovation to be tested, with the risk transferred to social investors. There is £60 million in outcomes funding available in Outcomes Funds administered by the Big Lottery Fund and Cabinet Office, as well as up to £3 million in development grants to refine a SIB proposal. We are working in partnership with the LGA to deliver a support contract on behalf of the Big Lottery Fund, to encourage applications to the Funds. More information about the support available can be found here

We hope projects like the two listed above will encourage more commissioners to look into the SIB mechanism and the potential it has to transform services in areas affecting the most vulnerable in our communities. 

By Sarah Henderson, Service Manager at Social Finance 

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Essex – no longer the only way

We are entering the fourth month of our support and engagement contract for Commissioning Better Outcomes[1] on behalf of the Big Lottery Fund. So far we’ve held 4 workshops, and spoken to over 100 commissioners and service providers who have shown an interest in developing a Social Impact Bond (SIB) in their community. Many of them were introduced to the concept by reading about the Essex SIB, which was the first Local Authority commissioned Social Impact Bond, launching in November 2012. This was a watershed moment for Social Impact Bonds as it hinted at the potential of this mechanism to transform local government service provision across the UK. Since then countless blogs, articles and publications have espoused the value of contracting on outcomes, and the rigour performance management can bring to a programme.

Over a year on from the Essex launch, SIBs are being developed in areas such as troubled families, long term health conditions and rough sleeping. But it is still children’s services where we are observing the most interest. A few weeks ago we hosted a webinar looking at the Manchester Social Impact Bond that is currently in development, which, unlike Essex (which looks to prevent entry to the care system) is looking to improve the outcomes for children already in care. This blog will take a look at the Manchester SIB, and some of the differences between the two projects.


At the heart of a Social Impact Bond is the social issue it is designed to address. In Peterborough it is the lack of support for short sentenced offenders, in Essex it is children at risk of going into care, and in Manchester it is poor outcomes for children in residential care.

Social Issue

Manchester currently has 1,300 children and young people in its care with 177 of these children in residential placements, significantly higher than the national average and its statistical neighbours. The Department for Education estimated the weekly cost of care in a residential placement at £2,689 per child/young person per week, compared with an average cost of £676 for foster care. There is also consistent evidence of the social cost; overall those children and young people in residential care have poorer school attendance, a greater likelihood of a substance abuse problem, a greater chance of having entered the criminal justice system, and a greater chance of becoming NEET to name but a few.

Foster care has two kinds of benefits. First, it is seen as giving better outcomes for a young person in terms of their educational, social and emotional well-being. Second, it is more cost effective as compared to the use of an internal or external residential placement.

Manchester came to us with this issue in mind; they wanted to explore how social investment could support young people to transition from residential care to foster care and target those individuals who have experienced the breakdown of multiple foster placements. We designed a SIB model that would allow for the funding of Multi-dimensional Treatment Foster Care (MTFC). This is an intensive intervention where young people live with specially trained foster parents who are supported around the clock by a team of professionals from health, education and social care.  Each set of foster parents looks after just one child for 9-12 months, concentrating on behaviour management to promote emotional stability and the skills needed to live in a family setting. It is expected that 66% of young people will ‘Graduate’ from the programme, meaning they will complete their individual programmes and move on to family-based placements.

Outcome Payments

Unlike the Essex SIB where outcomes payments are based on a reduction on children entering the care system, Manchester operates a tariff model where outcomes payments will be made for a child achieving milestones such as staying on the MTFC programme for the duration, and after graduation remaining in a family setting and therefore away from residential care.

Although a year of MTFC costs £100,000 per total package of support, the residential costs per year are estimated at £125,000, for the remainder of a young person’s care journey. If successful, it will be both MCC’s Children’s Services and Central Government benefiting from the cost savings. This makes Manchester an obvious candidate for “top-up” payments from the Big Lottery and Cabinet Office’s Outcomes Funds.


In some cases the Essex Social Impact Bond can be directly replicated.  Other social issues may require detailed analysis of the local area in order to design a model to address these specific issues, but the more SIBs in development, the more pooled knowledge there is to share.  There is also a plethora of support on offer; the Cabinet Office SIB Knowledge Box is a comprehensive resource of technical guides and case studies, and we are co-hosting with the LGA a series of workshops focussing on different aspects of Social Impact Bonds. The Big Lottery Fund has also made available up to £3million of technical assistance for commissioners with an EOI accepted by the Funds. We are optimistic that Essex has carved a path for other Local Authorities to follow, and hope that our partnership with LGA and BLF will support commissioners on this journey.

Any further questions, please contact sioutcomesfunds@socialfinance.org.uk

By Sarah Henderson, Service Manager at Social Finance 

[1] Please note that Commissioning Better Outcomes is part of the “The outcomes Funds” which refers to both the Commissioning Better Outcomes (Big Lottery Fund) and the Social Outcomes Fund (Cabinet Office). For ease of access however there is only one application form and the Funds will decide during assessment which fund is most appropriate for your application and in some cases may decide to jointly fund projects.

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HM Treasury Has “Stopped, Looked and Listened”

HM Treasury released on 10 December key detail on the proposed Social Investment Tax Relief (SITR).  Our impression is that HM Treasury has spent time listening to social enterprises and charities and their needs, as well as to intermediaries as they attempt to construct investments that satisfy both providers of cash (investors) and users of cash (social enterprises).

We are pleased that the eligible investees can now include co-operatives (through registration with the FCA), unregulated CLGs (through registration with the CIC Regulator) and social impact bond share companies (accredited by the Government). 

Whilst the amount of tax-advantaged capital that a social enterprise can raise will remain limited during the first applicable tax year 2014-15, the inclusion of plain vanilla unsecured debt will mean that small enterprises can immediately offer its Friends & Family network a tax relief against providing much needed growth capital.  

Once the amount of tax-advantaged capital has been raised to the level of a commercial enterprise (£5 million per rolling 12 months) in 2015-16, there will be wider and further utilisation of SITR.  

Our firm belief is that a wide section of the investing public will want to invest for the benefit of UK society.  It is therefore important to see how the SITR eligibility rules (regarding both investees and instruments) could be transferred to the already existing Venture Capital Trust-style indirect investment scheme or some other similar indirect scheme.  HM Treasury’s roadmap for social investment, scheduled for January 2014, will be a further step in the right direction.  

Tax Relief on a Personal Level

What does this mean for the individual investor?  Below are three small ways in which the new tax relief can make an individual investor like myself more likely to dip her toe into the new and exciting impact investment arena: 

  1. Retail bonds – for the right investee and instrument: During the past year, Triodos Bank and Fidelitas Capital have arranged several exciting, fixed-coupon bond offerings by charities and environmentally minded companies.  Examples include £10 million for Golden Lane Housing (for the benefit of learning disability charity Mencap), £5 million for Greenwich Leisure Limited and up to £5 million for Avante Partnership (a dementia charity).  Many of us have already invested in these.  For the right charity or social enterprise, and when correctly structured, these retail bonds should with time (when the investee limit is increased) be able to make use of the new tax relief.
  2. Social Impact Bonds (SIBs): An increasing number of gritty social issues have now been tackled through the SIB: children on the edge of care, NEETs, adoption, homelessness, etc.  When the next generation of SIBs is created in 2014 and beyond, there is the possibility for individuals like myself to invest a proportion of my liquid assets in a SIB instrument and receive an up-front tax relief in the fiscal year I invest.   Additionally, any capital gains reliefs available to a commercial Enterprise Investment Scheme investor would now also be available to me, the SITR investor. For instance, the loss relief element of the relief could reduce my potential downside on a £10,000 investment to less than £4,000.
  3. Community Organisations – Pubs, Care Homes, Nurseries, Community Regeneration: Provided the investee fits the size and trading activity requirements, a local co-operative or Community Interest Company can raise capital from local residents and, in return, offer an upfront tax benefit.  The April 2011 IPSOS Mori survey Investing for the Good of Society indicated that a local investment combined with a tax relief constituted a highly attractive investment opportunity for a wealthy individual.

With the tax relief in place, and a roadmap for increasing its size and reach to a wider audience, it is now back to the drawing board for charities, social enterprises and intermediaries to see how we could make use of the new relief in 2014.

 By Annika Tverin, Director at Social Finance

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Commissioning Better Outcomes – the first few months

With the first quarter of our Commissioning Better Outcomes support contract drawing to a close, it seems like a good time to reflect on activities so far. To recap,  Big Lottery Fund appointed Social Finance in partnership with the Local Government Association (LGA) to support the development of Social Impact Bond (SIB) proposals in England that could then benefit from the £40million Big Lottery Fund’s Commissioning Better Outcomes Fund or the Cabinet Office’s £20 million Social Outcomes Fund. We plan to do this through a range of activities – workshops, webinars, podcasts, and technical guides.

So, what’s happened so far? It all kicked off with a launch in September, at which the Big Lottery Fund England Chair Nat Sloane gave some context as to why this support was contracted. He stated that we need 30+ SIBs launched for the SIB market to really take off. The market currently stands at 15, so we certainly feel excited about what this contract might help achieve.

The team has quite literally travelled the length of the country, with workshops in London and Newcastle. Both workshops have been oversubscribed, but we’re holding plenty more so check out the events page for one in your region. After all the work planning and developing materials, we were excited about starting to deliver. It wasn’t quite down to earth with a bump, but the first workshops certainly brought home the scale of the challenge ahead. The attendees came with a mixed range of previous knowledge so the workshops had to be sufficiently broad to engage all participants.

After every workshop we’ve reviewed our approach and made changes in light of feedback received. There seems a challenge of “what next” after the initial excitement of the workshop.  We are considering how we can best support commissioners through this stage, which requires a more personalised approach. For commissioners already working on an early stage SIB proposal, an expression of interest (EOI) to the Outcomes Funds is more straightforward. We can put them in touch with one of our team to discuss any queries they may have. For those with very early ideas, we hope they will review the materials publically available on the affiliated websites (a full list is at the bottom of this page.) We recognise that every commissioner will have their own barriers to overcome and can offer support in briefing their colleagues, or just talking through some early stage ideas.

The most popular section of the workshops has consistently been when we’ve reviewed the Essex SIB. This shows us the power of a case study to bring a complicated structure to life.

This video features Roger Bullen from ECC. He played an influential role in the Essex SIB and highlights the importance of an internal SIB “champion” in pushing forward with this complex, but ultimately rewarding new mechanism.

Our partner LGA has been instrumental in reaching out to their networks and introducing the local authority audience to the potential of social investment. You only have to look at where other countries are in terms of their SIB development to see what a vital role Big Lottery funding has played. They have recognised that there is untapped support need among local and central government.  We have also observed a really productive partnership in the way the CBO Fund has been able to complement the existing Cabinet Office Social Outcomes Fund. This has certainly removed the potential for duplication of work, and consequently public funds.

We’ve had to clear up a few more misconceptions around the Funds and our role. For the full scope of our work check out this page, but a key point to note is that no commissioner is required to speak to us in order to submit an EOI or full submission. If you are currently working with another intermediary, or feel confident that you have the internal capacity, then don’t feel you need to speak to us. All the resources we provide are of course at your disposal. There has also been some confusion about the two outcomes funds. For efficiency there is only one entry form, and the Funds will decide who should fund what. The key difference is that the Big Lottery Fund  is looking for projects that enable more people, particularly those most in need, to lead fulfilling lives, in enriching places and as part of successful communities. For the Cabinet Office, they are looking to catalyse and test innovative approaches to tackling complex issues using outcomes based commissioning.

So, looking forward to 2014, we are planning more workshops, more webinars, and hopefully more people getting in touch. It has been particularly inspiring to see that at a time of such upheaval for local government, the people we are speaking to still have the energy and motivation to embrace new ideas and consider a different way of reshaping and financing their public services.

Key Resources

Full guidance, Q&A and Expression of Interest application form – Big Lottery Fund and Cabinet Office. This is recommended as the first port of call for anyone considering submitting an EOI: www.biglotteryfund.org.uk/sioutcomesfunds

Social Finance website: www.socialfinance.org.uk/sioutcomesfunds

SIB Knowledge Box – Cabinet Office: http://data.gov.uk/sib_knowledge_box/

 By Sarah Henderson, Service Manager, Social Finance

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Development Impact Bonds Debut in NYC

New York City: Social impact investors, leaders of non-governmental organizations, and development specialists gathered at the Rockefeller Foundation in New York City this week to learn about Development Impact Bonds (DIBs), a new financial instrument that aims to tap private sector innovation to help improve the lives of poor people in the developing world.  

Zia Khan, Rockefeller Foundation vice president for strategy and evaluation, told the audience that DIBs hold promise as “the next evolution” of innovative finance for meeting global development goals.

“What excites me most about the report are the specific case studies ranging from HIV prevention in Swaziland to scaling up low-cost schools in Pakistan. There’s enormous appetite for this kind of innovation at a global level,” Khan said.

Although the first DIB deal has yet to be signed, the idea is more than wishful thinking. Presenters explained how DIB pilots in various stages of development would bring the private sector’s drive for success to such problems as reducing sleeping sickness in Uganda, improving education in Pakistan, avoiding teen pregnancy in Colombia, and fighting malaria in Mozambique. (See event page for full video and photos.)

“There’s growing interest in doing good while doing well but changing the world requires more than good intentions,” said Toby Eccles, the founder of Social Finance UK, an organization that works to inject market-principles into social sector funding. “DIBs provide an opportunity for the private sector to invest in the world’s most pressing development challenges in a meaningful way.”

Eccles, CGD senior fellow and director for Europe Owen Barder, and Elizabeth Littlefield, CEO of the US Overseas Private Investment Corp., a US government agency that turns a profit, served as co-chairs of the CGD-Social Finance Working Group that prepared the report.

Eccles explained how Social Finance UK pioneered a new instrument for involving private investors in financing socially desired outcomes starting with a project to reduce high rates of UK recidivism—when former prisoners commit fresh crimes after release and wind up behind bars again.

Barder told how he was living in Ethiopia when he first learned about the new approach, dubbed Social Impact Bonds, or SIBs, and contacted Social Finance to explore how the approach could be applied to development challenges. That led to a partnership between CGD and Social Finance, which jointly convened a working group to adapt the new approach as Development Impact Bonds, or DIBs. 

SIBs and DIBs work in a similar fashion: Private investors provide up-front capital to service providers who work to achieve a specific, measurable goal, such as fewer teenage pregnancies or reduced recidivism. If an independent third party verifies the goal has been met, funders (such as national governments for SIBs or donors for DIBs) repay the investors their initial investment plus a return linked to performance—the better the outcome, the greater the return.

Unlike traditional aid projects, which tend to focus on implementation of specific solutions identified before a project is funded, the DIBs approach links payments to outcomes and aligns the incentives for investors and the service providers to discover the quickest and most cost-effective means to achieve the desired result. Funders—aid donors, in the case of DIBS—pay only if the result is achieved.

Drawing on one of six case studies in the report that describe emerging pilot projects, Barder explained how a DIB could be used in Uganda to reduce sleeping sickness, a parasitic disease that takes a heavy toll on human health and is invariably fatal if left untreated. He encouraged investors and donors to learn about the new approach—and to consider taking the plunge.

“This is a time for leadership,” Barder said. “Traditional aid is giving way to innovative new forms of development finance that will create new opportunities for private firms and donors—and at the same time much better development outcomes. But these benefits can only be realized if some pioneering funders and investors are willing to bear the upfront costs of creating a new market. Heroes wanted!”

To help manage risk for individual investors and funders, the Working Group recommends the creation of a new DIB Outcomes Fund and DIB Investment Funds. These funds, which would pool capital and dilute risk, would facilitate launch and implementation of the first DIB projects and help catalyze market growth. 

Luther Ragin, president and chief executive officer of the Global Impact Investing Nework (GIIN) kicked off the discussion at the New York event with a ringing endorsement of DIBs, .

“There is innovation at play that is very exciting to a wide range of investors. At the GIIN, we are convinced that this is a space that has lots of opportunity. We are happy to be associated with the development of these instruments, and the organizations that have pushed the development of these instruments.”

But he also offered some potential concerns from investors. Success would depend crucially on the quality of the management of the NGO or other entity that serves as the intermediary, he said, and of “the quality and integrity of the data that determines whether or not investors get paid.”

The Development Impact Bond Working Group was convened by CGD and Social Finance with support from the Rockefeller Foundation and the Omidyar Network. Working Group members include thought leaders from the worlds of finance, government, civil society, foundations and official aid.

Six case studies of DIBs in various stages of feasibility, development and negotiation are included in the Working Group report. Pilot DIBs currently being explored and the groups in the lead include: Social Finance, for reducing sleeping sickness in Uganda; Lion’s Head Global Partners, a London-based merchant bank, for education in Pakistan; Instiglio, a non-profit that designs Social Impact Bonds, for avoiding teen pregnancy in Colombia; OPIC, for investment in clean energy; and Dalberg, a development advisory firm, for fighting malaria in Mozambique.  

Guest post by Lawrence MacDonald, Center for Global Development

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Social investment is not an asset class, it’s a mindset

If we want to truly change the world, we need to start thinking bigger; we need to start seeing social investment as something that is relevant to all of our financial activity; we need a new mindset.

“In today’s globalized world, too much emphasis is placed on economic success, measured in terms of material wealth…”

Social investment – investing private capital in organisations that create a direct, intended and measurable social impact while also generating a financial return – is a wonderful thing.  It appeals to both the commercially and philanthropically minded as in theory it can (and in practice often does) allow investors to have their cake and eat it, so to speak.  Whilst the concept seems at odds with the prevailing materialistic mentality of today’s society, there are few people who are not intrigued at the idea of “doing well whilst doing good”.

It’s hardly a new idea.  One can point to the great Quaker business leaders of the 1800s for their radical ideas on ‘good business’.  The US introduced Program-Related Investment in 1969 and the Community Reinvestment Act in 1977.  Professor Yunus began his work on microfinance in the mid-70s.  Even the recent market growth started over a decade ago, helped by a UK government initiative leading to innovations such as Social Impact Bonds and the world’s first Social Investment Bank.

 “.. What gets overlooked is that GDP and other economic activities are means to ultimate ends, not the ends themselves…”

And yet, despite all this work and the topic even making the agenda of this year’s G8 conference, the social investment market remains tiny in the grand scheme of things.  JPMorgan’s seminal 2010 report predicted social investment could be as large as $1 trillion over the next decade – barely 1% of global assets.  Even SRI/ESG investing is seen as a niche market by most institutional investors.  Up to 20% of global assets are said to be managed with “ESG considerations” although few would argue that this has led to a 20% improvement in global social or environmental impacts.

The simple reality is that financial return and short-term thinking continue to rule business and investment decisions.  Social investment and social entrepreneurship are nice ideas best left to individuals with money to spare and a conscience.  But if 80% (at least) of our money doesn’t care about how it generates its return, we can hardly be surprised when problems arise.

“.. We need to redefine success in terms of the wellbeing that is generated by our activities and how this wellbeing is distributed across populations and generations…”

There is a story of an old man walking on a beach where the tide has gone out, leaving many starfish stranded and dying on the sand.  Every few steps the old man stops, bends down and throws a single starfish back into the water.  A young man watches for a while and then wanders over.  “You’re wasting your time!” he says.  “You’re missing most of the starfish and the tide will simply come back in again and leave more stranded.  You’re not making any difference.”  The old man smiles gently, picks up a starfish and throwing it back says “It made a difference to that one”.

Viewed in isolation, I see social investment somewhat like the old man.  Yes it will make a very significant difference to a few and for that the market is to be encouraged, nurtured and grown.  We must find more people willing to pick up more starfish, so the few become many.  We must develop more ideas focused on intervention, like Social Impact Bonds, to reduce the numbers washed up on to the beach in the first place.

But whilst the tides of global economic growth continue to surge with no care for those caught in the wash, many victims will continue to be left stranded.  We must therefore address this issue at the same time and for that I believe we need a new mindset.

“.. Such a redefinition can lead to new approaches toward achieving fair and sustainable prosperity.

So how do we change the tide?  By firstly realising that we can no longer separate business activity into either “commercial” or “social”, but that they need to become one and the same thing.  Businesses must rediscover what it means to be socially valuable in all that they do.  They need to factor in the true cost of their activities – including elements like environmental impact.  They need to strive to be of benefit to as many people as possible.  That is certainly not to say they should not also be profitable, but it will mean a change in the way things are done.

And we can achieve this by using finance as the key lever of change.  Put simply, as investors and consumers, you and I together can choose where to put our money to bring about these changes.

I have come to see my whole financial portfolio as a spectrum – from investments made primarily for the financial return through to pure grants.  The financially focused part of my portfolio needs to reflect my values just as much as the grants I might make and all the elements in between.  I want to understand the local and global effects of the companies I invest in and, more importantly, I want to invest in those that are creating opportunities for sustainable human flourishing around the world.  This is not an oxymoron.  It’s an opportunity to re-engineer business and for investors to use their capital to create a future worth having.

 “.. It can also uncover new opportunities for human cooperation.”

This is what I mean when I say Social Investment is not an asset class, it’s a mindset. 

I really don’t care about the semantics – call it whatever you will.  What I care about is seeing the behaviour of individuals and corporations change for the better. 

Will you change your mindset?

By Martin Rich, Director at Social Finance. This post was originally written for the Global Economic Symposium 

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