Will Corporate Bonds Issued by Charities Take Off?

Scope Charity Bond

Scope, which was set up in 1952 to support children with cerebral palsy, has grown over the years to include housing schemes, information support, campaigns and education. In launching their £20 million bond programme, they have become one of the few UK charities to raise funds in this way on the debt market. Their income of around £100m per year consists of charitable donations, grants, and income from their shops and services.

The purpose of this bond, which will be listed on the Luxembourg Stock Exchange, is officially “for general charitable purposes”, and to open more shops, and expand services. There will be a variety of tranches, with different maturity dates and coupon yields, but Scope have noted that the financial return on this investment will be less than from commercial investments due to the social return, and yields will be around 2-3% on 3-5 year maturities.

The question here is then how much of a premium investors will pay for this social return. With inflation currently at 5.4% (RPI) and expected to remain high, investors will lose out in real terms. Examples of alternative returns on the market today are the Halifax Online Saver, which offer over 4% interest, and we recently featured Ecotricity who have offered significantly higher returns, the Ecotricity bond offers up to 6.5%.  Obviously these alternatives carry different financial risks which investors need to understand. The key issues, in times of austerity such as these, are firstly, what uptake will there be in the broad investment community for lower return products, which have a social impact? And secondly, are yields of 2% to 3%, when inflation is around 5%, too low for normal investors to stomach?

Peterborough Social Investment Bond

The first Peterborough Social Investment Bond (SIB) was launched in September 2010, they raised £5 million to reduce reoffending levels for male short-sentenced offenders from Peterborough prison.

A social investment bond functions differently to a corporate bond such as the Scope Charity Bond. Their repayment relies upon the outcome of the government social projects that they are linked to. In this case, the Peterborough SIB has to reduce re-offending by 7.5% for investors to get a return, with increasing returns for increasing outcomes of the project. Whether the project has achieved this outcome or not will not be known until 2014, although the first year report suggests that they are on their way to achieving this goal.

Charity and Social Investment In the Future

Scope is undertaking this programme with Investing for Good, who provide social investment services, who have stated that they are already speaking to other charities about this kind of funding, which could become more mainstream in the future.

Social Finance, the UK organisation that aims to facilitate social investment, is working on more social investment bonds, such as to improve the lives of vulnerable children. The “Big Lottery Fund”, who invest in Social Finance, have also announced their own £6m to fund more social investment, Deutsche Bank has also announced a £10m social investment fund, and Big Society Capital,a government initiative to lend to social finance providers , is set to launch in 2012.

The idea has also spread to the US, where they are called “Pay for Success Bonds”, which is currently being assessed for potential projects and outcomes.