Policy recommendations to drive the social impact investment market
The BVCA has identified six key policy recommendations to encourage the growth of the social impact investment market.
The expansion of the Social Investment Tax Relief (SITR)
The BVCA responded to both consultations issued by HMT, respectively on introducing the Social Investment Tax Relief (September 2013) and on enlarging it (September 2014). We strongly welcome the introduction in the Finance Bill 2014 of the SITR, which we believe can have a galvanising influence on the impact investing market.
We stressed that the key to this remains the size of the opportunity. We argued that with the investment limit per social enterprise as initially suggested (i.e. €344,827 over three years, which does not require European Commission approval), there simply isn’t the scale and market to allow the intermediaries and financial advisors to offer these opportunities to their clients. Without them we are relying on ad hoc fund raising which will limit the availability of capital for social enterprises. That is why we recommended the most important action required is to seek state aid clearance for a larger limit of 5m, and offer as much visibility on this process to the investment community.
The Government announced at the Autumn Statement 2014 that it will be seeking EU State aid clearance for a maximum of £5 million per organisation per year up to a total of £15 million and will make the change through secondary legislation following that process. The change is expected to come into effect on or after 6 April 2015, subject to the timing of State Aid clearance.
The introduction of a Social VCT to provide for indirect investment via a separate legal entity
We think the other key factors in successfully attracting a meaningful amount of non-philanthropic capital to SITR advantaged funds would be to permit indirect investment through a Venture Capital Trust (VCT)-type structure and to provide an equivalent, or enhanced, package of tax reliefs when compared with the Enterprise Investment Scheme (EIS). We argued that moving Social VCTs from the niche to the mainstream requires a VCT-type structure offering the following reliefs:
- Business Property Relief on investment into Social VCTs
- Loss relief
- Income tax relief on dividends from the Social VCT.
The BVCA also recommended that AIM listing would be more appropriate for a Social VCT than a listing on a regulated stock market, due to high costs associated to the latter.
At the end of 2014, the Government issued their response on options for providing for indirect investment and set out the high level decision on a new Social VCT, with a view to making necessary legislative changes later in 2015 in a future Finance Bill. The new scheme would expand the number and type of social investors.
We urge whoever forms the next government to act upon the increase of the investment limit under the SITR and the introduction of an attractive social VCT scheme, in order to really seize the ongoing momentum around social investment.
We also fully support the recommendations from the Report of the Social Impact Investment Taskforce established by the G8, particularly the following:
Encourage pension funds to have a social investment option
A review of fiduciary duties of investment intermediaries was launched in 2014 by the Law Commission to address the lack of clarity around such duties when taking into account social and environmental impact in making investment decisions. The Review found that pension fund trustees do not have to focus solely on maximising returns in the short-term at the expense of risks over the longer term. The reform to increase the flexibility and autonomy of pension fund managers has the potential to drive up commitments to social impact investment.
Given that pension funds are a natural route to access individual investors at scale, we believe the next step should be to encourage pension fund managers that offer defined contribution investment funds to include impact investment options as part of their offering.
As recommended by the UK Advisory Board to the Social Investment Taskforce, this could be based on the French model ‘fonds d’investissement solidaires dits 90/10 ‘ (90/10 solidarity investment funds), which allocate at least 90% of the money to traditional mainstream investments and the other 10% or so to funding social enterprises. But important adaptations to reflect the UK’s particular interpretation of social impact investment, to include charity bonds, social property portfolios and social impact bonds, should be taken into account.
Give Profit-with Purpose businesses the ability to lock-in their social mission
Governments should provide appropriate legal forms or provisions for entrepreneurs and investors who wish to protect the social mission of impact-driven organisations. Likewise, a legal and regulatory framework that relaxes provisions that currently prevent social sector organisations from generating revenues, would be welcome.
As described in the report ‘The Social Business Frontier’ prepared by Big Society Capital with Bridges Impact +, there are a variety of tools including the ‘Golden Shareholder’ already being used in the UK that can be employed by the variety of enforcers to manage and secure different elements that contribute to impact. Profit-with Purpose businesses are therefore, exactly the type of social ventures best placed to attract equity investment as they are able to both distribute profits and lock-in their social mission.
Promoting a new culture of government procurement
Governments should pave the way for commissioning social ventures to address complex social issues and should also consider streamlining pay-for-success arrangements such as social impact bonds.
The Public Services (Social Value) Act was passed in 2012 in the UK. It provides justification for government commissioners to specifically include social impact in their procurement decisions. This effort should be further strengthened so that a new culture of public services procurement encouraging innovation and prevention becomes the norm.
Boost social sector organisational capacity
The BVCA supports the introduction of educational programs aimed at increasing the information for social entrepreneurs on impact finance, including awareness of the diversity of sources and types of impact finance as well as preparedness for accessing such finance.
The BVCA aims to contribute to building awareness in this space over the next few months, both directed at impact investors and impact-driven organisations. We believe the focus should also be on improving the capacity of social organisations to appropriately use investment to scale their impact. Governments and foundations are therefore invited to consider establishing capacity-building grants programmes or centres of excellence to support social ventures in their efforts to scale.