Profit from philanthropy finance

The taskforce, set up under the UK's presidency of the G8 in 2013, set out to see how investments made into businesses, non-governmental organisations (NGOs) and charities can generate a measurable social return, as well as a profit.

The concept of social investing has gathered pace in times of austerity as governments struggling to cope with failing healthcare systems, poverty, crime and poor education increasingly look to the private sector, with around £30bn in social investments already under management globally. These include an incredibly diverse mix of investing opportunities, including microfinance, affordable housing development and renewable energy finance, to name just a few.

As the director of the UK chapter of an international aid organisation these new developments seem extremely attractive to me. Is there a way, even in these cash-strapped times, to solve some of society's most entrenched issues while also allowing investors to collect a dividend? And all this while saving governments money? It seems too good to be true, but it may not be.

Social impact bonds

The UK has been a frontrunner in this area, pioneering the first-ever social impact bond (SIB) in 2010 in a pilot scheme to reduce reoffending among prisoners in Peterborough. SIBs work by using a payment-by-results model, whereby private investors fund preventative social projects, usually aimed at improving the lives of at-risk individuals, and paying those investors back - with interest - from public funds if targets are met. Underpinning this is the idea that successful projects will cut government spending in the long term.

In the UK, for example, a youth offender is estimated to cost the state around £21,000 a year, while a successful project to reduce recidivism means that could be reduced to as little as £7,000. The £5m of private money invested in the Peterborough SIB cut reoffending rates by 8.4 per cent compared with national averages. Investors in the second phase, in this instance a number of charitable foundations, will receive their money back and a small return should the hurdle rate of a 7.5 per cent reduction be beaten.

The applications, however, can be extended much further than criminal justice. The Think Forward scheme in east London is a good example which, thanks to social investment, provides educational support to almost 1,000 vulnerable teenagers, meaning 60 per cent of the group now achieve five A*-C GCSEs. By improving their employment prospects, these young people are now much less likely to end up on unemployment benefits.

For the healthcare charity I work for, Doctors of the World, there's huge potential for this sort of investment. We run a clinic for excluded people in London's Bethnal Green, helping those who are facing barriers to NHS care, including vulnerable migrants, the destitute and trafficked people.

By treating people and helping them access mainstream healthcare our volunteer doctors ensure illnesses are detected and treated as early as possible, which often precludes the need for much more expensive hospital treatment down the line. For instance, diabetes can be managed easily and cheaply via prescriptions at the GP level, but if not treated can lead to blindness, heart conditions, and even amputations, which are all expensive to treat. Therefore a SIB project that helps ensure more people see a doctor early could both save the NHS millions and improve public health, and generate a return for the investors that provided the funding - the larger impact they have, the larger the repayment investors will receive.

No silver bullet

The flipside to this, of course, is the possibility that if investors front all the costs they risk not being paid by governments if impact targets are not reached. While the strongest motivation for those looking to put funds into such schemes will often be the social impact itself, the desire to see a financial return will come a close second - and they will certainly not want to throw money away. Which raises perhaps the biggest question of all: can investors really make money while making a difference?

That's the claim made by many social impact investment funds and a US study seems to back this up, asserting that the majority of social impact investing produces market-rate returns. In the UK, one pooled vehicle, the Bridges Social Impact Bond Fund, expects to generate returns of around 5 per cent, but the returns from individual projects can be higher depending on the level of risk they're prepared to take on and the social returns expected to be gained from a project.

Yet, despite what seems like a win-win scenario there has been some cautionary criticism of social impact schemes such as SIBs from the charity sector itself. Rates of return - the payback rate - are a regular bone of contention in SIBs. Others are concerned that by being targeted on strict definitions of what's considered an impact, such schemes risk only focusing on what can give the required results to the detriment of other, perhaps equally important, work.

I know from my work in global healthcare that not all the things a charity does can be put into a spreadsheet with regard to quantifiable results, and the good we do often goes beyond figures. The valuable time that volunteers at our clinic put into speaking with individual patients could risk being reduced if, say, volunteers were targeted purely on the amount of patients seen. This could be a particular concern for advocacy, arts and alternative organisations.

Another worry - for both investors and charities - is that such schemes can be affected by the shifts and whims of the political landscape. This turned out to be true for the Peterborough pilot SIB, the third phase of which was recently cancelled when the government brought in its nationwide Transforming Rehabilitation programme in a new attempt to stop reoffending.

But such concerns about social investment have not stopped the chorus of endorsements from economists and policy experts. The UK's Development Secretary, Justine Greening, recently said that the potential is there to "transform the way investment is made into [social] enterprises". Across the pond, Harvard economist Larry Summers and hedge fund manager Bill Ackman have both supported SIBs and have put their own money in them. "This is ground zero of a big deal," Summers recently said after investing in one of the US's first social impact bonds. Elizabeth Littlefield, the chief executive of OPIC, the US government's development finance institution, continued the hyperbole, describing the recent growth of social investment as "nothing short of revolutionary".

And as the list of commendations grows, so do the number of SIB projects. The UK has taken global leadership in this respect, with 15 SIBs now in place across the country. Beyond the UK, SIB programmes have since been announced in Canada, Belgium, the Netherlands, Germany, Australia and across the US. The number of projects in the US will expand considerably if Congress passes the Social Impact Bond Act, which will grant a further $300m to SIB projects.

In the face of this rising tide, one question that arises, from a humanitarian angle at least, is where does this leave traditional philanthropy? If people are now collecting dividends from social investments, does this mean people no longer need to give their money away?

Most seem to agree that social investment is far from a panacea for all the world's ills and philanthropy still has a huge role to play. It's even been said that the challenges facing those trying to unlock the maximum impact from social investments will require more, not less, philanthropy, and that philanthropic support will need to be delivered in new ways.

And herein lies the bottom line - social investment is not a silver bullet. There may be huge potential for benefits for both investors and society, but it should not be seen as a substitute for sound public policy. Yet if you are looking to do some good in the world without giving your money away, social investment could be exactly what you're looking for.