G8 TASKFORCE REPORTS REVIEW

Transcription

1 G8 TASKFORCE REPORTS REVIEW Prepared by: David Tinnion Simon Rowell Thanks June

2 EXECUTIVE SUMMARY G8 National Advisory Board (NAB) and Working Group (WG) reports were reviewed to identify potential learning points for the future development of the UK social investment market. The review aimed to opportunistically identify both general themes and specific actionable ideas for further consideration by the UK. 1 The majority of the themes and specific ideas identified related to the supply of capital for social investment, reflecting in large part the focus on supply-related measures prevalent in the G8 reports. It was noted that the majority of reports from other countries made specific reference to the use of social investment in supporting international development, a perspective that was absent from the UK NAB report. The UK is currently addressing a different set of challenges to other reporting countries, with a much greater focus on social sector demand. In terms of work already completed to develop the supply of capital, the UK is repeatedly referenced as an example to work towards across the NAB and Working Group reports. The following general themes were identified from the review as discussion points for the UK NAB or its successor. 1. What more can the UK do to develop the talent pipeline for the UK Social Investment market? 2. Should the UK demand more mandatory action to develop the social investment market? 3. Can the UK do more to develop long-term investment time-horizons for social investment? The following specific, actionable ideas were also identified for consideration by the UK NAB or its successor. 1. Inheritance tax relief for social investments 2. Social investment visas 3. A kitemark to clearly differentiate social investments (following the French Finansol example) 1. See Appendix for a full list of all themes and specific ideas arising from the review. 2

3 SUMMARY FINDINGS FROM G8 PAPERS The UK is currently addressing a different set of challenges to other reporting countries, with a much greater focus on social sector demand. In terms of work already completed to develop the supply of capital, the UK is repeatedly referenced as an example to work towards across the NAB and Working Group reports. Other country reports and recommendations contain a focus on increasing the supply of capital for social investment that reflects a substantial portion of work already completed in the UK to develop this area. The majority of the recommendations from other countries are initiatives that the UK has completed, or is currently developing. NAB Country Recommendations (by UK Progress ) NAB Country Recommendations (by Market Component) NAB Country Recommendations (by BSC Strategy Strand) The UK has either completed work or has work in progress on > 60% of each country s NAB recommendations. Other countries NAB recommendations are more heavily focused on supply related measures. The UK is an outlier in being focused on demand. Other countries NAB recommendations show a leaning towards SMC Finance and Innovation, or more general measures that will support all component strands of BSC strategy. 3

4 HIGH LEVEL THEMES TO INFORM FUTURE U.K. WORK # Theme / related recommendations 1 Promotion and awareness of social investment Engage authoritative organisations such as business associations to encourage networking & knowledge sharing. [Japan] Benchmark survey of investor attitudes. [Australia] Finansol brand clearly identifies social/solidarity investments for retail/institutional investors. [France] Publish regular market reports that provide information about market developments. [Germany] 2 Developing Social Savings and Pensions is the UK being ambitious enough? Target to have 1% of French financial wealth in solidarity savings by 2025 to include life insurance, DC pensions & standard savings.[france] Social enterprises in France are entitled to low rate dedicated funding from solidarity savings accounts. [France] 3 Talent Develop a mid-career fellowship programme for VC investors to work with impact investment funds [USA] 4 Corporate involvement can the UK learn from the example of Japan? Japanese corporations are active social impact investors using principal investment. [Japan] Daiwa impact investment bonds (450bn Yen of Japanese total of 697bn Yen (2013) focused on climate change, poverty, vaccine, foods, education can UK do something similar for domestic social issues? [Japan] 5 European wide developments can the UK do more to shape Europe-wide developments? French solidarity funds use promissory notes, excluding them from UCITS IV and EU passport. [France] France recommends changes to SICAV and FCP structures to increase current 10% on impact investments. [France] 6 Developing long term time horizons for social investments Enable social sector organisations to focus on long-term impact creation [Germany] How can social infrastructure investments be enabled [Australia] Ensure minimum investment threshold for European Long Term investment funds are lower to encourage a wider range of investors [Triodos WG] 7 Use of Guarantees Develop guarantee instruments/special guarantees to support SII product providers.[germany] Associations, as well as commercial status social enterprises, can take secured debt thanks to the France Active guarantee system [France] At the state level, there are several financing institutions (e.g. L-Bank in Baden-Wuerttemberg) which support social organisations through the provision of guarantees. [Germany] 8 Optional vs Mandatory Participation does the UK have the right balance? Alter charity/trust law to require charity trustees to consider social impact when making investments [Canada] Create incentives for foundations to commit to making a fixed % of SI or mission related investments over an agreed time period [Germany] Pensions to include social option as default option requiring opt out [Asset Allocation Paper] Take steps to increase the disclosure of financial alignment to mission required from foundations [USA non formal recommendation] 9 Sharing lessons between domestic social investment and international development investment The majority of NAB reports include commentary on how international development can be supported using social investment. 4

5 THEMES TO INFORM FUTURE DEVELOPMENT OF U.K. MARKET TALENT Theme Outline What more can the UK do to develop the talent pipeline for the UK Social Investment market? A number of the NAB reports note that in order to successfully develop social investment markets, a growing pipeline of suitable talent combining financial expertise and social sector knowledge will be required. NAB/WG Observations Develop fellowship programme for VC investors to work in impact investing. [USA] Need for social investment training, including masters & business school courses. [France] Despite appetite for impactful work, loss of salary & benefits can be too risky for FS professionals to transfer. [Policy Levers WG] Develop expertise & awareness with a service to match pro-bono offers from FS professionals to S.I. sector demand. [Aust.] Possible Action Create a talent working group to report on; SIFIs experience of finding talent Talent requirements over next decade Actions to develop the talent pipeline MANDATORY ACTION Theme Outline Should the UK demand more mandatory action to develop the social investment market? NAB reports from some other countries propose mandating social investment to a greater extent than the UK has done to date. It may be worth considering where the UK positions itself on this spectrum as social investment market develops. NAB/WG Observations Alter charity/trust law to require charity trustees to consider social impact when making investments. [Canada] Pensions should include a social fund as the default option, requiring deliberate opt out. [Asset Allocation WG] Create incentives for foundations to commit to making a fixed % of SI or mission-related investments. [Germany] Possible Action Identify three key challenges delaying development of UK S.I. market. Hold roundtable to discuss whether mandatory action could be an appropriate tool to help remedy these problems. LONG TERM TIME HORIZONS Theme Outline Can the UK do more to develop long-term investment time-horizons for social investment? A number of NAB reports note the potential benefit to social outcomes of enabling long term social investment. It may be worth considering what more can be done do to promote longterm investments in the UK. NAB/WG Observations Target to have 1% of financial wealth in solidarity savings by 2025, using life insurance & DC pensions. [France] Important to enable organisations to focus on long-term impact creation. [Germany] European Long Term Investment Funds could have large overlap with impact investing if fund rules amended. [Retail WG] Need to remove barriers to investing in social infrastructure.[australia] Possible Action Create a working group to report on; Current investment time horizons and how they are changing (shortening/lengthening). Specific barriers to investing with very long term time horizons. 5

6 SPECIFIC, ACTIONABLE IDEAS FOR DISCUSSION Inheritance Tax Relief for Social Investment Opportunity There will be a huge inter-generational transfer of wealth in the UK in the coming decades. Charitable donations in the UK currently benefit from inheritance tax relief. Social investment could benefit in a similar way. UK Social Investment Visas Opportunity The UK issues visas to investors and entrepreneurs based on their contribution to the UK economy. Recently the UK has linked visa issuance to tech investments as part of attempts to support the development of the UK tech industry. Kitemark for UK Social Investments Opportunity As the UK social investment market develops, one of the challenges for people and institutions motivated to make a social investment could be a lack of transparency as to which investments are social. What could the UK do? The UK could change inheritance tax rules so that social investments are exempt, or partially exempt, from inheritance tax. This would also provide a strong incentive for IFAs to engage with social investment, as well as creating an additional supply of capital. What could the UK do? The UK could develop a social investment visa, based on a requirement to commit a specific amount of capital to social investments and/or set up social enterprises targeting specific social outcomes. What could the UK do? The UK could create a social investment kitemark which would be applied to qualifying social investments, allowing potential investors to easily identify social investment opportunities. The label would be assigned and periodically reviewed by an independent awarding body. What prompted the idea? The USA National Advisory Board report noted that Millennials will receive an intergenerational wealth transfer of $41 trillion in the coming decades. (USA NAB Report). What prompted the idea? The US EB-5 visa grants green cards to investors making $500k investments or creating 10 or more jobs in disadvantaged communities. (USA NAB report). What prompted the idea? Since 1997 the French "Finansol" label has helped investors to clearly and easily identify social/solidarity-related financial products. The label is independently assigned by a committee of civil society experts and reviewed annually for compliance. The Policy Levers WG report recommended supporting efforts to establish a kitemark of this kind. 6

7 APPENDIX 7

8 SPECIFIC, ACTIONABLE IDEAS FOR DISCUSSION (I) # Opportunity What could the UK do? Where did the idea come from? 1 A UK Kite mark/label to Differentiate Social Investments The UK could create a clearly recognised social investment label which would be applied to qualifying social investments. The label would be assigned by an independent review body. The awarding of the label to an investment product would allow investors to easily identify social investment opportunities. Since 1997 the "Finansol" label in France has helped investors to clearly and easily identify social/solidarity-related financial products. The label is independently assigned by a committee of civil society experts and reviewed annually for compliance. 2 Social Savings the UK must be more ambitious The UK should mandate all mainstream providers to offer a social option for pensions, life insurance and savings accounts. This would substantially lower the barrier to participation in social investments. France is aiming to have 1% of French financial wealth invested in solidarity based savings by equivalent to 4 billion Euro in The '90/10' funds format used for social pensions could be expanded to life insurance and other savings products. 3 UK Social Investment Visas The UK should develop a social investment visa, based on a requirement to commit a specific amount of capital to social investments and/or set up social enterprises targeting specific social outcomes. The US EB-5 visa grants green cards to investors making $500k investments or creating 10 or more jobs in disadvantaged communities. 4 Crowdfunding - social projects aggregation platform The UK should create a website to aggregate all socially motivated projects from UK crowdfunding sites in one place. This would create a one stop shop" for crowdfunders looking to make a social investment. The Tous nos Projets platform hosted by BPI France aggregates impact and social projects from French crowdfunding platforms on a daily basis. 5 UK Immigrant Access Fund The UK should develop a fund to replicate the role of Alberta s IAF. The Immigrant Access Fund (IAF) provides loans of up to $10,000 to immigrants in Alberta to finance licensing and training to help immigrants enter the workforce. 6 Community Economic Development Investment Funds (CEDIF) UK should create a version of the Canadian CEDIF Funds to help encourage community based social investment. Including the ability to include the fund in pension plans would encourage participation. CEDIFs are Canadian funds formed through the sale of shares to persons in a defined community. They invest in creating or expanding local businesses. CEDIFs combine a simplified offering document, 35% income tax credit and can be wrapped into individual s retirement plans. 7 More mergers and acquisitions! The UK should convene an expert panel to produce specific, actionable recommendations on how best to promote consolidation amongst social sector organisations. The Australian NAB report notes the need to provide impetus for aggregation and mergers and acquisitions on the demand side. 8 Disaster recovery - An Opportunity for Social Investment? The UK should establish a social investment fund to support social enterprises and community projects in areas recovering from extreme weather events. The fund would help embed a social economy in the recovering community and lockin community cohesion. Natural disasters can raise public awareness of the social sector. The Japanese National Advisory Board reported that the 2011 Japanese earthquake and tsunami spurred interest in social impact investing in Japan, while 77% of the Japanese public donated to support earthquake relief in that year. 9 Corporate Commissioning of Social Investment Can the UK do more to enable and encourage corporates to procure sociallyrelated services that will benefit their operations, for example Corporate Commissioned SIBs for employee wellbeing or supporting disabled employees and customers? Charitable donations in Japan are very limited compared to the UK and US, but giving is dominated by corporate giving (58%) vs. 6% in US and 5% in UK. In total Japanese corporations donate 2.1% of total corporate income. India has passed a law requiring corporates to donate 2% of their net profits on social development. 10 Inheritance Tax Relief for Social Investment The UK could change inheritance tax rules so that social investments are exempt, or partially exempt, from inheritance tax. This would provide a strong incentive for Independent Financial Advisors to engage with social investment, as well as creating an additional supply of capital. The USA National Advisory Board report noted that Millennials will receive an intergenerational wealth transfer of $41 trillion in the coming decades. 8

9 SPECIFIC, ACTIONABLE IDEAS FOR DISCUSSION (II) # Opportunity What could the UK do? Where did the idea come from? 11 Social investment losses should be treated as donations The UK should consider changing tax rules so that losses made on social investments can be considered as charitable donations for tax purposes. USA NAB recommended reviewing the US tax code to better support Social Impact Investment, including suggesting looking into writing off impact investment losses as a charitable tax deduction. 12 A UK Community Reinvestment Act? The UK should replicate the USA's Community Reinvestment Act to incentivise banks and other financial services companies to serve all segments of the communities they operate in. The US Community Reinvestment Act requires US banks to meet the needs of borrowers in all segments of the communities they serve. Compliance is assessed and taken into account when banks apply to open new branches and/or complete mergers or acquisitions. 13 Harness devolution to help support UK social investment The UK should develop an equivalent to the Living Cities Catalyst Fund in parallel with the devolution agenda, to help spur the development of social impact investing across the UK. The Living Cities Catalyst Fund is a US domestic impact investment vehicle which since 2008 has made $35 million in below-market rate loans to support community development, in parallel to the grant making, research and policy work of the Living Cities agenda, which is aimed at dramatically improving the economic well-being of low-income people in urban areas. 14 Careers - Mix Them Up! The UK should develop a work-placement programme to allow mid-career professionals from social sector organisations, the social investment industry and mainstream financial services to experience each other s sectors. This would increase mutual understanding and awareness and help create a pipeline of talent for the social investment industry. The Policy Levers Working Group report noted that a profession of impact investment managers will need to be created in order to deploy significant capital into social investment. The USA National Advisory Board suggested the development of a mid-career fellowship for VC investors to work with impact investment funds. 15 Use UK infrastructure spend to deliver social objectives The UK should require contributions to social outcomes be integrated into the budgeting and planning for all new infrastructure projects, and identify opportunities to use "non-social" budgets (e.g. transport budgets) to help support social outcomes. The San-Francisco Bay Area Metropolitan Transportation Commission used $10m of its transport budget to act as first loss for a $50m fund dedicated to building affordable housing for low-income families close to existing public transport locations. This enabled low-income families to continue to benefit from proximity to transport links. 16 Retail participation - what can the UK copy? The UK should develop domestically focused development bonds and majority socially focused funds to help develop retail social investment in the UK, building on the experience of Daiwa's success with international development bonds in Japan and Dutch "Groen Fonds". The Japanese NAB report notes that Daiwa Securities issued 450 bn Yen (~$4 bn) between in issue based bonds focusing primarily on climate change and international development issues such as poverty alleviation. The Triodos WG report notes the success of the Dutch 'Groen Fonds' retail scheme, under which at least 70% of the Fund has to be invested in qualifying green projects. 17 Community Participation - Go Big or Go Home! The UK should promote more ambitious community initiatives, seeking to develop much larger scale projects including infrastructure serving large urban communities. The Triodos WG report on retail participation notes the example of Hamburg, where citizens recently voted to take back control of the privately operated city energy grid and operate it under a municipal company, with a focus on the adoption of renewable energy generation. 18 SIB Lab UK The UK should create an independent Social Impact Bond Lab to generate ideas for UK SIBs and spread learning across commissioners. The Harvard Kennedy School Social Impact Bond Technical Assistance Lab (SIB Lab) conducts research on how governments can foster social innovation and improve the results they obtain with their social spending. 9