Retail investor interest in impact investing

In 2015, a 68-page report from the Organisation for Economic Commerce and Development - Social Impact Investment: Building the Evidence Base - explored the metrics behind social impact investment across the globe.

It looked at how foundations, family offices and institutional investors were putting money into impact investment, and how this could help emerging economies globally through financial support at a microcosmic level.

The report highlighted these “mainstream investors” tend to focus on investments with at “least a market risk-adjusted financial return due to fiduciary responsibilities”.

While impact investment has been the domain of the institutional and uber-wealthy, the OECD report also highlighted the need to provide “practical steps to be taken in order for mainstream investors to engage in social impact investment”.

It is starting to gain traction with retail investors who want to invest their money in order to make a difference as well as receiving some financial benefit. Lisa Beauvilain

Retail interest

Yet while impact investment might seem like something for institutions with huge amounts of money to put into such enterprises, there are more retail investors taking an interest in this approach than you might think.

According to Daniel Brewer, managing director of social impact investment company Resonance: “By volume, retail impact investors far outnumber institutional impact investors.

“There are many thousands who have made impact investments but the total quantum is much smaller than the total quantum of institutional impact investment. Both continue to grow in volume and scale.”

The number of retail investors opting for impact investing is still growing, says Lisa Beauvilain, director and head of ESG and sustainability for Impax Asset Management.

She explains: “Impact investing may have had its roots in philanthropy and was pioneered by ultra high net-worth investors and family offices, but it is starting to gain traction with retail investors who want to invest their money to make a difference as well as receiving some financial benefit.”

Indeed, interest is particularly growing among the younger investor.

Bertrand Gacon, head of impact investing and SRI for Lombard Odier, comments: “It is still a fairly new concept but we’ve seen interest from private clients and pension funds alike.

“Driving social change and generating returns in this way feels natural to Millennials in particular.”

Amanda Young, head of responsible investing for Standard Life Investments, agrees. She says: “The market is responding to the changing requirement of investors and the rise of the Millennials, in particular, highlighting the different motivations from their Baby Boomer parents, and are more likely to want to align their social values with their investments.”

Cost

However, despite the growth of impact investment in the UK, even the more accessible investments such as social impact bonds and private equity can be costly.

Mr Brewer says: “Some social impact bonds have been backed by individuals but these are sophisticated products designed for sophisticated clients.”

For example, in 2013, Columbia Threadneedle launched its Social Bond fund, in association with Big Issue Invest, the social investment arm of charity The Big Issue.

Its institutional share classes carries a minimum investment of £5m; retail or ‘Z’ share classes carry a minimum investment of £1m.

The fund has garnered £97.2m in assets under management as at the end of July 2016.

While some family offices and wealth management groups can set up a nominee account, meaning interested investors can pool together smaller amounts of capital to invest through the nominee account, this is still too pricey for the average investor.

Yet the risk metrics - rated just three out of seven by Morningstar, with a 3 per cent distribution yield - would make this a good addition to a wider retail investment portfolio, according to investment advisers FTAdviser spoke to. And it is Isa-qualifying.

Columbia Threadneedle Social Bond Fund NAV since launch

So if the price tag is out of reach for most retail investors, but the interest is high and still growing, what can the industry do to meet this demand?

Jon Hale, head of sustainability research for Morningstar, comments: “Most retail investors do not have enough capital to invest in a private placement impact investment.

“To address retail interest in the concept of having an impact with their investments, we may see asset managers developing new impact-oriented funds which invest in public equities and bonds, or simply doing a better job explaining to investors the impact of existing sustainable or responsible funds.”

According to John Ditchfield, partner at Castlefield Advisory Partners, education and availability of information can also be an issue.

He says: “Complexity is certainly an issue for advisers and their clients. Ideally, we would have a conventional collective working to aggregate some of the investment opportunities in this area.

“Castlefield is undertaking some work at present with a view to developing such a fund.”