Typically there have been two routes for government to pay for what it wants to deliver: raising taxes or selling debt. Social impact investment envisages a third way
In June last year prime minister David Cameron asked Sir Ronald Cohen – a businessman and investor - to lead a G8 taskforce on social impact investment. The conclusions are published in a report today.
Social impact investments intentionally target specific social objectives – like reducing reoffending or improving youth unemployment - along with a financial return, and they measure the achievement of both. The report contends that up to $1trillion of such investment could be released across the world by the end of the decade if its recommendations are followed.
That number has to be treated with care. After all government spending is driven by social impact too. Buying sovereign debt could be classed as social investment. The report tries to hold the line that its conclusions have nothing to do with the level of government spending. But then most of its examples of social impact come from public services.
The issue is that, if government withdraws the direct funding of services – its own, as contemplated throughout this report - and switches to paying for impact when delivered by businesses, charities or social enterprises, then by the very act of doing that it creates among those impact-driven organisations a demand for investment. The report is right to say that there will be – all other things being equal - impact-driven investors who will step in to supply it but it’s not incidental that the returns the report talks about for these investors are 7-10% as opposed to the much lower yields associated with sovereign debt.
Typically there have been two ways for government to pay for the impact it wants to see in the world: by raising taxes; or by selling debt. The former takes citizens’ money, usually more of rich citizens’ money, to pay for impact; the latter borrows it from citizens and non-citizens alike and provides them with a return. In the new world envisaged by this report though, there is a third way for government to pay for impact: it commissions impact from other organisations that raise money from citizens or non-citizens, usually paying more by way of a return to them than government does.
In my view, this might be justified - for reasons I’ll describe in a minute - but it’s important to be honest about what’s going on. The $1trillion claim for the additional social investment that could be got by 2020 should probably be considered alongside a figure for how much government spending is going to change by over the same period. Otherwise we might find ourselves celebrating an overall diminution in the resources available for impact rather than an apparent increase.
Anyway, why is social impact investment even potentially a good thing? The most important argument may be that tapping into a broader range of impact-driven organisations makes it more likely that we’ll see positive impact on some of the most intractable social issues around. When government is the only actor, then innovation is likely to be slower than if plenty of organisations are competing to deliver impact. Plus not everyone who cares about impact wants to work for government – there’s the politics, the bagginess, the bulk. Many impact-oriented people prefer more flexible and more creative organisations.
We can complain that commissioning services from other organisations doesn’t require funding by impact. However, one of the reasons why non-governmental organisations may be more creative is because of the risk that they will vanish unless they do everything that they can think of to supply the impact they’re driven to produce.
The report’s recommendations for increasing impact investment are well nuanced. For example, it recognises that we need ways to track and measure impact consistently and rigorously, or the whole impact industry suffers the reputational damage of something like misselling payment protection insurance. Especially if impact investment is to benefit from tax incentives like charitable giving does – another recommendation of the report - then this is important.
Broadening the base of impact investors is a third area discussed at length. In France, for example, mass market savers and pension holders are given the option of putting their money into what are called fonds d’investissement solidaires dits 90/10. These allocate at least 90% to traditional mainstream investments and the remaining 10% to funding social enterprises, mostly with long-term loans at low interest rates. UK savers could be offered a similar choice at the point of enrolment into a workplace pension or when considering an ISA.
In the end this will be the key to achieving scale for social investment, taking it out of a specialist category where only those with high commitment or high worth are able to consider it and bringing it into the mainstream of savings and investment products. The report represents a major attempt to do precisely that in the detail of its recommendations but it isn’t explicit enough about the bigger context of falling public spending in which it appears. If what is about to happen in the realm of impact-driven services is a $1trillion change in how they’re funded, then we should face up to the trade-offs this involves rather than pretend it’s nothing but good news.
Emran Mian is director of the Social Market Foundation
