City of London Economic Research

‘Evidence-based policy making’ - oxymoron, fable or feasible?

This blog post is co-authored by Sabrina Basran, a former Research Officer at the City of London Corporation, and Gareth Reilly, who has recently joined the City of London Corporation as a graduate trainee.

Gareth Reilly:

The case for using well informed and well-rounded data within the policy process is, arguably, one of common sense, yet at times common sense doesn’t prevail. On many occasions data is used in the wrong way or insufficiently; not enough is taken into consideration for a proper informed policy to be formed.

Using data within policymaking can contribute to its efficacy in several ways: accurate information can help define the issue which the policy is trying to resolve and it allows the scope to be narrowed to focus on specific areas, which in turn allows targeted options to be formed on how best to take the policy forward. Robust and informed data is always likely to help policymakers make accurate predictions about what impact the changes will have once implemented as well as acting as a point of referral for future work, in order to evaluate a policy’s success or failure.

Accurate data can also help increase the longevity of a policy. Whilst numbers and statistics are constantly changing, research can, if well thought-out, be used to shape policy in such a way that it is effectual in the longer term. One prime example of this is the work which was carried out on Growing the Social Investment Market. Not only did the research assess the existing market, but it also carried out an economic impact assessment for the first time providing new, detailed baseline information on the market which has since helped act as guideline for policy considerations as well as contributing to the formation of the Social Investment Research Council.

As a recent graduate trainee joining the Economic Development Office I hope to be able to make a worthwhile contribution to the research process and potentially the policy making process. As such, it is paramount that I practice what I preach and ensure that the data I use is of the best quality and the most relevant to the topic at hand. 

Sabrina Basran:

It’s always exciting to have somebody new in a team, and to hear a fresh perspective on how research can be used, to help ensure that the Corporation’s programme remains relevant. It’s my personal view that it is essential for any practical initiative or public policy to be evidence-based, in order to be effective. Gareth’s comments echo this, though he also raises the important point that there needs to be careful consideration from the research side, to ensure the right data is used. 

The Corporation plays a key role in supporting and promoting London as a leading international financial and business centre and the encompassing aspects of this – from helping local communities to improving the City and London’s attractiveness to businesses and visitors, to enhancing the capital’s position as a cultural hub. It is paramount then for the Corporation to use a well-researched, factual and evidence-based approach to dealing with key policy decisions in order to best serve not only the City, but London more widely and the UK as a whole.

To enable us to do so, our economic research programme spans a variety and range of topics – competitiveness, the UK economy, the EU and regulation, infrastructure, corporate social responsibility (CSR) and London communities to name a few  – with each topic underpinning and helping to inform the Corporation’s policy priorities and strategic areas of focus.

There are a number of examples where we have used research to achieve policy objectives:

• A paper exploring the threats facing London’s trees in the form of new and emerging pests and diseases – this helped to secure £1.5 million in Government funding for a project to fight oak processionary moth.
• Identifying and assessing good practice examples of employee health and well-being programmes amongst large firms based in the Square Mile to act as a benchmark for companies looking to support their employees and be used as a basis for engagement with firms starting on their employee health journey, as reflected at the report’s launch at the ‘Business Healthy’ conference.
• Presenting a rationale and justification for a tax relief for investors in social enterprises – this report, co-commissioned with Big Society Capital, informed Chancellor George Osborne’s announcement of a social investment tax relief in the 2013 Budget.

While by no means perfect, these examples help to demonstrate the value that can be achieved, when we get the right information to the right people in the right way. If there’s one thing I hope to take away from my time at the Corporation, it is this.

London is a strong national financial centre for social impact investment – but why is social impact measurement ‘red’ for the capital?

By Emily Khan, UK Social Investment and Enterprise team, PwC

The nature of the challenge

Our recent research, commissioned by the City of London Corporation, considered the essential features that would make London a global financial centre for social impact investment (SII).  A number of these features are common to other financial markets – such as skills and expertise, innovation in products and instruments, and international connections. However one in particular –‘social impact standards and reporting’ – stands out as unique to the SII market.  This is illustrated in the diagram below, which reflects a RAG analysis of London’s current position, assessed against six essential features of a global financial centre for SII. For social impact investors, social impact forms the second “currency” that, alongside financial returns, constitutes the basis of their investment decisions.  It also stands out as the one feature where concerns were most consistently expressed by those we consulted – 24 global impact investors – specifically, the lack of standardisation in the way that social impacts are measured and reported was seen as restraining SII market growth, in London and elsewhere.  This view is supported by other research, such as the 2015 JP Morgan and GIIN ‘Eyes on the Horizon’ investor survey. 

What does this mean in practice?

The red rating given to SII standards and reporting for London is not all bad news, however.  Indeed much progress has already been made in this area, for instance via the Inspiring Impact programme, which works with the charity sector to improve impact measurement practices.  For many, the rating is simply a reflection of the scale and size of the challenge.  Unlike ‘green’ markets, where measures of impact are generally more consistent, and where market standards – such as the approach to carbon ‘footprinting’ – have readily been adopted by the market, social issues are by their nature more complex, variable and wide-ranging.  It is not surprising therefore that methods and measures are variable and inconsistent.  Lastly, most of those we consulted felt that this is a feature that no one global financial centre can address alone and that, whilst it is an issue in and for the SII market in London, it is not a challenge that London alone can solve. It is one that requires global collaboration.

How can we address this challenge?

Waiting for the market to generate a body of evidence and reach agreement on standards could arguably mean missing many of the opportunities that are available for growing the SII market globally.  Finding ‘quick wins’ or ways of overcoming this challenge in the short term becomes of special importance when looking at attracting new groups of social investors.  There are an increasing number of examples where investors can take sufficient confidence from the mission and goals, structures and processes of an organisation that impacts will be delivered. Arguably then, adopting global accreditation standards – that focus on potential and commitment to deliver impact – are a good place to focus in the short term, whilst the market solves the knottier, long term challenge of standardising social impact measurement.

In France, the ‘Solidarity Investment Funds’ demonstrate how an accepted social impact accreditation – or certification of the social impact of a fund or enterprise – can be a powerful way of unlocking new supplies of investment capital.  In that case between 5% and 10% of employee savings schemes assets must be invested into unlisted ‘solidarity designed’ organisations, provided at least a third of their staff is comprised of workers who are employed as part of a work integration programme. There are signs of similar progress elsewhere, and indeed that this practice is already emerging in London– such as by the Social Stock Exchange, or B Lab’s recent UK launch of the B-Corporation Certification model. 

The red rating in our research therefore reflects the distance left to travel before standards for social impact measurement and reporting are fully embedded in the market in London. However, it also highlights the opportunity and need to think creatively about the problem in the short term and the fact that London can gain by drawing on international precedents in this area.

Download ‘Developing a global financial centre for social impact investment’

New sources of capital for the UK's social investment market

By The Social Investment Consultancy and London Economics

Untapped pools of potential investment capital exist

Our research, 'New Specialist Sources of Capital for the Social Investment Market', commissioned by the Social Investment Research Council, examined the potential for raising new finance for the UK social investment market from institutional investors. It focused on eight investor ‘groups’ which have been under-researched to date: pension funds, insurers, housing associations, charitable organisations, faith-based organisations, university endowments, corporations and family offices.

But hurdles to engagement remain

We found that these institutional investors do have an interest in social investment. However, challenges remain which prevent them from engaging more fully with the market. These include:

• a lack of performance track record for many social funds and organisations;
• lack of awareness of suitable investment opportunities among investors;
• and a need for credible investment advice.

In addition, we found that many of the investors interviewed tended to associate the ‘social investment’ market primarily with its more innovative products. When asked for their impressions of market performance, investors frequently cited social impact bonds as their point of reference – rather than, say, a sustainable forestry fund.  Thinking of social investment only in terms of its more innovative elements linked to the market as a whole being perceived as ‘high risk’ in the minds of investors – despite this not necessarily being the case.

A spectrum of opportunities could encourage new investors

To engage greater support from institutional investors, we identified a need to consider the full range of opportunities the market can offer. It can be helpful to think of the social investment market as a spectrum, with two key sets of investment opportunities at either end.

One opportunity is the need for risk finance investments - estimated at £500m - required to support social sector organisations in coming years. This might also include more innovative products such as social investment bonds.

The alternative, at the other ‘end’ of the market, is a multi-billion pound opportunity to invest in more established social industries, such as social housing, microfinance and clean tech.

Matching opportunities to investors

In considering the needs of institutional investors, our research suggested that investments at the established end of the market are most likely to appeal to institutions that would like to make social investments but are currently put off by what they see as a market dominated by small, risk-equity type deals, rather than the infrastructure projects and bonds that large investors such as pension funds are used to considering.

By contrast, risk finance deals are most likely to appeal to institutions that are more able to take a values-based approach to investing, either through philanthropy portfolios (family offices, charitable endowment funds, corporate CSR funds) or as a means of service delivery (housing associations).

Any attempt to engage institutional investors with social investment needs to reflect the different motivations and limitations of each group, and by extension what types of opportunity are most relevant. Such an appropriately-targeted approach is likely to be more successful than a ‘one size fits all’ approach to engaging new investors. 

Read more

The research report ‘New Specialist Sources of Capital for the Social Investment Market’ is available to download from the City of London’s research webpage. 

Helping to build the social investment market, one research piece at a time: launch of new research body

A new research body to support the growing social investment sector has been launched today: the Social Investment Research Council will provide practical recommendations and data to support the burgeoning social investment market. The Council is a joint venture between Big Lottery Fund, Big Society Capital, the Cabinet Office, Citi, and the City of London Corporation.

Reasons for optimism

The UK is on its way to establishing itself as a global leader for social investment, successfully hosting the first G8 Social Impact Investment Forum earlier this year. The UK social investment market grew by almost a quarter last year exceeding the £200 million mark in value for the first time according to our research Growing the Social Investment Market

At ground level there is also reason to be optimistic, with UK social enterprises performing favourably when compared to their SME counterparts, including higher proportions of social enterprises experiencing growth in the last year, and a start-up rate three times greater than SMEs. (See Social Enterprise UK's report, The People's Business here)

Information gap hindering growth

However there remain a number of key challenges for this nascent market. The lack of appropriate data represents one of the largest barriers to its growth, with unanswered questions around investment products (risks and returns, security and liquidity); identifying and meeting market needs, and the needs of key players; unlocking the right type of capital; mechanisms to invest; understanding and assessing social impact - the list continues.

The aim of the Social Investment Research Council is to consolidate research efforts to generate practical insights, for the benefit of social sector organisations and investors. By coordinating efforts, the Council aims to address important issues that are currently less researched, and subsequently help to accelerate market development.

Practical recommendations

We will therefore focus on projects which consider practical ways to impact the development of the market, with a potential transformative impact. Specifically, the inaugural 2013-2014 research programme will focus on improving the understanding of social investment products, and the investors needed to finance them.

Today the Council is launching its initial two projects. The first of these aims to develop a better understanding of the key characteristics and performance of social investment products (including loans and other investments) over time, looking at historical transactions in the social investment market. The second project focuses on identifying potential institutional sources of social investment capital in the UK –housing associations, pension funds and corporate foundations among others – and investigating the key motivations and barriers to investing they face, to help inform what needs to be done to help unlock this potential capital.

We look forward to partnering with those in the social investment market, to enable us to understand the market’s real information needs and ensure that those needs can be met.

More information about the Council and the two initial projects (n.b. tender closes midday on Thursday 14th November) is available at: www.bigsocietycapital.com/ResearchCouncil

For more on the City of London's Social Enterprise Research programme please visit us the City of London's economic research webpages.

Growing the Social Investment Market: the Landscape and Economic Impact



By Katie Hill, Social Investment Advisor, City of London

Is there room for another report on social investment? Why bother with this one? Does it really tell us anything new?

Quite simply, the answer to these questions is ‘Yes’.  A new research report, Growing the Social Investment Market: the Landscape and Economic Impact will satisfy the appetite of the ‘data-seekers’.  It provides new,  primary data on the size of the UK social investment market over the financial year 2011/12, telling  us the market has grown by almost a quarter in one year from £165 million to £202 million, through 765 deals. Breaching the £200 million mark is a significant milestone - and that is before Big Society Capital commitments have come on stream.

The report also gives us the breakdown of the 765 deals in terms of size, type of product, sector and region into which the investments were made.  It identifies significant areas of concentration of product type and lender in the marketplace.  Savvy social investment professionals and / or report readers will not be surprised to find that 90% of these deals are providing secured lending; only £10 million of investment out of the £202 million was made on an unsecured basis.  And then lenders are heavily concentrated too:   four large social banks account for 82% of all social investment in 2011/12.

 How is the social investment market contributing to the UK economy?

And there’s more data too, as for the first time, the research examines the overall contribution of the social investment market to the UK economy, both nationally and regionally.   At a gross level, over the lifetime of their finance period, the 765 investments will result in the creation or safeguarding of 340 social ventures, 6,870 full time equivalent (FTE) jobs, and £58m in annual GVA contribution to the UK economy. Though, the net economic impact of the 765 investments is lower, creating or safeguarding over 210 ventures and close to 3,550 FTE jobs. 

This demonstrates a high displacement effect, one of the key explanatory factors of the difference between gross and net impact. Displacement measures ‘did you just replace a local competitor?’  If new jobs were being created the difference between gross and net would be less marked. This displacement effect suggests that social investment is improving the competitive advantages of social organisations to secure contracts and win over customers.  It is not seemingly as effective yet at opening up new markets for social goods and services.

The infographic below shows some of the key stats mentioned - click on the image to enlarge it.

What are the bottlenecks in the social investment market?

The report helps highlight some key bottlenecks in the social investment market:  Social Investment Finance Intermediaries (SIFIs) argue that the use of grants continues to be distortive and reduces the number of good investment propositions reaching them. This tangled issue of when and how to use grants as a stepping stone or as a ‘lining’ to a deal and how to allocate different types of capital with maximum efficiency, requires further in depth case-based examination. Acumen’s report ‘From Blueprint to Scale’ and ‘Capital Curve for a better world’  by Matthew Bishop and Michael Green offer  useful thinking on this issue.

The application of grant finance may also affect the second reported ‘bottleneck’:  namely, that SIFIs see a limited number of high quality investment propositions.  In the last year, incubators, investment readiness programmes and mentoring and support programmes have been put in place to help tackle this.  If these are effective at producing investible propositions, we then need to ensure that the concentration of both lending and lender is not a bottleneck to providing these organisations with the type of capital they require.

A key question arising from this is ‘does this pattern of investment meet the needs of a growing sector’?  The counterfactual case is always difficult to make, but it is worth considering what might have been if the active SIFI base was wider, if the investment offers were more attractive, if the lending terms were more varied.   We know from other research of the dire need for higher risk unsecured finance.  

Room for more?

Clearly, there is plenty to dig into in this report.  We are now better informed about what has been working and where new investors can play a role.  There is real value in tracking this information to identify progress.   And that is not all:  the report does not attempt to measure the social impact of these investments, the core component of what the sector is about.    We can be sure that the report understates the true benefits of the 765 social investments.  

The report was co-commissioned by the City of London, Big Lottery Fund, Big Society Capital, and Her Majesty’s Government, and all the commissioners would like to thank the participants who engaged in this research to provide us with the clearer picture of the landscape and economic impacts of social investment. 

The report was prepared for the City of London by ICF GHK in association with BMG Research. 

The full report is available to download for free from the City of London website. 

Encouraging social investment through tax incentives



Following on from Chancellor George Osborne's announcement of a tax relief on social enterprise investment in today's Budget, Katie Hill from City of London Corporation along with Gavin Francis of Worthstone and Neil Pearson of Wragge and Co, explore how tax incentivisation could be implemented and structured to make investment opportunities in social enterprises more attractive to private investors. Their discussion draws on our recently published report The Role of Tax Incentives in Encouraging Social Investment.

  

The report was prepared for the City of London and Big Society Capital by Worthstone assisted by Wragge & Co LLP.

The full report is available to download for free from The City of London's website.