This is the belief of Bertrand Gacon, head of impact investing and socially responsible investment for Lombard Odier.
He describes impact investing as: “An investment approach with the twin objectives of generating a financial return and bringing positive solutions to concrete environmental and social issues.
“It is the next evolution of responsible investing.”
But if you’re thinking “Ten years ago, this term didn’t even exist”, you would be right. Its provenance has been ascribed to Antony Bugg-Levine, chief executive of the Nonprofit Finance Fund (NFF).
Mr Bugg-Levine had formerly been managing director at the Rockefeller Foundation and during a meeting in 2007, the phrase ‘impact investing’ was coined.
Sustainable/responsible investors want their investments to make a difference in the world Jon HaleAccording to the Global Impact Investing Network (Giin): “Impact investments are investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.”
Impact investments do not screen out certain ‘unethical’ stocks, such as tobacco or arms manufacturers.
Instead, Mr Gacon says: “Investors mobilise their capital to invest in the world’s most effective social businesses”.
For example, the NFF has now helped dozens of social and community enterprises, as well as delivering returns to philanthropic investors.
Pay for Success/Social Impact Bond Initiative |
In 2010, the US introduced the Pay for Success (PFS) initiative, followed closely by the UK. The UK was the first to launch a project, in 2010, and the US saw its first project launch in 2012 - and the US has been quicker to develop new projects over the years. By early 2016, 10 projects have launched, one project has completed, and there are more than 50 projects in development across the US. In a Pay for Success deal, private investors pay for preventative or interventional social services up front. If these services deliver their intended results, governments reimburse the investors with a return on their investment, while saving money on what they otherwise would have spent. For example, programmes can include getting young people into work, or preventing recidivism among people leaving prison. |
Difference
But what makes impact investing different to investing in any entrepreneurial business? Why bother considering impact investing instead of, say, investing generally in small start-ups?
Jon Hale, head of sustainability research for Morningstar, comments: “Impact investing is often used to refer to targeted investments in private equity or bonds that help finance companies or projects designed to generate social and/or environmental good.
“But the use of the term has started to broaden into a more general description of the purpose behind sustainable and responsible investing.
“Rather than simply wanting to align their investments with their values, sustainable/responsible investors want their investments to make a difference in the world.”
How popular is impact investing?
Despite many advancements made over the past 30 years to encourage responsible investing, both in the UK and overseas, for retail and institutional investors, it often still remains on the periphery of mainstream investment advice.
There have been many iterations of ‘responsible investment’ - such as socially responsible investment (SRI), ethical investment, green funds or screened funds.
But while many of these have found their way into the Investment Association’s sector lists of funds for retail investors, none of these quite match the latest variation in ‘responsible investing’, which is impact investing.
Amanda Young, head of responsible investing for Standard Life Investments, says: “Impact investment means making investments into companies and organisations with the intention of generating social and or environmental impact alongside financial returns.
“It is generally accepted investments can target a range of financial returns; we would argue investors do not need to give up any alpha as a consequence of investing for impact.”
She highlights four core characteristics of impact investing:
■ Intentionality - it is the investors’ intention to have a positive social or environmental impact through investing in impact stocks. It is not to be an unintended consequence.
■ Investment with return expectations - investors expect to generate a financial return. This differentiates impact investing from philanthropic investing.
■ Have a range of return expectations depending on underlying investments (equity only, fixed, venture capital, etc).
■ Impact measurement - important part is the commitment of the investor to measure and report on the social and environmental performance of the underlying investments.
America the brave
While the term may be relatively new, the merits of impact investing has a longer history. The US has sought ways for mass affluent people to get involved in philanthropy, whether through family foundations or donor advised funds (DAFs).
Impact investors invariably intend to achieve social or environmental goals. They are, by definition, socially motivated. Paul Brest and Kelly BornFor example, the Case Foundation was created by Jean and Steve Case in 1997 with a view to making such investments.
Over the years, they have used their investment capital, networks and experience in pursuit of a singular mission – to invest in people and ideas that, the Cases believe “can change the world”.
In an academic essay by Paul Brest and Kelly Born, published in 2013 in the Stanford Social Innovation Review, American investors were encouraged to assess the philanthropic and the pecuniary benefits of impact investing.
The essay stated there could be two fields of impact investment:
■ Concessionary investment - which sacrifice some financial return to achieve social benefit.
■ Non-concessionary investments, which expect risk-adjusted market returns or better.
For most investors seeking a way to make their money work for them and for good, the anticipated outcome would be to achieve risk-adjusted market returns.
However, the study stated impact investors were, like philanthropists, primarily driven by the motive of making their money work for the betterment of society.
The study said: “Impact investors invariably intend to achieve social or environmental goals. They are, by definition, socially motivated. Their goals may be as specific as providing anti-malaria bed nets to residents of a region in Africa, or as general as doing environmental good.
“In contrast, socially neutral investors are indifferent to the social consequences of their investments.”
Early-stage non-concessionary investment in the US has done well for some of these “socially motivated” investors.
Several impact investment-led businesses have become significant success stories, such as Elon Musk’s Tesla corporation or ethical spectacle maker Warby Parker.
UK success
If one thinks this is a US success story, think again: the UK is the world leader in social impact investing.
According to Social Finance’s global database, the UK has issued 31 social impact bonds (SIBs), out of a global total of 61 (and rising).
So far, the UK’s impact investment projects have raised £35.3m in capital and investors putting money into these products have helped to improve the lives of 46,090 people in the UK.
Breakdown of UK social impact investment bonds by project type
Source: Social Finance
Projects include an eight-year child and welfare project in Essex, which raised £3.1m to help young people and children in care receive proper therapy so they can spend fewer days in care, improve their school performance, enhance their wellbeing and reduce any reoffending.
The cost savings to Essex County Council as a result will go towards the returns, which are expected to be between 8 per cent to 12 per cent a year.
Obviously people who are concerned about getting children out of the care system and into self-sustainability could simply donate or set up a charitable trust or foundation.
But impact investing is not about giving; it is about making your long-term financial plan work for you as well as for others. Most people already give; this is going one step further.
This is why Daniel Brewer, managing director of social impact investment company Resonance, says impact investing is not just about investing into enterprises directly or indirectly through a fund, for example.
Instead, he says the investment is “focused on achieving an intentional social impact, while also achieving a positive financial return”.
