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Cracking the nut of social finance

11 October 2013

Crowdfunding is not the only new ethical-finance model of interest to churches, charities, and investors, says Rachel Giles


IMPACT investment, also known as social investment, or social finance, is a form of investment model that invests money in projects offering a social return - and, in most cases, a financial one, too, at below-market or at-market rate.

Investment can be large-scale, such as through Social Impact Bonds (SIBs) - complex multi-partner investment projects that tackle difficult societal problems; or small-scale, such as crowdfunding or microfinance loans to entrepreneurs in developing countries.

The CEO and founder of I.G. Advisors, Carlos Miranda, works with funders, charities, and social enterprises to explore their access to social investment. He says that impact investors need to clarify their goals: "What is your ultimate objective - is it about making money? Having a positive social impact? Both? And where is the balance between the two?

"Even with social finance on the rise, odds are that your return on investment is not going to be as great as more traditional forms of investment. But for most people who choose these vehicles, their 'return' is about more than the percentage they get back."

Ethex is a not-for-profit company based in Oxford, whose goal is to "make money do good". The managing director, Jamie Hartzell, says that what is happening to the investment market is similar to what happened with the organic and Fairtrade movements in the '80s and '90s, when people started to realise that the choices they made had an impact on the world.

Positive investment is different from negative screening: "It's not about not doing harm: it's about trying to do good."

The Ethex website makes it possible to view and compare different "positive investment" products. Projects include: Woodheat Co-operative, a school aiming to provide renewable energy from a state-of-the-art woodchip boiler; and the Golden Lane Housing Bond, which raises funds for Mencap to build homes for people with severe learning difficulties.

Returns range from about two per cent on a microcredit investment to about five to eight per cent for community renewable energy projects.


Social impact bonds

WITH Social Impact Bonds (SIBs), private investors put up the funds to support a project that would normally be funded by local or central government. Currently, ten SIBs have been commissioned by the Department of Work and Pensions, one by the Ministry of Justice, and two by local councils.

There are three parties involved in any SIB: the investors; a "third-sector" organisation, such as a charity or charities who work to deliver the required social change; and a facilitating partner, such as the not-for-profit social-investment intermediary Social Finance.

Investment is high risk; investors only get a return if the project achieves the required social change. And, currently, they are available only to professional investors (the minimum investment tends to be about £100,000).

The sales director of Social Finance, Martin Rich, says, however, that "We continue to explore different routes to enable individuals to access this market, and hope this will happen in the not too distant future."

The Government would welcome this, too. A recent report by the City of London estimated that £480 million could flow into the social sector over five years, from more than 225,000 households.

Tax relief for social finance was proposed in this year's Budget, with the aim of introducing it in the Chancellor's autumn statement. If this happens, there would be potential for products such as SIBs to enter the retail investment market, and similar products for individual investors could follow.

One possible example could be the Allia Retail Charitable Bond, to be launched in the next six months. Individuals will be able to invest £2000 in well-established charities that would otherwise use banks to raise finance to acquire capital assets, or finance existing assets. These assets, such as social housing or care-home provision, are expected to generate a return for the investor of about four per cent.



HALF the world's adult population have no access to formal financial services, a report by McKinsey in 2009 suggests. Either they have no, or few, assets, or there is no bank where they live. Microfinance has, over the past quarter of a century, been viewed as one of the solutions.

Microfinance works to provide growth by giving access to loans and savings. Often, the group most helped by microfinance is women. By receiving loans for small enterprises, they not only expand their businesses, but through that growth can better feed and educate their families.

Check how microfinance is managed in the country it is lending to. Is it done at arm's length, or is there a local agency working with the people it lends to, training and supporting them?

"Due diligence is important, but when done well - and when it includes other services, like financial literacy, or microinsurance - microfinance can be an excellent investment," Mr Miranda says.

Five Talents is the official Anglican microfinance charity, established at the 1998 Lambeth Conference. Currently, 68,000 individuals are enrolled in either village savings or lending programmes in 11 countries worldwide, including Sudan, north Uganda, and Burundi.

Donations are channelled to specific projects supported by the Anglican Church in the countries concerned. As savings groups grow, Five Talents helps to establish village banks to create a local independent source of finance.

Kubaru is a non-profit online microlending platform specialising in post-disaster microfinance. Investors can lend as little as £10 to an individual with an online profile.

A Kubaru loan is paid back over six to 18 months. Local community banks administer the loans, and give training to recipients. Once repaid, the choice is to lend to someone new, withdraw the loan, or donate it to Kubaru.

Oikocredit grew from a meeting of the World Council of Churches in 1968, and promotes social justice in developing countries by providing loans, credit, and equity investments to businesses.

While microfinance makes up the majority of Oikocredit's activity, it also invests in agricultural and fair-trade enterprises. Eighty-four per cent of its clients are women.

Oikocredit has 48,000 investors in 69 countries, and from a minimum investment of £150 to a maximum of £6000, you can expect a modest two per cent return.

Community shares

PUBS, bakeries, grocery shops, sustainable-energy projects, and football clubs are among the enterprises that are embracing the community share offer as a way of raising finance and getting local people to invest in their futures.

Community share initiatives are normally linked to co-operatives. They are run for the benefit of its members, and are completely democratic, giving one member one vote. Shares are non-transferable, and their value does not go up (it can go down, if the co-operative decides it is good for the business), and they can be "withdrawn" (or sold back to) the co-operative.

There have been almost 150 community share offers in the UK since 2009, raising more than £25 million in equity from about 20,000 members. The average share offer is between £150,000 and £200,000, and the average individual investment is about £1000.

Simon Borkin, the project leader of the Community Shares Unit, which provides support and advice to groups considering this route, says: "We are seeing considerable growth." The unit is funded by the Department for Communities and Local Government. 

As with any investment, there are risks: a share offer may not reach target, or the co-operative may not pay interest to its investors if the business is not robust enough.

In Manchester, solar panels on a south-facing church roof in Manchester, funded by community shares, have been the key to helping a community centre to secure a long-term future.

St John's Centre, next door to St John's, Old Trafford, was set up in 1981 as a response to the Moss Side riots. It provides a welcoming place to learn and meet in a deprived interfaith area. Initially a church-run voluntary project, it now has charitable status.

The Priest-in-Charge of St John's and chairman of the centre's board, the Revd John Hughes, had the idea of installing solar panels on the roof to save money on bills, and to raise money by selling electricity back to the utility provider.

A director of the consultancy Sustainable Change, Fiona Nicholls, suggested that the project could be run as a co-operative. She gave advice on forming a co-operative and how to set up a community share offer, to raise the £15,000 needed to buy and install the panels.

In the project's first year, there was a £350 saving on electricity bills, and £1500 was made through the Feed-in Tariff, creating a fund for "Sunshine Grants".

Any financial return is likely to be several years away, and modest. "It is an investment, but it's not a pension plan," he says.











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