Beacon Forum

A national strategy would help government to understand where philanthropy and impact fits into the economy and send a clear message about the role that government sees for the charitable sector, philanthropy and impact investing.

A national strategy must address the role of impact-led finance within our changing economic thinking and our evolving democracy. The strategy needs to be long term and encompass the tax system, regulation, the role of financial advice, structures and incentives such as match funding. It should harness the power of local connection and build on place-based efforts. And it will need to join up different government departments because impact capital stretches across all parts of our economy and wider society.

There is a need for greater education about the complementarity of philanthropy, impact investing and ESG strategies. They are tools in a toolkit and a portfolio approach is most likely to be both effective and rewarding. However, because advisers are not trained across the spectrum of capital, the provision of advice is siloed.

Trustees, wealth holding families and other investors cannot receive holistic advice that allows them to move forward with the best approach to achieve their social impact goals. Regulators also have a role to play to mitigate concerns and to ensure standards and accountability.e

Philanthropy is not currently seen as a social norm. Until it is more mainstream, with an environment that enables and supports it, peer engagement will be essential to build the confidence of donors. It is important to note that peer engagement is the outcome of learning and networking, not the starting point. It is through networking and sharing knowledge that relationships, trust and confidence are built. Also, because there are many types of donors and approaches to philanthropy, there needs to be different peer engagement strategies for different segments of the philanthropy community – there is no “one-size-fits-all” approach.

At the moment peer engagement is in its infancy and fundraisers and advisers will need to learn how to do it well.

Donors and investors need personalised impact strategies, which requires a variety of tools and strategies to support them across the spectrum of capital. However, the general lack of professional advice means tools are even more important to provide holistic support. In designing tools to support donors, we must include wider perspectives, especially that of the charity sector, and smaller charities particularly, to ensure they do not get overlooked.I

The lack of consistent data on charities based on agreed standards makes it difficult to build common infrastructure to support philanthropy. Better data would enable intermediation, transparency, collaboration and trust. It would also reduce inefficiencies for the charities themselves by enabling better technology. Government needs to drive the transition towards better quality charity data and funders need to fund charities to provide it. Major donors have a role to play in catalysing change in the data culture in the charity sector.

The impact investment sector has different needs. In particular, more consultation is needed around standards and impact reporting. Current activity in this field is largely uncoordinated.

There are notable innovations taking place in the philanthropy sector, including match funding, unrestricted funding and participatory grantmaking. However, there are few drivers for trusts and foundations to innovate. Additionally, donors rarely provide research and development type funding to the charities they support, which could fuel further innovations.

Areas that would benefit from more innovation investment include data and technology, infrastructure and platforms, impact measurement, open-source tools and mechanisms to drive interoperability.

There is a possibility that the next generation of funders have a greater focus on transformative practices in philanthropy, including enabling whole-sector development, and will be more willing to fund these kinds of innovation within charities and the philanthropy sector.

Supporting generosity is a shared responsibility including government, the philanthropy sector, charities, philanthropists and the media. It not the sole responsibility of charities to engage new donors. Indeed, charities have only a limited capacity to drive a step change in our culture of generosity.

We need more advocacy on the importance of a collective effort to grow generosity and funding for the infrastructure to support it, including volunteer movements, local philanthropy efforts, peer-to-peer networks and facilitating the new generation of donors.

There is a recognition in the grant-making community that they have set the norms by which charities can access funding, which in turn may perpetuate the status quo.

Strategies to “share power” seek to overcome this dynamic by engaging communities in programme design and funding decisions. However, it will take time for confidence to build among funders and recipients for these changing practices, particularly as there is currently only a limited evidence base and there are mixed views on the effectiveness of these trust-based approaches.

There is rich nuance in the language of sustainability. For government, it relates to their responsibility for equitable economic empowerment for people and planet. For investors, it is defined according to the types of investments they make on the spectrum of capital. For charities, it can mean how they can ensure their own resilience.

These nuances can lead to misunderstandings about shared goals. We need to take responsibility for using language clearly, simply and intentionally in order to foster greater understanding of shared goals and the different mechanisms to achieve them.f

The market shift away from ESG (Environmental, Social and Governance) investment strategies has created an opportunity for a mature conversation about impact investment.

Private/philanthropy capital is needed to invest in impact reporting, especially drives toward the standardisation of definitions and taxonomies that suit local, regional and global efforts. These will enable common frameworks and help to avoid greenwashing. Advocacy is also needed with the FCA (Financial Conduct Authority) to clarify adviser responsibilities for impact investing under Consumer Duty.a

Impact investing has plateaued in the UK and there needs to be a greater focus on education and supporting investors to understand the spectrum of capital and how to evaluate the return and impact characteristics of different strategies.

Advisers need to be equipped to support a diverse range of investors, including the trustees of charities, to understand how impact investments can be used to further their missions. Lens-based investing (where impact investment managers apply thematic filters, such as childhood, gender, old-age) could be particularly helpful to ensure mission-alignment.

The impact-led finance sector also needs to develop a range of products, including simple cash replacements, that will help trustees to gain experience while managing liquidity and other risks.

Charity leaders and impact investors agree that good impact reporting is anchored to a theory of change and the measures are agreed up front. Ideally, you will use a range of standard and targeted data measures, as well as stories and case studies. The use of non-standard measures and storytelling makes it difficult to compare different approaches, but sector comparisons may be achievable.

Impact measurement is essential to the impact investing community and there are more conventions and standards emerging. These are most advanced in the field of climate impact. There is also widespread use of the SDGs (Sustainable Development Goals) as a framework.

Measures of social impact are less well advanced. In the charity sector, some organisations may not be able to report impact. For example, organisations that focus on prevention may not be able to measure the long-term impact of their work. Funders also need to be aware of the need to fund impact measurement within the charities they support and the need for it to be proportionate, ideally running alongside the cycle of financial reporting.

It is also important to remember the purpose of impact measurement is to drive better outcomes. It is therefore important to have processes in place for learning from negative impacts in order to improve performance over time.

Impact measurements need to be robust and linked to the theory of change. Quantitative measurements enable managers to determine if the strategy is meeting its goals and to determine incentives, such as impact-linked carry.

Qualitative measures are needed to elevate the voices of the communities and identify negative impacts that are useful for adjusting strategies. To achieve this, you need to find common language to transfer key concepts from communities to senior managers.

There are a number of conventions being used to achieve these goals, but currently advisers are not informed about impact measurement so they cannot advise end-investors.

SDR (Sustainability Disclosure Requirements) has introduced a regime for labelling sustainable investments, including impact investments. The regime is designed to build investor confidence, tackle greenwashing and will improve impact disclosure and measurement against theories of change.

However, the regime will not increase flows of capital from toward impact investments. This requires training and incentives for advisers to support clients to invest in SDR-labelled products.

Without greater attention given to the advice regime, the backlog of client demand is unlikely to be met.

There are number of existing tax schemes for early-state investing that can be used as an incentive for early-stage investment into social enterprises, including Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS), Community Investment Tax Relief (CITR) and the Social Enterprise Investment Scheme (SEIS). However, there are drawbacks.

Social entrepreneurs are often advised to use legal structures for their businesses that don’t qualify for investment under the VCT or EIS schemes, and SEIS is targeted at very early-stage ventures, which increases the investment risk. CITR is regarded as a well-kept secret, but this underscores the lack of understanding among investors and advisers about how these reliefs can be used within impact investing strategies. Consequently, there are only a few niche managers that have developed funds using these schemes.

It would be helpful if the Charity Commission and FCA (Financial Conduct Authority) could develop policy in this area, including the requirement for advisers to provide information about the use of these schemes in the context of impact investment.

If only a small fraction of VCT and EIS investment goes into targeted tax optimised impact investment funds, it would generate millions of pounds of investment for impact-led companies.reyou are