Social investment is getting a lot of press at the moment, following the Chancellor’s recent announcements fleshing out the rules around tax relief.

In brief, the rate of Social Impact Tax Relief (SITR), as announced in the recent budget, will be set at 30 per cent, in line with the Enterprise Investment Scheme (EIS) regime, for organisations with a maximum of 500 staff and gross assets of no more than £15m. Eligible organisations will be able to receive up to a limit of £290,000 over three years.

See here for more details:

What remains to be seen is how the product market will continue to develop during its embryonic phase, and the impact the tax relief has for real causes and real investors. The key questions are around the detail of what constitutes social investment, with the underlying suspicion in some quarters that the market will be distorted by tax-led schemes where the social impact aspect is relegated to the undercard (à la the EIS arena, rife as it is with products that don’t have much to do with enterprise at all, and where the inherent risk they carry is talked down in the marketing spiel). The devil will be in the detail.

The usual questions about the interaction of social investments with portfolio construction raise their head too. Whatever the details as they evolve, social investment will probably always fail the ‘Plain English Test’, which states that if a product can’t be explained to a client in under a hundred words it probably shouldn’t be in their portfolio (see most structured products; also pretty much anything with the word ‘collateralised’ in it).

Without the ability to properly factor the expected risk of these products, and their correlation with all the other moving parts of a portfolio, they shouldn’t be relied on as part of the strategy to support your core financial goals.

Although this could change depending on how the market develops, for now this part of a portfolio should be reported on separately from the main (asset allocated) element, and the objectives should be geared around the underlying cause not the tax relief.

On that note, I heard an excellent speaker recently, who verbalised as clearly as anyone I’ve heard how profit and social impact, whilst being separate goals, can at least be complementary.

Paul Harrod is the founder of Bristol Together CIC, a social enterprise partnership which employs ex-offenders on projects which aim to restore empty properties in the area, which are then sold on at a profit. He made the point very eloquently that the profit-generating nature of the projects was essential not only to the viability of the partnership, but also to its overarching aim of reducing reoffending, because of the sense of tangible purpose that creating a return on the eventual property sale provides.

There will always be a debate about how separate social impact and commerciality are, but this is another good example of a successful project which has found a way to combine elements of both.

For more details see

RMT Ref 58/04.14/SL

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