The government has disproportionately focused on social impact bonds and should use other forms of alternative finance that have more impact across the charity sector, according to the House of Lords Select Committee on Charities.
In its report Stronger Charities for a Stronger Society, the committee says that the expected results from SIBs have "yet to materialise" and, though the government should make them work better, future public funding should focus on other financial products that apply to a wider range of charities and beneficiaries.
The government had predicted that the SIB market would be worth £1bn by the end of this decade, but they had attracted only had £14m of investment by the end of 2015.
The report says that, although SIBs can be a "useful tool", their potential as an alternative finance option for charities is limited because they are relevant only "where they produce a saving that can be transferred to a private investor".
The report welcomes the government’s attempts to make social investment more accessible to small and medium-sized charities through Access – the Foundation for Social Investment, but it warns that social investment is "unlikely to reach its potential unless further resources are put into the investment-readiness of smaller charities".
Commenting on measures to reduce transaction costs for social investment and promote the market to investors willing to accept lower rates of return, the report says the government and sector leaders can do more to address the reasons behind high-transaction costs.
Investors should also be encouraged to "have more realistic expectations of the potential for returns from social investment", the report says.
In a committee hearing last year, Sir Harvey McGrath, chair of the social investment wholesaler Big Society Capital, told peers that expectations for social investment "have been overstated in the past", but it was an important and growing part of the overall funding mix.
Commenting on the findings, Peter Holbrook, chief executive of Social Enterprise UK, said: "While we support government initiatives around social investment, there are more important sources of funding that need to be looked at and structural inequalities that must be challenged in order to support charities and social enterprises to have a greater impact.
"We need to open up markets to civil society organisations by addressing barriers to procurement and market access, and tackle the wider issues of market failure that result in more inequality and social problems. These include corporate tax avoidance and the concentration of power in public sector monopolies."
Cliff Prior, chief executive of Big Society Capital, said: "Many of the recommendations echo what we have heard from our stakeholders. Investment-readiness programmes are of enormous importance to charities and social enterprises, while simplifying and standardising transactions could help reduce costs.
"But there is still more work to be done. We hope that our new strategy, launching later in the year, will provide greater focus and enable more charities and social enterprises to access the repayable finance they need to tackle important social issues."
HM Revenue & Customs
The committee’s report also welcomes changes to the Gift Aid Small Donations Scheme and recommends that the government should work with HM Revenue & Customs to ensure charities are high on the agenda when future VAT and national living wage changes are discussed.