Better investment for a better Britain

The challenge

Whichever party wins the next election will have big ambitions for change and big challenges to address. Up and down the country people are struggling with the cost-of-living and rising inflation. Housing is less affordable, the NHS is struggling to cope with huge demand and as we strive to meet net zero our most vulnerable communities are at risk of being left behind.

These multiple pressures come at a time when the public purse is under greater strain than ever before. Given the scale of this challenge, any future government will have to think differently and identify new sources of funding, and that includes being much more ambitious about harnessing private investment to tackle public problems.

Tackling society’s challenges head on

Right now, the power of social impact investing is a missed opportunity. Since 2012, thanks to the visionary Dormant Assets Scheme, the social impact investment market has grown tenfold in just ten years from £800 million to £9.4 billion in 2022. This means nearly £10 billion of private investment is already tackling social issues from unemployment to financial inclusion and homelessness to long term illness.

By joining forces with social impact investors and “spending smarter” itself, we believe Government can more than double this impact and unlock at least an additional £10 billion of private investment over the next five years to both grow the economy and solve the problems the public cares about.

This discussion paper sets out our ideas, driven by our work with partners, for how a future government could better achieve its goals through a genuine partnership with investors, creating a world-leading Britain. Simply put, it is Better Investment for a Better Britain.

The challenge

From the NHS to adult social care, from children's services to support for the homeless, our public services face their most severe challenges in decades. NHS funding has increased by 9% over the last five years but it’s estimated that waiting times for GP appointments have risen still, and the number of hospital admissions has grown by 15% and A&E admissions by 35%. While spending has risen it is outstripped by the problems public services deal with from Covid to mental health issues and drug and alcohol abuse which are getting ever more complex.

Spending has also tipped towards crisis and away from prevention. For example, £4 in every additional £5 spent on children’s services – now increased to 25% of council spending – is going on late intervention services rather than prevention. The result is more children in costly – largely privately run – residential care placements.

Our public services rely on ‘one-size-fits-all’ approaches. These work in some areas (e.g. refuse collection), but not others e.g. looking after children with complex needs or helping people with long term conditions find work.

How social impact investors are helping

An innovative social impact investment approach known as outcomes partnerships has over the past decade been driving improved public services for over 55,000 people across homelessness, health, children’s services, education and employment, and all at better value for money for Government.

Independent analysis shows that this approach works. It generates £10 in social, economic and fiscal value for every £1 spent by Government, including an impressive £3 in direct savings to, or costs avoided by, Government.

Outcomes partnerships are delivered by passionate and local networks of charities and social enterprises who are given full freedom to do what it takes to help people in the way that suits them. Social impact investors – such as charitable trusts and pension funds - provide the upfront finance and Government only pays later when outcomes are achieved and verified.

Government action

Put people at the heart of public services – embed commissioning and procurement for outcomes across government departments, driven by a central co-payment fund led by a central team in the Cabinet Office or HM Treasury. Reallocating £1 billion of existing spend to outcomes commissioning in this way would enable the following:

The challenge

We are no longer in a housing crisis but a housing emergency. Government figures show that over 100,000 households including over 130,000 children are in temporary accommodation, the highest figure since records began.

Tackling the chronic shortage of social and affordable housing in the UK requires an estimated £16.9 billion every year for the next ten years. This is only possible if government actively seeks to crowd in private investment to grow availability of social housing.

How social impact investors are helping

Big Society Capital and its co-investors have committed £1.4 billion over the last decade which is currently being used to deliver 6,600 social and affordable homes and wraparound support for families and key workers. This includes the most vulnerable stuck in temporary accommodation, which is saving local authorities huge amounts in temporary accommodation costs, as well as being massively beneficial for the individuals involved.

For example, a £40 million investment from the Department for Levelling Up, Housing and Communities recently leveraged in an additional £123 million from other investors including Big Society Capital – trebling the number of homes provided to 1,300 – which are for individuals and families who are homeless or stuck in temporary accommodation.

The wider UK social and affordable housing investment market has now grown substantially from virtually zero in 2012 to an estimated £5.1 billion by the end of 2022. With active government support, the capital committed could be many times more.

Government action

Spend smarter – government already spends money on new social homes but could make this go very much further by working with social impact investors. A new £100 million investment from DLUHC could leverage in another £650 million of private capital and deliver 5,000 homes for those in greatest housing need. These are individuals and families who are homeless or stuck in the very worst temporary accommodation.

Stable and consistent social rent – even more investment and support could be unlocked for wider groups such as key workers by setting a long-term plan for social rents. We estimate a government commitment to a five-to-ten-year plan on social rents could unlock up to £20 billion of private investment from pension funds, which can in turn deliver quality housing for more than 263,000 people.

The challenge

The UK tech economy is the third largest in the world by economic valuation and the UK tech ecosystem was valued at just under $1 trillion in 2022 – more than 17 times the value of ten years ago.

The role tech can play in improving lives has grown enormously in recent years, for example, in diagnosing health problems, managing mental wellbeing and helping children and adults with mobility or other issues.

This is just the beginning. The potential of ‘Tech-for-Good' to address society’s challenges, enhance wellbeing, and create a more green and inclusive future is rapidly becoming a reality. However, if we want future technology to do good then we need to invest now in those founders and entrepreneurs putting people and planet at the heart of their businesses.

How social impact investors are helping

There is growing momentum for better tech at the heart of the UK’s venture capital industry. Britain is home to ImpactVC, founded by Big Society Capital, an international community of over 500 Venture Capital firms united by a shared commitment to invest in ‘Tech-for-Good’ and driving innovations in healthcare, education, climate, and affordable financial products.

Investment into UK impact orientated startups increased 7x in five years to 2021. Big Society Capital is the leading investor in impact venture funds in the UK, supporting more than 250 startups who have reached more than 10 million people.

Government action

Tech-for Good’s potential is limitless, but Government can – if it chooses – harness its power and accelerate its growth.

Spend smarter – The Government has already committed to investing £2.5 billion over the next ten years into technology businesses through its Quantum strategy. The Government can achieve the double-benefit of economic growth while also tackling key social and environmental issues by allocating some of this to ‘Tech-For-Good' at no extra cost to the taxpayer. For example, a ‘Better Tech Fund’ to last the full Parliamentary term with an allocation of up to £500 million would leverage an estimated £1.5 billion from private investors to deliver positive social impact.

The challenge

To get Britain’s economy growing again is not just about big business and heavy industry, we need to tap into the entrepreneurial potential of all parts of our society – businesses and organisations, large and small, in every community. This includes over 100,000 social enterprises in the UK that contribute £60 billion to the economy and employ 2 million people. They are businesses that have community needs and interests at their core. For example, 30% of the jobs they create are in the most deprived communities.

We need better business to drive jobs and opportunity at a local level while generating positive outcomes for society.

How social impact investors are helping 

Social impact investors are lending £650 million per year to social enterprises and small businesses across the UK who are a force for good, generating social and economic contributions for the areas where they operate. In total, investors have put £3.8 billion in outstanding social impact investment into these businesses, 43% in the most disadvantaged levelling up priority 1 areas. This includes non-profit community lenders who are social enterprises themselves and lend to micro and small enterprises, 90% of which were previously turned down by mainstream lenders.

The result is economic growth in the most under-served communities as research shows organisations accessing social impact investment increase their employment figures by 16% on average, with wages increasing alongside business growth.

Government action 

Spending smarter – Government already invests billions trying to achieve local economic growth and regenerate communities, but it could achieve so much more by spending smarter. This is how;

Government directs spending departments to work with social impact investors and crowd in private investment supported by a central team in Cabinet Office or Treasury. For example, re-directing £100 million from the Towns Fund to invest in scaling community enterprises, which have a track record of job creation in the most disadvantaged communities, and so crowd in £300 million of private investment and multiplying the local economic impact of public funds.

Levelling playing field for Better Businesses – While social enterprises deliver positive social impact, they don’t have easy access to the same tax reliefs and schemes as high growth profit-making enterprises. Government should level the playing field so that social purpose organisations can receive investment benefits that support all businesses including the Recovery Loan Scheme and Enterprise Investment Scheme. This would mean a redesigned targeted tax relief encouraging investment into better business.

Community Power Act – Government could unlock billions of pounds of investment from people themselves and at the same time put more power into the hands of local communities by giving new rights to local people to collectively buy and run their own assets. The Community Power Act would empower communities across Britain to buy and run amenities from local shops and pubs through to leisure centres and community hubs.

The challenge 

The transition to net zero emissions is a social issue – the most disadvantaged people are at greatest risk of being left behind or harmed by climate change, and the transition itself will rely on communities embracing and benefitting from more and better jobs, revitalised towns and communities, and reduced regional inequalities.

Moving the UK to net zero by 2050 will require an estimated £6 trillion in investment over the next 30 years. This unprecedented level of financial mobilisation demands extensive partnership between government, the private sector, and society.

How social impact investors are helping 

The UK social impact investment sector is already bringing capital into underserved communities to finance the transition to net zero. Big Society Capital has invested £150 million into over 200 local projects, mobilising close to three times this amount from other investors.

Such local ‘place-based’ approaches have been shown to halve the costs of transitioning to net zero and double the benefits.

This is because social impact investors work closely with communities to help design and deliver solutions that work for them – from retrofitting community buildings to installing solar panels to improving the energy efficiency of social housing. These investments have recycled some £48 million of profits back into local organisations, saved £25 million on annual energy bills for households at risk of fuel poverty and avoid 85,000 tons of CO2 annually.

Climate change experts agree that progress towards net zero is highly dependent on society buying in, so solutions designed and delivered with local communities are much more likely to succeed. Scaling up partnerships like these will be essential to delivering a transition that works for the UK.

Government action

Scaling up partnerships between government, communities, and social impact investors is essential to delivering a transition with society bought in. Government should:

Develop a national, 5 year retrofit investment strategy – Government should spend smarter when decarbonising housing through existing schemes by working with social impact investors to make this money go much further. Social and low-cost housing is the least energy efficient and where savings for households make the most difference. Government should accelerate decarbonisation in the areas that need it most using existing funding streams including the Social Housing Decarbonisation Fund and the Energy Company Obligation scheme to crowd in more private investment and channel capital towards social organisations with strong track records of working with communities. Crucially, Government should use its long-term buying power to create certainty of demand – to help net zero providers build capacity and plan delivery of services – including through outcomes partnerships and advanced market commitments.

Empower communities with shared ownership – developers of renewable energy projects should offer shared ownership opportunities to communities as standard on all new projects, including expansions of existing projects. The UK’s community energy sector has scope for substantial growth and with the right support can rapidly expand, recycling profits back into communities, providing platforms for local climate action and community benefit.

Prioritise grant for social start-ups – a lack of early-stage support has limited the number of places and communities developing community energy projects from solar to wind, and the number of social organisations providing net zero services from retrofit to electric vehicle charging points. These are areas of huge potential and Government should prioritise available net zero support to social start-ups, working with social impact investors to lever in more external finance.

Mandate regional net zero investment plans – require every UK city and region receiving central government net zero support to create a net zero investment plan around it. This would ensure that local government comes together with local communities and private and social impact investors around achieving a transition to net zero.

Crowd in private investment to build a world class, locally led net zero delivery service – The UK needs to rapidly scale up enterprises providing services across energy efficiency, EV infrastructure, manufacturing and food and agriculture to deliver net zero. Government support in the form of guarantees, underwritings and tax incentives for growth investment in net zero SMEs and social organisations can help crowd in more capital, create new green jobs, and solve the current supply side constraints that are holding back progress now.

The challenge

In the UK, the combined value of pensions and insurance assets amounts to £4.6 trillion, making it the world’s second-largest pool of long-term capital.

Yet investment into the UK is chronically low as a share of GDP compared to its peers. Increasing that investment will be critical not only to economic growth and productivity but also to addressing regional disparities, tackling social issues and achieving the transition to net zero. At the same time, there is a transformative shift among investors of all types towards seeking impact alongside financial returns. For example, 54% of institutional investors expect to be integrating impact into their investing in the next two years. The challenge for a future government is how to unlock this wave of private investment for public benefit.

How social impact investors are helping

Over the last decade social impact investors have made a pioneering start. Using just £400 million of dormant assets allocated in 2012, Big Society Capital has helped to grow the market for social impact more than ten-fold from £800 million invested in tackling social problems to more than £9.4 billion last year. In the process, it has helped unlock more than £8 billion from a range of investors from institutional investors like pension funds through to the family offices of the ultra-wealthy. This appetite from investors to use their capital for impact as well as returns has driven growth in areas from affordable housing to ‘Tech-for-Good' and community lending. There is no reason why these proven investment strategies cannot scale and deliver multiples of the current volume of private investment deployed into improving lives in the UK.

Government action

There are three key policy shifts a future Government needs to make which will cost it nothing to unlock significant pools of aligned capital and incentivise investment into bettering the lives of those across the UK. We estimate based on current deployment that at least £10 billion of additional private investment could be unlocked over the next parliament by implementing the recommendations made in this paper.

A. Integrate social impact investment across government

Any future government that is serious about harnessing private investment for public good will need to make this a clear central priority driven from the top. This is essential to signal intent externally to investors and attract long-term capital but also internally to drive fundamental change in the way government spends and invests.

This will require strong central direction through cabinet-level leadership and the creation of a dedicated implementation team in HM Treasury or Cabinet Office to embed through a coordinated approach to policy, culture and practice across spending departments. While investment won’t be appropriate in every area of public service, there are multiple opportunities across health, housing, education, social care and net zero transition to better empower communities, partner with social impact investors and secure the best possible value for taxpayer funds.

As well as clear political direction, attracting private investment for public good will require policy shifts to lower barriers and incentivise investors which could include for example;

• A Fair Banking Act would require mainstream banking institutions to disclose their performance on financial exclusion in a transparent, publicly available, data disclosure framework. Similar legislation in the US is attributed with a massive increase in bank funding of financial institutions such as credit unions and non-profit community lenders.
• Local Government Pension Funds already encouraged to invest at least 5% of their funds into unlisted UK investments, they could be encouraged to focus a proportion on social impact, akin to the French 90/10 solidarity pension schemes.
• Effective investment tax incentives – building on lessons learned from previous initiatives such as Community Investment Tax and Social Investment Tax Relief – a redesigned effective tax regime could incentivise a significant growth in investment for tackling social and environmental issues.
• Use Government Guarantees to reduce perceived risk around social impact investment and bring larger pools of private investment into play emulating approaches taken in the US to grow the community lending sector.
• International Investment; As a global investment centre, the UK has an opportunity to attract and target significant international pools of private investment through a strategic blend of tax incentives, and potentially even visa requirements tied to significant commitments to public benefit investments for instance within social and affordable housing.
• Fiduciary duty; A significant barrier to investing for social impact for pension funds as well as trusts and endowments is a perception that their fiduciary duty as trustees prevents them. This is an evolving area where very clear guidance that investment for impact as well as returns aligns with fiduciary duties could help unlock significant private investment over time.

B. Spend it smarter

Government’s greatest tool to unlock more investment is its own spending budget and it can certainly spend it smarter. Currently central government spends £780 billion itself every year on services and £85 billion on capital investments but rarely if ever considers whether any of these taxpayer funds could have been used to unlock private investment alongside it in the ways described in earlier sections. Changing the spending habits of government will not be easy but is both possible and necessary.

A more collaborative approach involving the financial sector, social impact investors, government, and civil society entities could mobilise large amounts of private investment swiftly. There are many isolated examples where this is already happening for example through blended finance. This is where strategic use of existing government grant can mobilise additional investment from the private sector but it could be at much greater scale.

Another clear example of how government could spend smarter would be to create a fund dedicated to unlocking private investment for public benefit. How this could work is detailed in the recent LSE, Grantham Research Institute report on Mobilising Private Capital for Public Policy Priorities. The research suggests a Community Growth Fund could unlock £5 billion in private capital over the next five to ten years.

So by spending its money smarter, making it go further by taking a small part of existing spending and combining it with social impact investment, the Government could add billions of pounds to its ability to tackle social problems. Individual policymakers and civil servants are already aware of this opportunity in limited policy areas but this awareness needs to be strengthened across government and embedded in policy design to really scale the opportunity.

C. Focus on outcomes

Using investment to deliver public services can not only unlock more private investment but does so in a way that puts people first and delivers better results. To secure finance for the delivery of public services, government will need to focus on long-term outcomes and prevention of social problems rather than firefighting crises.

Over the last decade social impact investors have developed a highly effective approach known as social outcomes partnerships – originally social impact bonds – to ensure government only pays for successful outcomes of public services while social impact investors take the risk. This ensures taxpayer funds are put to the best use, creating tangible savings.

While national and local government can be effective in delivering large-scale general public services, this approach is more effective for difficult complex social issues such as homelessness, which require a multi-agency approach, where traditional public service siloes struggle with tailoring long-term support to individual need. The result;

Over the last decade the UK has launched 90 such programmes across local and central government, involving 220 social sector delivery partners, and benefitting over 55,000 people with complex issues from child and family welfare to employment and training, health, homelessness, and criminal justice across the UK.

For every £1 of tax-payer funds spent in this way rather than commissioning traditional services, government has saved £3 in savings from other budgets and generated a total of £10 of economic value in terms of jobs generated and ill-health averted.