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Social Investment: ready for take-off

The UK is a world leader in developing innovative forms of financing for social enterprises. This is understandable given that these social ventures employ over 2 million people and contribute £55 billion to the UK economy. Social Investment Tax Relief has been introduced to try and stimulate involvement in financing these activities from private individuals. In this introductory article we look at the key issues.
In the past we either had investment (made in the expectation of a financial return) or donation (on which no financial return is expected and the outcomes are often unclear). Social investment seeks to offer a combination of financial and social returns. The purest version is the Social Impact Bond (SIB), which offers investors a predetermined rate of return depending on the outcomes of a specific social intervention.

The first SIB was issued in 2010 with the objective of reducing reoffending rates from Peterborough prison. If the rate of reoffending drops by at least 7.5% investors will get their capital back and if it falls by more than that they will earn a positive return. Data from the first cohort has shown an encouraging decline of 8.5%. There are now over 31 SIBs in the UK – more than in all the rest of the world.

HM Government is trying to stimulate further activity, evidence for which is the introduction of Social Investment Tax Relief [1], or SITR. This offers similar incentives to the EIS but can be adapted to suit a wider range of organisations. The ambition is to raise £500 million for social investment over the next 5 years, although so far it has been slow to get off the ground. This is partly because the maximum that can be raised by a single organisation is low (about £275,000) but there are proposals to increase this to £5 million per year subject to EEC permission.

Another drawback to promoting SITR at present is that the FCA regards these as high risk investments which restricts the way in which they can be promoted. EQ has made representations to the FCA to relax these rules.

EQ intends to be active in this market, both in terms of helping clients to identify attractive proposals and making investments ourselves on behalf of the EQ Foundation.