Mark Salway, director of social finance at Cass CCE, discusses the case for social investment

Charity finance models are being tested as never before. Fundraising is having a tough time and grants and government funding are down by 25% year on year. According to the latest NCVO Almanac there is a predicted £4.6bn shortfall in voluntary sector finances by 2018/19. With greater demand for services, charities must also consider the sustainability of their financial strategies, their impact and whether they can take their work to scale.

Given that the financial outlook isn’t likely to change any time soon, could social investment provide a good alternative solution?

A fledgling market

Social investment is a funding model that uses repayable finance to achieve a social as well as a financial return. It is heralded as a key tool to address the financial challenges faced by the sector, and particularly suited to those organisations working in the social and welfare fields. Usually, it will be used as part of a funding mix that also includes grants and donations, to give balance and avoid over-reliance on any one income stream.

It is still very much a fledgling market, but a recent survey commissioned by Cass CCE highlighted that the next five-year period will see a 10-12% shift away from donations and grants and towards social investment models. Already we are seeing how social investment is transforming the business models of several organisations - for example, Relate and Catch 22. Social investment has enabled them to be financially sustainable, take their work to scale and make a genuine impact for their beneficiaries.

Barriers to growth

There have been barriers, however, to the growth of the social investment market - one of which has been the fact that some boards are risk averse, and not ready to take on repayable finance. Boards also need to have greater financial capability so trustees can ask the right questions, put in place the best business models and approach the investment in the right way – they need advice from experts, and education to understand implications, to see if social investment is appropriate for them or not.

There is still much complexity and hype in the market too that needs to be demystified before non-profit organisations and investors are truly able to talk effectively and build the social investment market together. For example, while there is no shortage of people who want to invest for a social purpose, when gets bankers and charity leaders get together to talk about social investment they often struggle to get on the same page, as they simply don’t speak the same language.

Furthermore, the Cass survey highlighted that only 45% of all charities say they have a good understanding of social investment. Clearly there is a need for greater understanding of and education about social investment, so that informed decisions can be taken by charities on whether or not to pursue this model.

Is it right for me?

Certainly, charities will need to carefully consider their appetite for risk, and what 'risk' means for them. The following 12 questions will help charities establish whether or not social investment is a viable option for them:

• What finance do we need and why do we need it?
• Are there alternative ways of getting finance or raising money?
• Would a loan or crowdfunding be a better option?
• What kind of financing will make the most impact?
• Which investors should we use and are there intermediaries we should be talking to?
• Will the social investment be part of a balanced funding mix?
• How much will it cost?
• When will we be able to repay?
• Will we need to change our business model to do it?
• What will the impact be and how will it enhance our mission?
• How will that impact be measured for investors?
• Are we funding innovation, or taking our work to scale?

Growing understanding

Social investment is not a silver bullet, and won’t be right for everyone. Not all charities can use a business solution for social change, and organisations certainly shouldn’t be put under pressure to go down the social investment route. There is a need for more conversations between charities, government, the investment community and academics, in order to encourage and facilitate greater collaboration. In the meantime, charities should take time to understand the model, as it could pay real dividends in the long run.

To read highlights of the recent Cass CCE symposium on social investment, visit the Cass CCE website 

Mark Salway is director of social finance at Cass CCE