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It’s getting off to a slow start, but the Big Society Bank looks set to mark a new dawn for social investment, bringing a potential £400m into the market. But before this, in 2007, a new-style social lender entered the market with a relatively modest £15m, before growing into one of the largest social investors in the country.

The organisation started off as the Adventure Capital Fund, which then became known as Futurebuilders – generating the organisation's biggest fund to date, finally settling on Social Investment Business – a clear catchall to describe the organisation, and a nod to its ambitions to run the Big Society Bank, a concept known as the social investment wholesale bank under the Labour government.

Despite its positive effect in financing the charity world, some have criticised it for growing so large so quickly – it has managed a number of funds on behalf of the government and is worth around £400m. Lewis makes no apology:

Its outgoing and first chief executive, Jonathan Lewis, says he is most proud that Social Investment Business has shown that social investment works:

Lewis is also proud that the write-off rate of loans with Futurebuilders was so low, especially since it funds organisations which can’t access traditional finance.

“Through Futurebuilders, we lent £120m to organisations which couldn’t get bank finance, and the culminative write-off rate on that money over six years is less than 4 per cent. I’m extremely proud of this fact.”

“With Futurebuilders (the £215m fund managed by Social Investment Business on behalf of the Office for Civil Society) we were supposed to help charities win something like 300 contracts. In fact they won over 800, which shows that if you give them a bit of appropriate help they can win lots of contracts by providing innovative and transformative services.”

“Though it was slightly unpopular to grow this quickly, I think creating a large social investor moves the market on a little bit, and the market is going to be moved on again by the Big Society Bank.”

Lewis’ time at Social Investment Business could be viewed as the frontier of social investment. His new role follows a similar pattern. Lewis leaves to head the staff-run NHS social enterprise spin-off Bromley Healthcare, one of many public service providers deciding to become a mutual under minister for the Cabinet Office Francis Maude’s new "right to provide" agenda. Maude is leading a drive to support employees of public services to set up mutuals.  Bromley Healthcare is a staff-run healthcare provider organisation rather than a commissioning one. Lewis joins it as chief executive in August.

Commentators on one side of the political spectrum attribute this failure to the lack of resources available to the state and to the state’s reluctance or inability to act appropriately. Commentators on the other side attribute government’s shortcomings to the inherent inefficiency of the state itself. The truth is that the political process, which focuses on short-term gains, does not favor long-term, preventative investment of the type required to address major social problems.

The social sector, which is also called the voluntary, non-profit or third sector, has done its best, with the support of philanthropic donations and government, to address the social problems that fall through the gaps in government provision.

Some argue that the social sector’s problem is that it is significantly under-resourced. Others argue that the insufficiency of resources is in part a consequence of the sector’s reliance upon philanthropy — from foundations and from individual donors — that can be unpredictable. Both critiques may be correct: the social sector has a problem in accessing capital, often because of a lack of a reliable revenue stream, and, as a consequence, it is inefficient, especially in respect of building sustainable organizations, securing funding and utilizing assets to support large-scale activity.

Recent moves to make the social sector more efficient, by focusing on improvements to the management of both the donors and the recipients of grants, are an important development. The Bill & Melinda Gates Foundation applies rigorous criteria to the assessment of the performance of organizations in receipt of its grant funding. Michael Dell’s philanthropic work is similarly rigorous. Their goal, according to Harvard professors Robert Kaplan and Allen Grossman, is, essentially, “to find and fund the Microsofts and Dells of the non-profit sector.”

In fact, such moves are more necessary than ever, as deficit-ridden governments seek to pass greater responsibility onto the shoulders of the social sector. An example of this is the UK Coalition Government’s strategic objective to foster the “Big Society.” In essence, the Big Society agenda seeks to pass a significant portion of responsibility for social cohesion back to the community via the voluntary sector, and, at the same time, to confer greater legitimacy upon such community work and to provide incentives and support for it. However, the social sector as currently constituted is unlikely to be able to address the scale of the social need; or, to put it another way, to meet the scale of the social challenge.

This is where social entrepreneurs come in. We know that entrepreneurs create jobs and foster innovation. In that sense, they already make a substantial social contribution. But entrepreneurs have special qualities that could make a significant beneficial impact were they to be applied to social issues. The entrepreneurial mindset embraces leadership, vision, the ability to attract talented people, drive, focus, perseverance, self-confidence, optimism, competitiveness and ambition. To these one might add an appetite for taking informed risks, an unwavering focus on results, a willingness to take responsibility, a grounded sense of realism, astute judgment of opportunities and people, and a fascination with the field of enterprise in question. The engagement of entrepreneurs in the social sector, bringing in their wake high expectations of performance, accountability and innovation, could lead to significantly increased social impact.

Could the social sector be transformed to allow the emergence of entrepreneurs from within its own ranks and attract social entrepreneurs and capital on a large scale? The answer is yes, provided that we can create an effective system to support social entrepreneurship, by linking the social sector to the capital markets and introducing new financial instruments that enable entrepreneurs to make beneficial social impact while also making adequate financial returns for investors. Given these conditions, it is possible that social entrepreneurs and impact investors will significantly fill the gap between social need and current government and social-sector provision. Indeed, were social enterprise to achieve significant scale, it would transform the social sector and lead to a new contract between government, the capital markets and citizens.

In this process, charitable, institutional and private investors, attracted by the combination of social as well as financial returns, would bring into being a new asset class: impact investment. In a recent report, JP Morgan came to the conclusion that impact investments already constitute an emerging asset class: “In a world where government resources and charitable donations are insufficient to address the world’s social problems, impact investing offers a new alternative for channeling large-scale private capital for social benefit. With increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose, the impact investment market is now at a significant turning point as it enters the mainstream… We argue that impact investments are emerging as an alternative asset class.”

This new asset class requires a specific set of investment and risk-management skills; it demands organizational structures to accommodate these skills; it must be serviced by industry organizations and associations; and it must encourage the development of standardized metrics, benchmarks and even ratings. As has been observed by the impact-investment firm Bridges Ventures in the UK, such an asset class should provide welcome diversification for capital markets: at times of economic stress, price-sensitive business models appropriate to lower income neighborhoods can prove more resilient and also find wider applications in the mainstream market as both margins and consumer spending power are squeezed.

Not surprisingly, politicians as well as academics, entrepreneurs and investors are paying increasingly close attention to these developments. In the US and in the UK, and now also in Canada and Australia, steps are being taken to provide social entrepreneurs with access to the same kinds of resources as business entrepreneurs. The USA’s Social Innovation Fund ($173 million) and the Investing in Innovation Fund ($644 million) are notable examples; as is the proposed creation of the UK’s Big Society Bank. In Canada, the Federal Government recently received the report of the Canadian Task Force on Social Finance, whose recommendations include requiring public and private foundations to devote a proportion of their funds to mission-related investments; clarifying fiduciary obligations so that pension funds and others can invest in social programs; introducing new financial instruments for social enterprise; and marshalling government support for social enterprise, directly through seed investment and business support services and indirectly through fiscal engineering.

How likely is it that such steps will succeed? In answering this question, we would do well to consider that the global economy faced a similar moment of challenge and opportunity in the 1970s and 1980s, when many of the most familiar names in the post-war corporate world started to decline and shed jobs, among them General Motors, American Motors, Courtaulds, ICI, Smith Corona, Olivetti, US Steel, Bethlehem Steel, Kodak and International Harvester. The question then was: what would take their place?

What took their place was a new wave of business enterprise helped by venture investing, mostly focused on high-tech industries. This is the wave that brought us Intel, Cisco, Oracle, Microsoft, Apple, Sun Microsystems and Genentech. The hi-tech wave has since swept the world, taking us into the embrace of Google, Wikipedia and Facebook and ushering in a communications and information revolution based on global access to information from multiple sources. It has thereby profoundly changed global culture.

Just as hi-tech business enterprise and venture capital, working in tandem, have attracted increasing numbers of talented risk-takers since the 1970s, so social enterprise and impact investment are now attracting a new generation of talented and committed innovators seeking to combine new approaches to achieving social returns. Social enterprise and impact investing, in short, look like the wave of the future.

About Sir Ronald Cohen Sir Ronald Cohen is chairman of Bridges Ventures and The Portland Trust. He chaired the UK’s Social Investment Task Force and the Commission on Unclaimed Assets and he is a founder-director of Social Finance. Until 2005, he was executive chairman of Apax Partners Worldwide LLP, which he co-founded in 1972.

They would be overseen by a social finance regulator that would operate within the proposed Financial Conduct Authority, the successor to the Financial Services Authority.

The framework would create new legal categories of 'social investment' and 'social investor'. The two organisations hope to persuade the government to make it into law.

The National Endowment for Science, Technology and the Arts and the law firm Bates Wells & Braithwaite have proposed a new regulatory framework for social finance aimed at making it easier to invest in voluntary sector organisations.

"At the moment, it's easier to give £100 to charity than to lend £100 to charity," said Luke Fletcher, an associate at Bates Wells & Braithwaite and author of the report.

The new framework, he said, would make it easy for charities and social enterprises to create a financial prospectus for a bond or share offer, without the need to offer the tight protections for investors that are currently required.

"The main target for this would be the mass affluent, who are not currently considered sophisticated investors," Fletcher said. "Charities would like to create offers targeting these people, but they find the legal restrictions too onerous."

Fletcher said there were already exemptions for community benefit societies, formerly known as industrial and provident societies, and he wanted to extend these to all third sector organisations. "I think there's a chance of getting this into law now," he said. "There's a real window of opportunity. The reform of the Financial Services Authority is already under way, there's big interest from government in social investment and there's a drive to reduce red tape for the sector." The Cabinet Office has expressed support for the idea of a new regulatory framework in its strategy paper Growing the Social Investment Market, in which it said it would "seek further evidence on the impact of the regulatory framework on social and community investment to assess whether it is proportionate". One of the six key recommendations in Lord Hodgson's report on red tape in the third sector, Unshackling Good Neighbours, was the creation of a class of "social investors" who could invest under less strict guidelines because they understood they were receiving both a social and financial return.

“We have a sustainable matrix system that allows us to invest in high-impact sectors like oil only if the company is exceptionally sustainable,” Mr Straehle says.

It remains to be seen how permanent that caution is, but the political shift away from nuclear in Europe, particularly in Germany, could restrain European banks from funding such projects further afield.

This may just be current pragmatism, but it reflects homegrown changes in business strategies by banks with international reach.

For example, in recent months mainstream British banks have been drawn, sometimes screaming, into doing more to assist the broader society. The so-called Project Merlin agreement between the big UK banks was centred on government lending targets, but it also bound the banks into several other do-good projects that are more ambitious in their scope than standard government-sponsored financing initiatives.

The biggest idea is the creation of a £2.5bn ($4.1bn) private equity-style Business Growth Fund to kick-start small business investment, while a further £200m has been committed to the Big Society Bank, a project conceived by David Cameron, UK prime minister, to support regional development ventures.

There is a theoretical promise of commercial returns for the banks, but few expect them to be generous.

To date £97.5m has been committed from the Transition Fund to more than 900 charities. Final awards will be announced later this summer.

The Transition Fund aims to help charities make the most of more opportunities to deliver public services and new sources of finance, such as capital investment from the Big Society Bank

Nick Hurd, minister for civil society, said: “All the charities receiving transition funds have a plan to overcome current challenges and emerge stronger. We recognise the hugely important contribution charities make to our society and we are committed to supporting them."

Charities like the Beat Bullying, which has helped countless children and young people deeply affected by bullying, and ICENI, which treats and tackles addiction in Ipswich and Suffolk, are using the money to modernise. This will help them make the most of more opportunities for them to deliver public services and new sources of finance, such as capital investment from the Big Society Bank, which the Government is developing as part of its drive to support a Big Society.

Francis Maude said: "We all want a bigger, stronger society where people get involved and do their bit.

"This isn't new - there are already loads of people right across Britain taking responsibility and making our communities better places to live.

"What is new is that this Government is making it easier for people to do more: giving people power to improve public service, putting communities in control, and supporting people to help others."

Nick Hurd said: "The Transition Fund is part of a much wider package of support for charities and voluntary groups and social enterprises. "The Cabinet Office will invest around £470million in direct support over four years. "We are opening up new opportunities for charities to deliver public services, cutting red tape and developing new sources of finance such as the Big Society Bank." The Transition Fund was announced in the Spending Review, October 2010. The Fund closed to applications on 21 January 2011. £94million has now been committed and final awards will be announced later this summer.

Some specific observations:  No such thing as the Big Society? – considering that at one stage this was supposed to give policy substance to the Big Society, it is striking how absent the Big Society is from the White Paper. That’s one cut it didn’t make.  I did a control search and only came across one Big Society reference in the whole report, and this was not to the idea but to the Big Society bank. So this leaves an obvious question about how central the Big Society now will be to the Government? One practical effect of there being no Big Society strand is that the tenor of the White Paper is much more consumerist, gone appears to be the emphasis on social citizenship and responsibility.  This leaves a big gap because, as our Commission on 2020 Public Services argued, the big challenges of the future will need to be met through citizens and the state working together to create better social outcomes.  Very few concrete proposals – This is about direction of travel, rather than specific proposals. In fact, there are very few concrete proposals. Instead this is much more like a Green Paper in which general propositions are put out for consultation, with the question being what specific policy changes would these require? This is clearly a long way from what some of the Big Society evangelists had originally wanted to see.  No short term wins for the voluntary sector – Earlier in the year there had been speculation that the White Paper might contain some specific guarantees for the voluntary sector to help offset the consequences of Council grant cuts.  But, whilst there are warm words for the role of the voluntary sector, and some new development money and support to help develop social social enterprises, there is no specific commitment to, for example, a quota of Council services to be subject to voluntary sector right to bid.   Diversity of provision – the boldest statement in the White Paper is that there is no case for monopoly state provision of services, except for the special cases of defence, criminal justice and policing.  The case is made for all public services to be run on the basis of autonomous institutions such as Academies and Foundation Trusts, which could be run by businesses, mutuals or social enterprises.  However, there are no specific proposals to apply this to any particular service area.  Local government is the big winner – this is the most pro-local government policy paper to have been published by the Coalition.  Whereas, the distinct impression in previous policy developments on public service reform has been that local government was being sidestepped, now it is much more central to the Coalition’s plans for decentralisation.  The principle of decentralisation which is set out in the white paper bears some similarity with the subsidiarity principle developed in the 1990s by the European Union, under which decisions should be devolved to the lowest possible level of government.  The new twist to this is the emphasis in the white paper on establishing neighbourhood councils in urban areas to mirror parishes and to be responsible for the same types of very local, community and public space services.  But the White Paper also makes the case for more powers and greater financial autonomy for local authorities and, in one of its few specific proposals, also recommends that skills funding should pass to some Councils, something which cities like Manchester have been strongly pushing for.

As Nick Timmins noted in the FT today, there are a number of tensions within the White Paper, which are not even acknowledged, let alone resolved.  He cited the principle of promoting diversity whilst at the same time needing to guard against failure, a weakness of successive health reforms and a particularly current concern given the collapse of Southern Cross.   But this isn’t the half of it. Other questions which the White Paper doesn’t confront, but which a credible reform plan would have to resolve, include:  Service integration vs institutional autonomy – how can local government integrate services in the way that the white paper suggests, whilst at the same time vertical service silos are being strengthened through the promotion of institutional autonomy in schools, hospitals, and now in every other service?  Consumerism vs social citizenship – how can a consumerist approach to public services help strengthen the co-productive relationship which there will need to be between citizens and services to meet the social challenges of 2020 and beyond?  Ideas vs practice – how can the Coalition move from exhortation to implementation? The White Paper may contain a framework of principles but it does not set out a convincing strategy as to how reforms based on these could be implemented.  Over the coming weeks we at 2020 will be analysing the Coalition’s reform agenda in more detail and looking to see where the opportunities exist for developing better social productivity practice.  Please let us have your comments and ideas.  Ben Lucas

A4 Who is this guidance for? Trustees and those who make decisions on behalf of trustees about a charity's investments and assets should use this guidance as a tool to help them make confident, informed decisions and publicly to report on those decisions.

While the Big Society Bank offers investment for growing larger social enterprises, it does not help those organisations become investable. Other investors looking to scale social enterprises have already struggled to find organisations that are ready for investment. Ethical bank Triodos had to close a large fund for social enterprises last year after only being able to make one investment. Investors report that only 16% of the social enterprises that approach them are investable.

To attract investment to scale, an enterprise needs a clear strategy, a robust model for generating revenue, and economics that scale (or, as the enterprise grows it will simply become bigger, and not better). This is tough; entrepreneurs often need support from some of the 100-plus organisations – identified in the NESTA-commissioned report, Growing Social Ventures – that are dedicated to supporting Britain's 65,000 social enterprises improve, expand or become more resilient. For example, Scottish social enterprise Working Rite was supported by the Young Foundation to develop a financially sustainable business model before it could attract capital to its apprenticeship-style work preparation programme, even though it had achieved better results for youngsters from tough backgrounds than its larger, commercial competitors.

While we welcome the Big Society Bank, the government needs to level the playing field in the ever-tighter fight for government contacts. Shrewd social entrepreneurs – like those behind Enabling Enterprise, Teach First and Working Rite – will need to continue to scrape around for risk capital, and scramble to build robust business models under innovative services. From on high the government declares that social enterprise is critical to the success of the big society, yet on the ground it can feel like "soft privatisation".