Reforming the regulatory framework for charities to allow them to invest more freely in schemes to achieve social good are among measures that could help unlock an extra $1tn (£615bn) of social investment funds around the world, according to a new report.
The document, Impact Investment: The Invisible Heart of Markets, has been produced by the Social Impact Investment Taskforce, which was set up under the UK’s presidency of the G8 in 2013.
The group, chaired by Sir Ronald Cohen, who was a co-founder and first chair of the social investment wholesaler Big Society Capital, recommends reforming the legal and regulatory frameworks for charitable organisations to help them "embrace entrepreneurial risk-taking and innovation where it furthers their mission".
The report says that new legal forms should be created that allow "impact-driven businesses" to lock in their social mission and remove regulatory obstacles around fiduciary duty.
The report says that pension funds and providers of tax-advantaged savings schemes should be encouraged to include impact investments in their portfolios, and that tax incentives for investment in social enterprises and charities should be expanded.
It says that a kitemark for impact investments products should be developed to make them stand out in the marketplace, and that a senior government minister should be appointed to champion impact investment.
It also recommends that the measurement of social impact of schemes should be standardised and appear alongside financial performance metrics.
Social impact investments are defined in the report as those that intentionally target specific social objectives along with a financial return and measure the achievement of both, such as social impact bonds.
The working group behind the report includes government officials and representatives from the social and private sectors from the G7 group of countries, the EU and Australia.
Advisory boards for each of the eight countries drew up reports for their own territories, which contributed to the overall report and are also published today.
The main report lists a number of recommendations that could help to dramatically increase the size of the global social impact investment market.
"The world is on the brink of a revolution in how we solve society’s toughest problems," it says. "The force capable of driving this revolution is ‘social impact investing’, which harnesses entrepreneurship, innovation and capital to power social improvement."
But in many countries, "various legal or regulatory impediments hold back the development of impact investment", it says.
"Key among these is the definition of the duties of trustees of charitable foundations and those of pension funds. There is a need for a clear 21st-century definition of these responsibilities. In some places, this will require legislative or regulatory changes. In others, it will require the clarification of existing laws and regulations."
The report says there is confusion among some charitable foundations around the world as to whether they are permitted to invest in impact assets.
"A key recommendation of the taskforce is to give foundation trustees the freedom to invest in impact assets and, where possible, a clear signal that allocating some of an investment portfolio to impact investment is positively desirable," it says.
The report produced by the UK advisory board, which was chaired by Nick O’Donohoe, chief executive of Big Society Capital, calls for a new culture of government procurement that would encourage innovation and would open up more opportunities for social organisations that need social investment.
It also calls for greater disclosure by financial institutions of their lending and investment both to social organisations and in areas of greatest deprivation.
In a statement, George Osborne, the Chancellor of the Exchequer, said the main report set out a clear plan of action for governments and he looked forward to implementing many of its proposals.
"This is a compelling and comprehensive report," he said. "It not only demonstrates the UK's leadership in the crucially important issue of social investment, but it articulates what still needs to be done to unleash new funds."
Cohen said: "This is not about increasing or reducing public expenditure, but helping government to benefit from innovation and private sector capital in order to achieve more impact with the money it has. In driving the achievement of impact, social impact investment harnesses the forces of entrepreneurship and capital and the power of markets to do good. It brings the invisible heart of markets to guide their invisible hand."