New research maps supply and demand for social finance

7/4/11

Two pioneering research reports which address significant gaps in the evidence base for the development of the social investment market and shine a light on how the market can be developed are published today by the National Endowment for Science, Technology and the Arts (NESTA).

The research, which examines investors' interest in social investment (research conducted by The Fairbanking Foundation and Ipsos MORI) and the demand for capital amongst social enterprises (research conducted by New Philanthropy Capital), is critical to understanding what is required to develop the emerging social finance market, and the catalytic role that the Big Society Bank could play in this.

To coincide with the research, NESTA is publishing details of a portfolio of twenty proposals for innovative social finance products developed through its Big Society Finance Fund, which demonstrate the kind of products and services that a thriving social finance sector could enable. Four of these products have been selected to receive a total of £1.2m investment from NESTA and Panaphur, which will act as a catalyst to leverage in private investment to support social enterprises.

Together, the three pieces of research show:

• NESTA's portfolio of twenty social investment intermediary proposals show how the capital needs of social ventures and the requirements of investors can be met in a sustainable way, providing returns to investors and appropriately priced capital to social ventures.
• The majority of demand for capital is for soft capital - patient, high risk and likely to yield lower financial returnsⁱ
• When considering making social investments, two thirds (67%) of wealthy individuals with £100k+ to invest are likely to invest in a financial product that benefits society as well as giving a comparable return on their moneyⁱⁱ
• The potential for a low return is not a barrier to involvement for many wealthy individuals. When asked about their motivations for investing in social finance products, a third (39%) of those with £50k - £1m to invest were found to have an active interest in the market. The top four factors that were found to be more motivating to this group than other investors were:
  a) being able to be personally involved in the project/ cause/ charity
  b) being able to visit the project/cause/charity
  c) liking the idea of social investment
  d) knowing that their money may come back to them so that they can re-use it for another social investmentⁱⁱ

• Wealthy individuals (with £100k+ to £1m to invest) under 40 years old are more likely than those over 55 years old to be receptive to social or ethical investmentsⁱⁱ
• The portfolio shows the transformative, multiplying role that the Big Society Bank can play for individual intermediaries, but also the social investment market as a whole. Within the proposals there is at least £12m of investment that could be made within the next six months, and over time this would catalyze at least five times that sum in additional investmentⁱⁱⁱ
• The amounts currently needed from a funder such as the Big Society Bank are estimated to be c£350m, demonstrating that social investment market is a small 'emerging market'ⁱⁱⁱ.

Stian Westlake, Director of Policy and Research at NESTA, says: 'Social enterprises are critical to addressing some of the major challenges faced by society but unless we urgently get the right type of finance to them, their potential will not be realised. We know that the emerging social finance market has a critical role to play in connecting investors and social enterprises and today's research is a big step towards understanding how this market can thrive.'

Antony Elliott, Director of The Fairbanking Foundation, says: 'The research clearly shows that there is an appetite from wealthy individuals to deliver the types of capital required by social enterprises. Products designed to address the motivations of this sector of investors could go a long way to unlocking a new source of capital and help build the social finance market.'

Key conclusions from the reports are:

• The 'mass affluent' could be an important source of new investment for social ventures
• It will be difficult to meet the needs of the emerging social investment market and deliver rates of return on capital that might be considered 'market-rate' or commercial
• Therefore 'a development bank' is needed to focus on developing the infrastructure of the emerging social investment market, catalysing the intermediaries to raise capital from a breadth of investors - commercial institutions, charitable foundations and individuals and thus allowing them to develop a greater degree of sustainability whilst meeting the needs of social ventures.

Iona Joy, Head of charity analysis at New Philanthropy Capital, says: 'The market for social finance needs investment to develop, and one way of achieving this is via existing social finance intermediaries. 'Patient' capital funding for intermediaries' own balance sheets would increase their ability to raise funds from investors and depositors, and to lend more onto charities and social enterprises. This investment would make intermediaries more sustainable. Funds are also needed to help charities and social enterprises become investment ready. While these investments may not yield good financial returns immediately, they will help to generate social impact and financial returns in future.'

The four social finance products which have received a total of £1.2m investment are:

• Fair Finance - to provide accessible, affordable and responsible financial services to the financially excluded
• Finance South East and Resonance - to invest in social enterprises that will deliver substantial growth and appropriate profit to meet investor requirementsImpact Assets - a fund designed to drive capital to maximum  environmental, social and financial investment impact 
• Charity Bank - to support large charities and social enterprises to deliver their mission more effectively.

Sir John Gieve, who chaired NESTA's Big Society Finance Fund selection panel, says: 'NESTA has demonstrated in a very tangible way the exciting potential for the social finance market. For the first time we can see how, with the right type of finance and  support, we can help social enterprises to raise the finance they need in ways that appeal to  the growing numbers  of investors who are looking for investments with a social pay off.'

-End-

Notes to Editors:

For further information please contact:

Jan Singleton on 020 7438 2606/ jan.singleton@nesta.org.uk or Ruth Attride on 020 7438 2609 or ruth.attride@nesta.org.uk

About the research

NESTA is today publishing three reports all of which are available to download at www.nesta.org.uk :

i) 'Understanding the demand for and supply of social finance: Research to inform the Big Society Bank' by Iona Joy, Lucy de Las Casas and Benedict Rickey. Research commissioned by NESTA and conducted by New Philanthropy Capital (NPC). NPC was asked to consider the demand for capital in three target markets: social finance, financial inclusion, and social housing. Research involved interviewing intermediaries and umbrella bodies about the target markets, interviewing a mixture of intermediaries, umbrella bodies and experts to build up a nuanced understanding of each market and analyzing published accounts to build up a high-level picture of the size of demand for social finance in each market.

ii) 'Investing for the Good of Society: Why and How Wealthy Individuals Will Respond' by Anthony Elliot. Research commissioned by NESTA and conducted by The Fairbanking Foundation with Ipsos MORI. Research comprised two parts:

a) A qualitative study to obtain knowledge of the types of individual and products that are likely to be important in the growth of the market for social / community investments. 26 in-depth interviews were conducted with investors with more than a million pounds of investment assets and existing social investors; and three focus groups were conducted with the mass affluent (respondents having more than £50k investment assets). Research was conducted between mid November 2010 and mid December 2010.

b) A quantitative online study with a sample size of 505 respondents having investment assets of £50k - £1m. The survey was conducted by using an online questionnaire based on the findings of the qualitative stage. Research was conducted between January 2011 and the beginning of February 2011. The study examined three areas: the characteristics of the mass affluent with respect to interest in social investment, the testing of four product concepts and the motivations underlying the active interest groups.

iii) 'Twenty catalytic investments to grow the social investment market' by NESTA. NESTA set up the Big Society Finance Fund in August 2010 to prototype new forms of social investment. By backing innovative investment products, the Fund hopes to catalyse the social investment market, and to demonstrate the role the Government's Big Society Bank could play in the future. With our partners Panahpur and UnLtd, we issued a public call for proposals, generating a wealth of information about the real need for capital in the social investment market today. Our resolutely practical approach shines a light on the actual state of this emerging market. The Big Society Finance Fund has supported the development of twenty pilot capital-raisings by social investment intermediaries. This exemplar portfolio, set out in detail in this publication, was chosen to illustrate the demand for different types of capital in the social investment market, and the ways in which this demand can be presented to attract investment. All of the projects demonstrate the benefit that a catalytic, strategic investor can bring in getting new social investment products to market and in leveraging significant amounts of new investment from private and charitable sources.

The work has been led by Joe Ludlow, a 2010 Clore Social Fellow, whose Fellowship was funded by NESTA. Joe undertook the secondment as part of his Fellowship where he led on the work on the development of the Big Society Fund and related research. NESTA is continuing to support the Clore Social Leadership programme in 2012, with applications for the 3rd year of Fellows due to open on 18 April. www.cloresocialleadership.org.uk

About NESTA

NESTA is the UK's foremost independent expert on how innovation can solve some of the country's major economic and social challenges. Its work is enabled by an endowment, funded by the National Lottery, and it continues to operate at no cost to the taxpayer. 

NESTA is a world leader in its field and carries out its work through a blend of experimental programmes, analytical research and investment in early-stage companies. www.nesta.org.uk   

About New philanthropy Capital

New Philanthropy Capital (NPC) is a charity consultancy and think tank dedicated to helping funders and charities to achieve a greater impact.We provide independent research, tools and advice for funders and charities, and shape the debate about what makes charities effective. We have an ambitious vision: to create a world in which charities and their funders are as effective as possible in improving people's lives and creating lasting change for the better.

For charities, this means focusing on activities that achieve a real difference, using evidence of results to improve performance, making good use of resources, and being ambitious to solve problems. This requires high-quality leadership and staff, and good financial management. For funders, this means understanding what makes charities effective and supporting their endeavours to become effective. It includes using evidence of charities' results to make funding decisions and to measure their own impact.

About The Fairbanking Foundation

The Fairbanking Foundation is a charity dedicated to encouraging and helping banking institutions to improve the financial wellbeing of their customers and thereby the UK public as a whole. Our work is designed to provide well-researched, independent and insightful new input to assist in producing financial products that benefit customers. In 2011 the first Fairbanking Marks will be granted for products that have features which help customers alter their financial behaviour.