Build social bonds with a Social Bond

Summary: To repair the eroded bonds of social cohesion by empowering our communities, the UK will use an innovative financial bond – the world’s first Social Cohesion Bond. This will attract investors switching into sustainable environmental and social investments. We’ll place the cheaply-financed money raised into a National Social Cohesion Fund. Having impact in 2021 is achievable with the Fund investing into those community services which are proven to strengthen social cohesion.

Recommended solution: Establish a new National Social Cohesion Fund financed by a new type of social bond.

The Fund will be national in reach, significant (& scalable) in terms of financial impact, and target those local services which enhance social cohesion. It will ensure it finances the best-possible community outcomes covering youth, skills, sport, leisure & cultural opportunities. A major benefit of establishing the Fund will be to send a strong signal to the parts of our society that feel marginalised, that their well-being and communities matter – this in itself supports cohesion.

The Fund with its financing method – is a practical and innovative solution to the erosion of social cohesion. Practical because government already has the mechanisms in place to kick-start it; and innovative because the Fund will emphasize holistic outcome-based projects, funded by a world-first form of social financing.

It will have impact because this Fund will operate at scale; not be niche or narrow (as UK social funds are now); and be additive to existing funding streams. It will target socially-cohesive programmes in communities which have been starved of funding; and will build longer-term financial sustainability into recipient operating models, because the finance will have to be repaid in some form. The Fund will be flexible, available to single projects proposed by communities or to Councils with comprehensive plans – all that matters is that proposals meet the Fund’s investment criteria and that regional distribution is fair.

The size of the fund will be dependent on demand from communities and the supply of investment funds – but once the mechanisms are in place, it will be easy to scale-up. Estimated demand would be in excess of £1 billion (e.g. real cuts to library funding alone since 2010 is £600 million), against a social bond investment supply of over £100 billion (2020 figures).

Timing: This could be implemented in 2021 because the mechanisms already exist.

• A Fund could be set up in based on existing HMG investment fund architecture (e.g. British Business Bank or Shareholder Executive models) – the mission and investment framework could be agreed in consultation with major stakeholders such as the Local Government Association, Whitehall depts., arts & sports bodies, and the devolved administrations.

• The Bond would be issued by the Debt Management Office which currently working on the UK’s first Sovereign Green Bond and so is already targeting a set of investors that would be interested in social bonds.

Background

1: The National Social Cohesion Fund – key elements

• Access: Available to local authorities, umbrella organisations for community sport, culture & training and social enterprises providing such services. The fund would be independently managed and governed to ensure that distribution was equitable and wasn’t eaten up by large national projects.

• Use of funds: Local socially-cohesive proposals, such as youth services including skills training; culture; and community sport & leisure. Aimed at all business needs – whether capital investment or working capital to fund staff investment or expansion of ongoing operations. This makes it distinct from the current Public Works Loan Board model which lends from central government funds only for capital projects.

• Investment decisions: Over-seen by an investment committee drawing on existing skills, youth, culture and sport bodies and in line with the categories of investment defined at the outset – supported by UK Government Investments (‘UKGI’).

• Funding style: The Fund will make investments – either equity or debt – and will seek a long-term return. As such, debt-funded recipients will need a repayment plan. The purpose of this is to build long-term sustainability into the recipient operating models – with the Fund (as equity holder) or recipient (as debtor) focused on eventual investment return.

• Existing funding: The investments would be additive not substitutive to existing government funding and charity (e.g. National Lottery) and so ring-fenced from central government control.

• Establishment: The Fund could be set-up by UKGI, with their experience of governance and fund structures; and representatives from major stakeholders as noted above.

2: Financing through a Social Cohesion Bond

• Innovation: Financing will be through a new form of social bond – the Social Cohesion Bond – and guaranteed by HMG – so providing access to a historically low cost of finance. The bond and its interest will be repaid from those organisations who access the Fund.

• Investors: This Bond would tap a huge and growing investor base which targets investments in “sustainable bonds” – some $750 billion of which (mainly green bonds) were issued in 2020. These investors often include government pension schemes and targeting these investors in particular would effectively see the savings of older generations being recycled into local services for younger generations.

• Structure: The bonds would need a legal framework around them (e.g. project evaluation, use & management of proceeds, reporting etc) – which could be adapted from UK work on green and Islamic sovereign bonds and standards from international bodies. The bonds will also have to match comparable market-returns or provide some other form of benefit which has value to the investor (such as a clear social benefit).

• Scalability: With the initial bond, a template will have been created for future funding which can easily be accessed through further issues. Current UK social bonds are small-scale, expensive to launch and tap a more specialised and much smaller investor base.

• Spin-off benefits: Would include showcasing the UK’s role in sustainable and innovative finance, and the framework could be exported as a global good for similar Social Cohesion Bonds around the world.

 

 

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