September 13, 2012
Big Society Capital was established to grow the social investment market in the UK. To do this we are investing to build the market infrastructure and support development of the financial intermediaries that are required to connect investors looking for both a social and financial return with the enterprises they can invest in to achieve this goal.
All the intermediaries we support are required under statute to use our funding to invest in “third sector organisations”.
But how should third sector or social sector organisations be defined? The statute which governs the establishment of BSC defines them as organisations that “exist wholly or mainly to provide benefits for society or the environment” This definition includes regulated social sector organisations such as charities, Community Interest Companies or Community Benefit Societies. But should it also include companies or enterprises that have legal forms that allow them to earn profits and distribute dividends?
First and foremost we will seek to ensure that the vast majority of the investments made by the intermediaries we support will go to regulated social sector organisations. We believe, however, that it would be wrong to completely exclude companies that seek to create significant social value but have organised themselves as for-profit companies.
We will therefore permit some of the intermediaries and vehicles we invest in to provide funding to for-profit companies under the following criteria:
- The Objects of the company set out that it is primarily concerned with providing benefit to society;
- The company ensures that any surpluses are principally used to achieve social objectives and payments to shareholders are capped;
- There is a constitutional or contractual lock on its Social Objects, dividend policy and an “asset-lock”;
- Remuneration levels reflect social sector organisation norms and are disclosed in line with the accounting requirements for charities; and
- In the event of a change of ownership, it will take steps to preserve the mission as that of a social sector organisation.
These criteria are explained in more detail in the Governance Agreement.
We recognise from our extensive consultations with those directly involved in social investment that there is a divergence of opinion. There are those who would like to define social enterprise and social purpose companies broadly particularly because they believe that that is the only way to attract the type of risk capital needed to support and encourage early stage investment in start-up enterprises. Others believe that Big Society Capital funding should only benefit organisations that fit into a regulatory category that ensures oversight and specific legal constraints.
Our proposed governance rules seek to find a middle ground that ensures that regulated social sector organisations can attract funding more easily from investment intermediaries but also that enterprises that are set up and managed principally for social purpose can obtain the type of capital that they need to grow and maximise their impact on our communities.
Chief Executive Officer, Big Society Capital
April 3, 2012
Today marks the operational launch of the UK’s dedicated social investment wholesaler – the first institution of its type in the world.
Big Society Capital (BSC) was an idea that was first raised over ten years ago. The government launched its formal social investment strategy just over a year ago. Since then a blueprint has been developed, EU State Aid exemptions and FSA authorisations have been obtained. The government and bank shareholders have done extensive due diligence. Today BSC is a financial institution with real offices, real employees and a committed and high calibre board. It has a capital base that will increase to £600 million over the next four years and it stands ready to fulfil its mandate to grow the social investment market in the UK. It will aim to provide a broad range of investment opportunities to individuals and institutions. It will seek to connect social organisations to financial markets and to revolutionise the funding alternatives available to them. Most importantly it will provide new investment capital specifically focused on improving lives and supporting communities around the country.
The launch of BSC comes at an exciting time for the social investment market. Over the last twelve months there have been new initiatives and new money made available – by mainstream banks, foundations and other financial institutions; by the Cabinet Office and the Department for Work and Pensions; and by the Big Lottery Fund. The number of Community Interest Companies (CIC) – entities set-up with a clear social mission and a legal commitment to use their surpluses predominantly in support of that mission – has grown to 6,000 and are proliferating at a rate of close to 200 new enterprises a month. It is now estimated that a third of new enterprise start-ups are socially motivated.
The activity has not just been confined to the UK. Recent research by JP Morgan suggests that governments across the UK, US, Europe and Australia have made over $5 billion available to promote social investment over the last three years, almost half of which was announced in 2011. Major international institutions are endorsing social impact investing as an emerging asset class. The concept of Social Impact Bonds, a revolutionary financing vehicle which allows private investors to fund important social interventions and earn a return based on actual social outcomes and which originated here in the UK, are being picked up around the world.
The EU is also on board. Over 800 people assembled in Brussels last November to listen to President Barosso and Commissioner Barnier launch the Social Business Initiative which lists 11 separate actions to improve access to funding, increase the visibility of social entrepreneurship, and improve the legal and regulatory environment for social businesses. Initiatives include a new Euro 90 million fund and special priority for investments in social enterprises in the next EU budget round.
The launch of BSC is an opportunity to accelerate the pace of change, to move beyond research and rhetoric and beyond aspiration for a new way of investing and a new asset class. The truth is that, despite all the activity and the good intentions, too little money is making it to the front line.
If the market is to grow, a number of things need to happen – there needs to be more investment readiness support, better means of measuring and reporting social impact, greater financial sophistication in the sector generally and, perhaps most importantly, a more open and realistic attitude towards risk-taking among all the stakeholders in this market.
Mainstream investors and trustees need to challenge received wisdom when it comes to their fiduciary responsibilities by demanding that their advisers and managers show them more social investment opportunities. Foundations need to use the new flexibility granted them by the Charity Commission and allocate at least a proportion of their endowments to social investment funds. Government and Local Authority commissioners need to be quicker to adopt payment by results and need to take risk in awarding more contracts to social enterprises. The fact that organisations with a social purpose can bring benefits that large privately owned government contractors cannot needs to be reflected. Financial institutions, particularly banks, need to create more specialised and dedicated pools of funds to support local community and social enterprises. The Treasury needs to follow up on its commitment in the budget to address the financial barriers to social enterprise and ideally to do so through appropriate tax incentives.
It is more than a decade since the Social Investment Task Force recommended building an infrastructure for social investment in the UK. Today the UK is at the forefront of the global social impact investing movement. Let us not miss this opportunity. Now needs to be the time when this leadership drives real transactions and starts to make a real difference to frontline social enterprises and to the lives of people in our society.
Chief Executive Officer, Big Society Capital