A Look at Impact Investing in the UK

Caroline Mason, Chief Executive, Esmée Fairbairn Foundation, will hold the workshop ‘Building an Impact Investing Market – 10 years of practice and learning’ on the Congress on Impact Investing on 24 January 2017.

Before joining Esmée, Caroline was Chief Operating Officer at Big Society Capital and preceding that, Charity Bank. Caroline was also the co-founder of Investing for Good, a social investment advisory firm and one of the first Community Interest Companies. Before joining the social sector, Caroline had an eighteen-year track record of creative and innovative product development in the financial services sector. With Reuters, she managed the global development of real-time news and television services and then pioneered the introduction of web technology products. She also had her own consulting company, working with several financial institutions to develop new business and products including an electronic brokering service and a global wealth management business for a private bank. Caroline is a Board Member of EVPA (European Venture Philanthropy Association). She is also a trustee of SafeLives, Impetus-PEF, and is on the advisory board of Big Society Capital.

What are important steps in the Impact Investing journey of Esmee Fairbairn?

Esmee Fairbairn began its journey into impact investing in 2005 when a grantee asked us for a loan rather than a grant. It led us to invest in the charity but also to begin to invest in the infrastructure that would help provide the right kind of loan financing for other charities. It led us to be one of the first investors into Charity Bank, the first social bank in the UK and in CAF Venturesome, the first venture philanthropy fund in the UK. Twelve years later we have made 117 investments totalling £44.5m, have a recycling rate of 37.5%, a gross IRR of 2.8% and a net IRR of 2%. In the meantime, CAF Venturesome has made 500 loans and Charity Bank has lent £160m into social change organisations. We have learnt a few key lessons over the years.
The key lesson is that mission focus and alignment is a major success factor and that a deep understanding of what makes a good, impactful organisation is critical. We have this at Esmee because we have a highly experienced grants team who are expert in their field. The success of impact investing does not lie in the structuring of the investment but in the expertise in the issue that the investment is there to solve. We have merged our grant and social investment team and this is working very well.
Linked to this is the realisation that appetite for risk is often directly correlated to the amount of real change that can be achieved. We have often invested in new and unproved models and interventions with astonishing results. But we have also lost the entirety of our investment capital in 6 months! Finally, grants and social investment are complementary tool, which when used creatively, can be transformational.

Can you give us some examples of successful complex multi-stakeholder financial constructs?

The restructure of Charity Bank’s core equity in order to allow it take on new investors and grow was difficult. Charity Bank is a regulated savings and lending bank and was under intense regulatory scrutiny from the UK Financial Conducts Authority at the time. We also were part of the creation of the Arts Impact Fund, which brings together public money (Arts Council), mezzanine philanthropic finance (Nesta and Esmee) and a mainstream bank (BAML) in a senior position. The aim of the fund is to test the appetite for impact investment in the Arts. It has committed £3m in its first year and over 100 organisations have expressed an interest in funding. The investment committee has representatives from each of the investors, two independent members and an independent chair and it is working well. However, the reason for this is because of the time spent understanding each other’s appetite for risk and return and for ensuring there was complete alignment on purpose and mission. Finally, we have used repayable grants to underwrite the risk of development for new financial products such as the Real Lettings Fund. The grant is used to carry out the research and development of the financial product. If it succeeds, the grant is repaid to be used for the next product and we become a cornerstone investor. If it doesn’t the grant is not repaid.

What are the most important challenges in the coming years as you assume it for UK?

Impact investment is sometimes regarded as a silver bullet that will replace government funding and will underwrite statutory and/or private sector costs and risks through outcomes based contracts. The assumption is also made that philanthropic capital will be used to do this. It is far from clear whether this is a good use of philanthropic capital or whether, in itself, it the best way in which to make genuine change happen. In the UK, the fragmentation of public service delivery and the devolution of commissioning makes systemic change very difficult. Even when there are interventions and innovations that are shown to work, there no longer exists a machinery of state to roll them out nationally. However, we see extraordinary innovation and ingenuity in areas such as community renewable energy, sustainable food, community ownership of shops, of social enterprise activity and of highly impactful collaborations that sit under the radar of most of the existing discourse that surrounds impact investment. It is here that we see the real shoots of change happening, where the people on the ground are using impact investing to determine their own future and our strategy is to make sure that we keep supporting them in doing so.