Big Society Capital launched an ‘open conversation about transparency’ in June 2015. It is “proposing a range of additional measures across three areas – as an investor, a market champion and as a corporate ourselves to increase our transparency. We hope these measures will improve understanding of BSC as well as the wider social investment market. Additionally practising better transparency could help increase standards across both the social and financial sectors.”
Engaging with Big Society Capital on social investment issues is often challenging as the organisation’s roots lie in venture capital and investment banking principles, rather than the values and ethos of the third sector. This means that it grounds and structures discussions using a different logic and a value set based on neo-liberal economics. Its rationales for transparency are focused on efficiency and effectiveness, without mentioning source of funding, stakeholders, ethics, mission, values, fairness or reputational risk.
The Global Alliance for Banking on Values places transparency as its key differentiator from the mainstream and as the most important driver of change in finance. An as yet unpublished working paper submitted to the UNEP Inquiry into the design of a sustainable financial system also identifies transparency as one of the core values that should be at the heart of any future financial system. At one level, transparency is about explaining the business, presenting unbiased information which allows for informed and responsible choice in decision making. However, transparency also relates to how Big Society Capital is run, for example, not just by noting the highest salaries but also having a ratio between highest and lowest salaries, and gender and minorities comparisons. Genuine transparency can also be improved by including customers in governance and operating systems.
BSC presents as one organisation, when in fact it is part of a multi-company structure headed by a trust and including at least one charity. The Big Society Group consists of Big Society Trust, Big Society Capital Ltd and Big Society Foundation. Big Society Trust is a (not-for-profit) company limited by guarantee with the object of promoting and developing the social investment market in the UK. It is the holding company for Big Society Capital Ltd, a private company limited by shares. Big Society Foundation was established to take charitable donations but appears to be dormant currently. The Access Foundation is a charity that was established recently as a partnership between the Cabinet Office and Big Lottery as a sister organisation to Big Society Capital Ltd.
Rather than concentrating initially on transparency practice, it is important to focus on the rationale for transparency. The Big Society Group was established, not for profit, in order to use funds from dormant bank accounts to deliver societal benefits (with funds from a small group of banks – the Merlin banks). In other words, it is using money that belonged to ordinary members of the public who are ultimately, therefore, BSC’s primary stakeholders. Big Society Capital should report to the public, so that we know what it is spending our money on. The language of public duty and accountability has been missing from the BSC narrative to date.
There are also other reasons for transparency that support BSC’s emphasis on efficiency and effectiveness. Transparent and unbiased information is what makes markets work most efficiently. It also acts as a driver for BSC itself, in that it supports a robust challenge function. This helps to reduce or eliminate displacement, as actual or potential market providers can see whether there is an opportunity for them to enter or expand into markets. Transparency also reduces the risk of edging into State Aid problems, as BSC invests in private, for profit organisations.
Big Society Capital hopes that transparency can “improve understanding of us”. Claiming that transparency was one of BSC’s founding principles is not borne out by experience. BSC’s reputation has not been helped by a private sector ethos that hyped the potential market size and growth (Boston Consulting Group and the Young Foundation; Lighting the Touchpaper; Nov 2011). In earlier years, BSC in its reporting also “muddled” investment amounts committed and invested and rejected my early requests (June and Sept 2013) asking for information on which of the listed in its first annual report had actually been drawn down and how much of those investment amounts had been drawn down to date. Rather than posing as a market leader on transparency, it is more than time for the organisation to live up to its principles.
The UK Green Investment Bank has produced (March 2015) the Green Investment Handbook. This is its manual setting out practical tools it uses to assess, monitor and report the green impact of every investment it makes. By publishing it to share the bank’s experiences, it seeks to start a discussion across the investment community about how green impact assessment can be improved. BSC’s role in growing the market can create a conflict of interest, where social investment may not be the most sensible option available in a particular case. Big Society Capital and the Green Investment Bank were founded in the same year. Publishing a manual similar to that of the GIB, providing clear and transparent information on the investment process, would help BSC deflect some of the criticism levelled at it and reduce the information asymmetries.
What forms of transparency are now required?
The following are essential:
Big Society Capital Level
- Investment policies, write-off and write-down policies. Redline areas (geographical, sectoral and by issue) where BSC will and will not lend or invest and the policy context for these decisions;
- Board minutes;
- Average and median loan/investment sizes, in total, by sector and by region;
- Available to invest/lend; lent or invested;
- Write-off and write-down rates in total, by loan size, investment type, sector and region. Loans and investments more than 30 days in arrears;
- Annual and investment term rates of return in total, by sector and by region;
Social Investment Financial intermediary Level:
- Amount committed; amount drawn to date; loan/investment terms, duration and interest rates; investment terms and proposed exit strategy if appropriate;
- loans/investments written off;
Frontline level data
- Non-anonymised deal level data as above (as currently published by a range of established social investment intermediaries). This simply requires the customer’s agreement and has been standard for many SIFIs for years;
- Greater clarity of impact criteria to include environmental and economic as well as social impact. Openness to adapt this in light of dialogue with the third sector;
- Predicted impact at time of investment and actual impact by investment;
- Explanations of over/under-delivery, feedback to others in the same sector and clarification of how actual results will inform future predictions and investment criteria;
- AGM to be held in public with citizen participation;
- Big Society Trust board to include two citizens’ representatives;
- Board minutes to be published;
- Publish all salaries, including gender and minority comparison table. Create a fixed ratio between highest and lowest salary;
- Publish contractor and consultant policies and ensure that tenders are advertised publicly, so that a wider range of organisations have the opportunity to bid for work;
Finally, Big Society Capital should be cautious of claims to be an exemplar of transparency, in the context of its third sector market, rather than investment banking. Better to walk the walk first.
Director, Small Change
13th August 2015