Speech

The future of the UK social investment market: Rob Wilson speech

Minister for Civil Society, Rob Wilson, spoke about why the investment market should help connect its customers with causes they care about.

Good morning everyone, it’s a great pleasure join you at the launch of QBE’s innovative Premiums 4 Good insurance product here at Lloyds of London.

Congratulations on the launch of this product - its great to see 40 early adopters.

I’m reliably informed that I am in good company today, surrounded by people who want to make a real difference. And that is crucial to what I want to talk to you about.

We all have an important role in making a difference to people’s lives.

When I choose to donate to a charity, I expect that charity to act in a responsible way and to be transparent in how my donation is used.

When I make a pension saving, I expect the investment manager to offer me a choice of investments and to keep me informed about its performance.

When you take out an insurance policy with QBE and their “Premiums 4 Good” product, you can choose where some of that premium is invested and expect it to report on the social and environmental impact generated by it.

These examples all have 3 things in common:

  • a focus on consumer choice
  • an intention to generate a positive impact, whether financial or social
  • transparency and accountability about how that impact gets delivered

These are principles I have been embedding in my programme of reform across charities, civil society and social investment. They are core to my vision of a bigger, stronger society here in the UK.

So let me tell you about what we as a government have done in the past, what we are doing in the present, and my vision of what we can do in the future.

Past: Charity sector reform

You will all be aware that the charity sector has had its fair share of difficulties recently. In the last year I have been focused on reforming the regulatory framework for charities and social sector organisations.

I have given the sector the chance to sign up to better standards of behaviour. If it fails to follow through on commitments to do things differently, I will take more prescriptive measures to ensure those who donate to charities and those who benefit from charities are protected.

I have ensured fundraising self-regulation is remodelled - a new fundraising self-regulator is being led by Lord Grade. This will provide confidence that fundraising scandals are now firmly behind the charity sector.

It provides a platform of public trust and confidence that the sector needs for a generous public to continue to donate to the causes that matter most to them.

Through the Charities Act, I have enhanced the powers of the Charity Commission to enable it to regulate the charity sector more effectively. Ensuring our charities have a framework fit for 2016 and beyond - subject to minimum bureaucracy but robust oversight.

The Act also contains a statutory power of social investment for charities, to better enable them to make investments that contribute to their charitable mission as well as providing a financial return. This is the first ever definition of social investment in legislation.

I hope this sends a strong signal to both the charity sector and the wider investment community that this government is committed to seeing social investment grow.

Past: Social Investment

The government took a number of pioneering measures in the last parliament to help with that growth:

We set up Big Society Capital - the world’s first social investment bank. With contributions from the big four high street banks it received £600 million of capital to be allocated to social investments.

We established Access - the foundation for social investment. With £100 million to support more organisations to take on investment, it will help stimulate the pipeline of social investment deals over the next 10 years.

We created a Social Investment Tax Relief, modelled on the successful Enterprise Investment Scheme, to stimulate social investment by individual investors.

We commissioned the world’s first Social Impact Bond, working on the principle that government only pays for the outcomes it wants to see and that are successfully delivered.

Investors provide the up-front capital needed to scale up innovative services - the investor is then repaid by government when the specified outcomes are delivered.

Present: Social Investment

You will hear hardly any mention of Social Impact Bonds in the media today. I intend to talk about them frequently in the weeks and months ahead.

Social Impact Bonds, or SIBs, are increasingly being deployed to deliver public service reform that cuts to the heart of some of the biggest challenges that we face as a country.

They often focus on prevention and early intervention, which will help us to contain the ever expanding demands on our public services.

In many cases, the delivery organisations are charities and social enterprises who have the experience of delivering successful programmes across local areas.

SIBs help to foster a genuine partnership between government, Big Society organisations and social investors – bringing in the additional investment needed to support these organisations, who can innovate in ways that big government simply cannot.

Perhaps most importantly though, they focus on delivering meaningful outcomes for real people. For example, supporting a child out of residential care into an adoptive home, a young person into their first job, or a rough sleeper into supported accommodation.

The Prime Minister recently announced our new £80 million Life Chances Fund - an important next step on a journey that will show how social investment can transform local public services.

This is a down payment on a Social Impact Bond market that I hope and expect to be worth more than £1 billion by the end of this parliament. The SIB model will become the norm for the way many of the more challenging public services are funded in years to come.

I have also set up a commission to look further at dormant assets. I believe there are a host of such assets which belong, in aggregate, to the public and should therefore be used to benefit the general public and not specific firms who may be, unwittingly or not, sitting on these stores of potential public value.

I expect the commission to report back later this year and I look forward to institutional investors playing their part in unlocking this puzzle.

The UK is a world leader in social investment - to remain so, we need to continue to push the agenda. This is the right thing to do because of the social benefits it leads to, but also because it supports the UK economy.

We attract foreign capital to investment opportunities in this country at the same time as exporting our expertise in this growing area to other states around the world. I will be unrelenting in pushing us all to seize this opportunity.

Future

My vision for the future of social investment is informed by the principles I set out at the start of this speech:

  • that individuals have genuine choice in how their money is managed in line with their values.
  • that institutional investors build social impact considerations into all their investment decision-making - recognising that fiduciary duty is not only compatible with, but ought to include an appreciation of, social and environmental factors.
  • that there is a culture of feedback on investment performance that includes social impact as well as financial performance.

To achieve this vision I am beginning to think about further reforms that will make it easy for more people to be social investors. To connect their investments with the causes they care about.

Firstly, requiring pension providers to offer products to scheme members where a specified percentage of their money goes to social investments. I think this should be as easy for the scheme members as ticking a box when they are deciding how they want their pension invested.

Working with the grain of people’s behaviour by asking about their preferences at the right time to allow them to take action.

It is something that we already see working successfully in the French pension system where billions of euros have been channeled to social impact investments.

Secondly, updating the guidance and regulation around fiduciary duty to better account for social investment and non-financial concerns.

The Law Commission has already set out a number of recommendations around fiduciary duty and its compatibility with environmental, social and governance factors. Broadly these say that fiduciary duty means considering both financial and non-financial factors. Or, put another way, fiduciaries are not doing their job correctly unless they are considering investments in the round.

I want to see these principles more fully incorporated into the investment strategies of investment managers. I want to make sure that when investment managers are thinking about their fiduciary duties they are thinking about people’s investment preferences in more than just financial terms.

This doesn’t mean reduced financial returns. It does mean considering how social impact can sustain or even enhance those returns.

If the end beneficiary of financial products has limited ability to directly engage with investment choices then the investment manager, acting as a proxy, needs to be thinking about those preferences in a holistic way.

75% of millennials say that it is important that a company gives back to society instead of just making a profit - these are the kind of preferences that need to be better thought through by investors.

I have already mentioned the power of social investment for charities that I recently legislated for, better enabling them to combine investments with financial and social returns. I would like to see this approach replicated across the wider investment industry.

Thirdly, creating a ‘social investor’ category along the lines of the ‘restricted investor’ category in the crowd-funding space.

Currently the cost of compliance with full FCA regulations can be out of kilter with the small scale financing needs of most social sector organisations.

A ‘social investor’ category, safeguarded with a maximum limit to each investment of say £250, would make it easier for ‘everyday’ investors to back local causes they care about, ranging from saving the local pub to sustainable energy production.

And finally, developing a dedicated social investment ISA to make social investing easily identifiable to mass market investors.

Product providers have made limited progress in developing social investment based offerings. I feel that an ISA allowance that has characteristics specific to social investment would provide the impetus needed to get a meaningful range of socially themed products in front of investors from the general public.

This could be in the form of a dedicated additional ISA allowance for social investments of say £1,000 to sit on top of the existing allowance.

I would very much welcome your ideas and engagement on this as well as some of the ongoing work I mentioned earlier. The role of the investment industry will be a large factor determining the success of further social investment reforms.

Key messages

I want to highlight some thoughts around social investment which I see as key.

Social Investment is taking off - institutions are already making social investments.

The investment manager Cheyne Capital is running a social impact property fund which I understand will make close to a £1 billion of investments in social property.

Threadneedle has a UK social bond fund with tens of millions of pounds under management which can be accessed by individual investors. I believe this is just the tip of the iceberg for retail fund offerings.

And today we are here to mark this innovative insurance product from QBE - demonstrating how social investment can be applied to new areas of financial provision.

Millennials are demanding this.

They will be the beneficiaries of the largest inter-generational wealth transfer in our history. Successful investment managers and product providers will need to cater for their preferences.

They are more interested in values-based lifestyles than previous generations - that includes consumption choices but also the way they want to invest.

They are also much more likely to demand transparency and accountability from those who manage their money. But the market is not yet providing suitable vehicles for them to express these preferences.

The government wants to back these people in the choices they want to make.

As I mentioned earlier, we are committed to growing the social economy. We will use social investment as a way to transform how public services are delivered, making them not just smarter but much more compassionate.

Closing remarks

I hope you have heard some clear and consistent messages from me today:

That I am undertaking a wide programme of reform in those areas that fall under my responsibility; for charities, for social investment and ultimately for a bigger stronger society.

That this government has taken decisive action to enable social investment in the past, that we are doing more now and that I want to take this much further in the future.

That I expect major drivers of this progress to be the principles of increased consumer investment choice, transparency of how individuals investments are handled and a focus on better reporting of impact.

The time for social investment is now - government expects institutions to actively engage in this space. We are listening, but want to see more of the kind of approach embodied by the ‘Premiums 4 Good’ product.

I am looking forward to the growth of an investment market that better connects its customers with the causes they care about. And I am looking to the investment community to help me deliver it.

Thank you and good luck to Premiums 4 Good.