Scottish National Investment Bank: Fairer Scotland Duty assessment

Executive Summary

About This Fairer Scotland Duty Assessment

1. The Scottish Government has committed to establishing the Scottish National Investment Bank (the Bank) which will be operational investing in businesses and communities across Scotland in 2020. The creation of the Bank will deliver an institution that can boost Scotland's economic performance and realise the Scottish Government's ambitions for the economy by providing patient capital to finance growth. The Bank's investment decisions will reflect financial, economic and wider social and ethical interests in order for it to have the desired impact, contribute to inclusive growth and fulfil the objectives set for it.

2. As set out in the Implementation Plan, the role of the Bank is to "…provide finance and act to catalyse private investment to achieve a step change in growth for the Scottish economy by powering innovation and accelerating the move to a low carbon, high-tech, connected, globally competitive and inclusive economy."^[1] Understanding success within the context of this vision mean that the Bank cannot be judged solely on the basis of financial returns but that its performance must also be assessed against social and environmental returns as well as the wider economic benefits arising from the Bank's activities. In that way the Bank will be an institution that is both commercially-minded and publicly accountable and one that is capable of investing to positive effect in communities and businesses across Scotland.

3. The Fairer Scotland Duty, Part 1 of the Equality Act 2010, came into force in April 2018. The Duty places a legal responsibility on public bodies in Scotland to pay due regard to how they can reduce inequalities of outcome arising from socioeconomic disadvantage. Interim guidance on applying the Fairer Scotland Duty was published in March 2018 as part of a three year implementation phase. This is to allow consideration to be given to any adaptations that may be necessary so that public bodies understand their responsibilities arising from the Duty and implement them effectively.

4. To fulfil their obligations under the Duty, public bodies must be able to demonstrate that they have actively considered how they can reduce inequalities of outcome arising from socioeconomic disadvantage in any major decisions that they take. The scope and scale of the Bank's activities give it the levers to have a direct impact on reducing socioeconomic disadvantage in Scotland. As such this FSDA will actively consider what opportunities are available to the Bank in reducing socioeconomic disadvantage rather than focusing on how it can address those inequalities of outcome that arise from the experience of poverty. These inequalities of outcomes will be addressed by reducing socioeconomic disadvantage directly.

5. Establishing the Bank is a significant undertaking with a number of key strategic decisions involved in its creation including setting missions, producing an investment strategy and developing an ethical statement. The content of both the investment strategy and ethical statement are a matter for the Bank itself. Moreover, work is ongoing to develop missions for the Bank and the Fairer Duty Scotland will be applied to the missions-setting process. This iteration of the FSDA will centre on the decision to establish the Bank, as such this FSDA gives guidance to the Scottish Government on how it can optimise the Bank towards reducing socioeconomic disadvantage during the build phase. It also sets out evidence for the Bank to consider once it is operational on how its activities can be conducted in a way which contributes towards reducing socioeconomic disadvantage.

6. A variety of methods have been used to inform the development of this FSDA including engagement with experts and stakeholders, the results of both public consultations on the Scottish National Investment Bank, the outcomes of the Economy, Energy and Fair Work Committee's scrutiny of the Bill as well as extensive desk-based research. In addition, an expert Panel including representation from key stakeholders was convened on two separate occasions to provide their perspective on how the Bank might contribute to reducing poverty in Scotland.

7. The outcomes of this Assessment demonstrate that the Bank has considerable potential to reduce socioeconomic disadvantage but finds that active steps must be taken by the Scottish Government during the build phase and by the Bank itself once established, in order, to realise this potential. It is important, however, not to place unrealistic expectations on the Bank regarding the impact it can have on reducing socioeconomic disadvantage. By working in conjunction with public sector partners and within the context of existing Scottish Government policy, the Bank can make a tangible contribution in this regard in its role as commercial lender but it is by no means a challenge that the Bank itself can solve. The Bank must have structures that enable it to evolve its response to reducing socioeconomic disadvantage as it matures as an institution and should be given the time and space to do this. It is, however, important to note that the Bank must operate on a commercial platform if it is to be financially viable and anything it does to address socioeconomic disadvantage must take this into account.

8. This Assessment concludes that the Bank can contribute towards reducing socioeconomic disadvantage by:

• improving access to finance for socioeconomically disadvantaged entrepreneurs;
• improving access to finance for firms with characteristics that contribute to poverty reduction; and
• introducing loan covenants.

9. In addition, this Assessment makes clear recommendations to the Scottish Government on steps that it can take in the establishment of the Bank to best support its contribution towards reducing socioeconomic disadvantage.

Improving Access To Finance For Socioeconomically Disadvantaged Entrepreneurs

10. Establishing a successful business can offer a potential route out of poverty for those who are socioeconomically disadvantaged. Where a business is successful, studies have found that it translates into increased income, more flexible working conditions, more stable employment and enhanced job satisfaction. Socioeconomically disadvantaged entrepreneurs experience specific challenges when establishing a business, not least in accessing capital. This FSDA has identified a range of barriers that socioeconomically disadvantaged entrepreneurs in Scotland face in accessing credit from private lenders which means that viable businesses aren't getting the funding they require.

11. This FSDA concludes that the Bank, as a 'cornerstone in Scotland's economic architecture', can play a key role in addressing this market failure. There are several opportunities for it to do so such as by contributing to a clearer understanding of the gap in provision for credit to socioeconomically disadvantaged entrepreneurs and considering its role in increasing the proliferation of financial products aimed at addressing the barriers to accessing finance identified within this Assessment. It further concludes that the Bank should consider how it can work with partners across the public sector to build increased financial awareness and business skills among entrepreneurs and potential entrepreneurs in Scotland.

Improving Access to Finance for Firms with Characteristics that Contribute to Poverty Reduction

12. Research has identified specific firm-level characteristics that have an inherent impact on reducing poverty, specifically microbusinesses and firms that use non-pyramidal company ownership models. Research shows that these businesses also experience distinct challenges in accessing the credit they require compared to larger firms and those which use more established company models.

13. This FSDA concludes that further analysis into the gap in provision of finance in Scotland for microbusinesses and companies that democratise the economy should be conducted. The Scottish Government will publish its findings on Access to Finance for SMEs in early 2020 and the Bank should factor these into how it works with partners across the public sector to reduce the barriers that microbusinesses and companies that democratise the economy face in accessing appropriate forms of finance as identified within this FSDA. This includes identifying specific financial instruments to overcome these market and institutional barriers as well as actions to reduce borrower discouragement. The Scottish Government will also consider what actions it should take in light of the review's findings.

Introducing Loan Covenants including fair work first

14. Although not every business that the Bank will invest in will have inherent characteristics that reduce socioeconomic disadvantage as a matter of course, opportunities exist for the Bank to influence the activity and behaviour of those firms that it invests in through loan covenants. These are already used by banks and other financial institutions to attach conditions designed to protect or enhance the value of their investments.

15. There are opportunities to build existing Scottish Government policy into the operation of the Bank through introducing Fair Work First to its commercial investments. In addition, the Assessment concludes that the Bank may wish to attach community benefit clauses to high value investments while also placing a requirement on firms that it lends money to join a business network. Research has revealed that attaching conditions to investments is a significant source of borrower discouragement and so the Assessment emphasises the importance of adopting a tailored approach to introducing loan covenants due to concerns that businesses will be deterred in seeking credit from the Bank.

Building Poverty Reduction into the Bank's Governance

16. The Bank's governance structures must also reflect a commitment to reducing socioeconomic disadvantage to ensure that this is built into the foundations of the Bank instead of being an additional element of its activity. This FSDA recommends specific steps that the Scottish Government must take in building the Bank to create an institution that can make a tangible contribution to reducing socioeconomic disadvantage in Scotland. These steps include amending the ancillary objects contained within the Scottish National Investment Bank Bill (the Bill), developing metrics to assess the Bank's contribution to reducing socioeconomic disadvantage and including representation from groups able to reflect the voice of those with lived experience of poverty on the Bank's Advisory Group.