January 11, 2017
Impact investment and social finance have experienced impressive growth over the past few years, with the UK in many respects being at the forefront of global efforts to turn the nascent sector into an established and leading part of the investment industry. Yet despite the substantial contributions made by social investors and the promising support given by the Government, it still remains relatively unknown and underrated. With political discourse focusing once again on living standards, skills and inclusive growth, the time for impact investment has surely arrived.
While many people may already be suffering from “Brexit fatigue”, the result has arguably forced us all to reevaluate and reexamine the state of the British economy and society, bringing stubbornly persistent yet often overlooked problems to the forefront of political debate, such as under-investment and the growing skills crisis.
It is not simply a matter of ensuring Britain can prosper and thrive outside of the EU, equally important is establishing a framework that best mitigates the potentially destabilising effects of withdrawal and prevents evident disadvantages from being exacerbated. Targeting investment (both public and private) towards long-term and financially sustainable goals is of course essential post-Brexit, but so too is making sure that entrenched social issues are tackled and resolved.
One may not see the direct correlation between Brexit and impact investment, but in many ways the risks that Britain faces over the coming years can also be opportunities for both the Government and the business community, and the tenets behind impact investment and social finance should be fully utilised to spur this targeted growth in the very places that will need it most.
“Profit with Purpose” may be viewed by cynics as a hollow PR slogan (enticing, but ultimately meaningless), but for a social or impact investor, it’s the very reason behind what they do – literally, putting their money where their mouth is.
The term ‘impact investment’ is a relatively new one, supposedly coined by the Rockefeller Foundation in 2007. Although an emphasis on addressing social and environmental issues has been a priority for many businesses and governments alike for some time, impact investment differs greatly in that its entire premise is dedicated towards generating positive social or environmental outcomes at the same time as securing robust financial returns; an investment class in its own right. According to the Global Impact Investing Network’s (GIIN) latest Annual Survey, investors committed more than $15.2 billion to impact investments in 2015 and were forecast to increase this to $17.7 billion by the end of last year.
“The UK has proven itself to be a leading force behind this growth and is well-placed to cement its position as a global centre of impact investing and social finance.”
Admittedly this is a mere drop in the ocean of the multi-trillion-dollar global investment market, but billions of dollars explicitly committed to environmental and socially positive outcomes reflects a promising trend and is certainly something that should be welcomed. While it should be noted that social investment and impact investment do differ in their remits – the former unsurprisingly focuses on social issues and is often concentrated in the charity and civil society sectors, while the latter encompasses multiple sectors in need of positive financial and environmental change – collectively they do represent a clear preferential shift towards investing for positive outcomes; not just for the investors’ bank account, but for wider society too.
Indeed, the UK has proven itself to be a leading force behind this growth and is well-placed to cement its position as a global centre of impact investing and social finance. In its first comprehensive study into social investment in Britain, Big Society Capital, the independent organisation set up by the Government in 2012 to help facilitate the growth of the sector, estimates that over 3,500 individual investments have been made in the UK, collectively worth over £1.5 billion at the end of 2015. Of this, 70 per cent has been committed to charities and social enterprises, with the remaining 30 per cent dedicated to profit-with-purpose companies and other social enterprises.
On a broader scale, impact investment as an asset class has gone from strength to strength and is no longer considered to be the exclusive home of socially-conscious angel investors or entrepreneurs with an environmental agenda. Over the past few years established firms in the banking, asset management and private equity industries have acknowledged the huge potential of impact investing, with BlackRock, Goldman Sachs and Bain Capital being notable examples of companies that have launched dedicated impact funds. This interest is expected to continue, with JP Morgan estimating that the impact investment market could grow to around $1 trillion by 2020. The investment bank itself has become strongly committed to the impact investment market, noting:
“Beyond being the right thing to do, addressing social and environmental challenges also fosters the economic growth that is core to our business as a global financial institution.”
Much of the enthusiasm can be attributed to growing investor demand over the last five years, particularly amongst younger investors and so-called millennials. According to a 2013 study conducted by the World Economic Forum, millennials stated that one of the main priorities for any business should be to improve society. It also found that millennials were more likely to invest in (and just as importantly, work for) companies with a clear social or environmental mission. One could argue that impact investment is not only a reflection of changing preferences (increasingly so as millennials become a dominant investor cohort over the next decade), but also a tangible method by which we can address longstanding problems and still secure market-rate returns – put simply, a policy win-win.
Indeed, UK-based investment companies are leading the charge. Cheyne Capital, for instance, provides properties for charities and social enterprises delivering housing and support services. Its Social Property Impact Fund is explicitly focused on investing £100 million (with a target of £300 million) into housing to help address a range of social issues, including the provision of elderly care and affordable housing for people with disabilities or on low incomes. One would not naturally associate such large scale investments with issues such social deprivation or homelessness, and yet Cheyne is proof that social investment can and does generate stable returns while creating positive outcomes.
Given that Theresa May has renewed the Government’s ambition to create an economy “for the many, not just the privileged few”, including an emphasis on the need for inclusive growth with shared prosperity, the social and impact investment sector is arguably well-placed to take the lead in turning these words into action. From providing affordable housing in deprived areas and renewable energy projects in rural communities, to funding training and education schemes for young people, social and impact investors are already tackling the very issues the Government has claimed it wishes to address over the course of this Parliament. Taking into consideration the ongoing budgetary pressures and uncertain economic climate, the impact investment sector thus has the potential to complement policy objectives with clear, tangible outcomes.
While the Government has shown strong support, much more could be done to upscale the sector and provide it with the firm backing it deserves. Rob Wilson MP, Parliamentary Under-Secretary of State for Civil Society and the government stakeholder with responsibility for social investment, has been a reliable backer and demonstrated genuine passion for the sector over the past three years. Yet broader awareness of impact and social investment still remains unnecessarily low, not only within the investment and business community but across the political spectrum too.
The Labour Party under Jeremy Corbyn MP has made it quite clear it views the investment community with at best suspicion, and at worst hostility. Yet what social and impact investors set out to achieve is precisely what Labour claims to represent: the diversion and targeting of resources towards those people and those social issues most in need of political attention and economic support. If indeed the official Opposition wish to regain some relevance within the private sector and business community, adapting its approach to investment policy to acknowledge and support impact investment could be a logical first step. It would simultaneously enhance Labour’s business and investment policy platform whilst bringing the party’s values into 21st century Britain.
The Government has clearly seen the potential of social investment, both in policy terms and as a means of outflanking Labour on social issues. As a concept, it chimes perfectly with the Conservatives’ objective to create an inclusive economy and become the true party of the so-called “Just About Managing” (JAMs) of society, at the same time as it enables fiscally-restrained departments to transfer some responsibility to charities, social enterprises and impact investment firms. This should not necessarily be seen in a negative light, or as a cynical attempt to relinquish accountability; social enterprises and impact investors have the expertise, passion and drive to upscale. The creation of the Inclusive Economy Unit within the Office of Civil Society, as well as the announcement in the Autumn Statement of an £80 million Life Chances Fund, are also promising signs that the Government does indeed intend to put policy into practice. But it will of course remain to be seen whether these will produce the returns that are hoped for.
As mentioned, the issue is not necessarily capacity but wider awareness of the sector and appreciation of its potential. Although Social Impact Bonds (SIBs) were introduced to the UK in 2010 – the first of their kind in the world – uptake has been underwhelming and many social sector organisations and investors remain unaware of their existence or applicability. The launch of the Government’s 2016 Social Investment Strategy showed promise, with Rob Wilson MP writing:
“Social investment can accelerate the growth of new businesses, transforming the impact of our public services, and support stronger communities to tackle the social challenges that they face. It has the power to transform lives and I am more committed than ever to helping social investment achieve its full potential.”
Yet if the Government is serious about accelerating growth in the market, it must do more to unlock its full potential. Extending the 30 per cent deduction in the Social Investment Tax Relief (SITR), for instance, could help encourage further investment into social enterprises. Raising the profile of the Access social investment foundation and Impact Readiness Fund could similarly aid organisations and social enterprises seeking capital and sector expertise.
With the Government understandably preoccupied with forthcoming Brexit negotiations, it may appear indulgent to demand that more political attention be paid to social investment. Yet given that the Government itself has acknowledged the need to “make the most of Brexit” and use it as an opportunity to make Britain a more inclusive, prosperous and competitive place to live and do business in, spurring on the social investment sector and supporting impact investors seems to be a logical extension of this. It is promising to see the incorporation of social investment into the international GREAT Britain campaign, but the potential of the sector to solve entrenched social and environmental problems while fostering a healthy investment environment needs to be even more widely promoted by policymakers. What better way to prove that Britain can prosper and tackle these issues than by making it the global hub of social and impact investment.