Social impact investor Big Society Capital (BSC) has outlined an action plan to improve its practices in response to the first independent review of its work conducted by the Big Society Trust (BST), which found the organisation has made considerable progress towards its goals, but highlighted areas for improvement.
The review, conducted by an independent panel and based on interviews with over 50 stakeholders found that since inception in 2012, BSC has made substantial progress towards its objectives, the key one being to “act as an investment wholesaler and generally to promote and develop the social investment market place in the UK”.
BSC was founded in 2012 by Sir Ronald Cohen with £600m of funding from four shareholder banks and UK dormant bank accounts, with a mission to improve people’s lives in the UK.
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According to the report: “BSC has had the capital to enable it to be a cornerstone investor in a number of funds, giving confidence to other investors. It is on track to become a self-sustaining wholesaler, preserving its capital endowment with a forecast portfolio IRR in low single digits, and thereby adding to the stock of total funding available for social investment.
“Since its inception, BSC has made a total of over 93 investments, totalling £600m. Alongside other investors, over £1.9bn has been made available to charities and social enterprises. It is a vital part of the social investment landscape, recognised by all, and interacts with all of the key stakeholders.”
The organisation’s achievements include increasing the number of Venture Impact funds to 28 in 2018 from just three in 2012; the launch of 18 UK retail impact funds since 2012 (when there were none on the market); growing the number of community share investors from 33,200 in 2012 to 67,400 today; and helping to create a £2bn social property fund market.
According to the review, “the overwhelming majority of interviewees believe that social investment in the UK would not have grown to the same extent without the catalytic impact of BSC’s focus, its funding resources and its highly-skilled people”.
Meanwhile, the BST also found that BSC-funded investments in charities and social enterprises have “delivered considerable social impact”. This includes projects within the charity bonds sector, property, venture capital, bank lending and renewable energy. For example, the BSC has supported 43 community energy projects and invested £22m in projected community benefit funds, while also working to seed new charity bond funds, helping grow this market from £30m in 2014 to £369m this year.
Areas for improvement
However, the report also identified a number of strategic issues for later consideration. It said these suggestions “should be seen against the background of the challenges BSC has faced and its overall substantial success”.
“The issues identified herein all emerged with a high degree of consensus in interviews internally with BSC leaders and externally with investors and investees as well as other stakeholders,” BST said.
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Overall, BST identified seven key areas in which BSC could make improvements. These are: creating further system change; building stronger relationships with investors and investees; broadening its social impact focus areas; gaining a stronger voice in influencing government; become more “attuned to stakeholders” by being more open to learning; improving its cost-effectiveness; and becoming more transparent in its decision making.
For example, the review uncovered some criticism that BSC has “crowded-out commercial money by offering a cheaper alternative”, while some stakeholders have suggested that BSC’s money is “expensive and comes with too many restrictions and oversight”.
The review also highlighted some issues when it comes to evaluating the social impact of BSC’s work, including questioning the validity of specific claims of the scale of its impact; BSC’s model of investable capital; and the relative impact of BSC compared to other players in the social enterprise eco-system.
The review concluded that “given overall success and consensus as to the issues, BSC is in a strong position to take stock and consider how it might build on successes and address the strategic issues”.
Responding to the outcome of the review, BSC itself said it “welcomes” the report for acknowledging the “substantial progress” it has made towards its objectives, “while recognising that we still have plenty to do and more to learn in this rapidly developing area”.
Sir Harvey McGrath, chair of BSC, said: “The report highlights some of the challenges and strategic issues, many of which are inherent in our mandate, that we will grapple with as we chart the next phase of our journey.”
McGrath sets out a “route map of how [BSC] intends to fill in those gaps”, adding that many of these plans were already underway or in development prior to the review.
“In line with our governance arrangements, the Big Society Capital Executive team under a new CEO will be accountable to the Big Society Capital board for delivering this route map, which we expect to become part of the organisation’s work over the next year,” he said.
A key priority is to address the issue with pricing its capital to investees, which will include working with its advisory board and wider stakeholders and conducting an internal review.
BST also intends to work with Access and fund managers to encourage the development of innovative projects and approaches, support the creation of blended finance products with its partners, and conduct a review of its own investment focus areas as part of a “refresh of [its] strategy to be completed by [its] new CEO”.
The group also intends to work with other organisations to “amplify the voice of social investment and social enterprise in government” and work on strengthening its relationship with governing bodies.
Additionally, BST has revealed it is setting up a publicly listed investment vehicle which “seeks to bring considerable additional capital into the social investment market”.
“As the first impact vehicle of its type, we believe it will help expand the range of successful investment exits as the review suggests and would increase our liquidity, releasing our capital to seed the next phase of innovative investments,” McGrath said.
BST also intends to “maintain and improve [its] culture of learning” through a number of initiatives, including a review of its advisory board to ensure a wider, more diverse representation; working with the Social Investment Diversity Forum on ways to encourage diversity; and looking for new partnerships to facilitate innovation.
And finally, McGrath said the organisation will continue to regularly review its investment process and performance of its intermediary fund managers, while also conducting a fresh review of whether its investment process sufficiently enables funds to provide access to investment for social enterprises and charities serving diverse communities.
This follows an expert external review which concluded its investment processes follow industry best practice and “demonstrate an unusually high degree of openness and challenge”.