Given the impact investment market is relatively young, how can investors get involved?
In 2000, the government set up the Social Investment Task Force and, according to Amanda Young, head of responsible investment for Standard Life Investments, since then, successive UK government have looked to introduce new initiatives to encourage social investment.
She comments: “This has included the creation of the Commission on Unclaimed Assets, leading to the pledge to create the Big Society Bank.
“In April 2012, Big Society Capital (BSC) was launched at an event hosted by the London Stock Exchange.
“BSC is an independent social investment institution which provides finance to organisations that support front-line social sector entities to help them grow, and was the world’s first social investment institution of its kind.”
Open-ended funds
But even before the government boosted impact investment, retail investors interested in investing in line with their principles had headed for ethical or socially responsible investment (SRI) funds.
While many of these carry small minimum investment requirements of £1,000 or even less through monthly regular payments, run by well-known fund management companies with experienced teams, not all of these funds would fit the impact investment category.
The UK has a number of platforms working hard to make impact investing more readily accessible, such as the Social Stock Exchange and Ethex John DitchfieldThis is because most of these simply screen out stocks, and they do not carry the attractive tax breaks that other forms of direct impact investing can provide.
Over the past few years, many UK investors had sought some ethical investments in tax-efficient enterprise investment schemes (EIS) which focused on renewable energy companies.
This could be argued to have been ‘impact investing’ as investors could see the results of their investment, such as the development of wind farms or fields of solar panels being set out, as well as getting a return on investments.
Previously promoted heavily by the government to get more people to invest in eco-friendly, entrepreneurial businesses, there were also some lucrative income tax breaks of 30 per cent, not to mention inheritance tax efficiency through the use of business property relief.
However, former chancellor George Osborne put a kibosh on this sort of investment in his 2014 autumn statement, when he announced energy generation was no longer to be included in EIS investments as of 6 April 2016, forcing the closure of many such schemes.
This left investors seeking alternative routes to putting their money to work in a way that has a positive social impact.
Social Impact Bonds
Social Impact Bonds (SIBs) have been described by Social Finance as: “A financial mechanism in which investors pay for a set of interventions to improve a social outcome that is of social and/or financial interest to a government commissioner.”
In addition to being expensive, such funds do carry risk. If the social outcome improves, the government commissioner repays the investors for their initial investment plus a return for the financial risks they took.
If the social outcomes are not achieved, the investors stand to lose their investment.
Daniel Brewer, managing director of Resonance, says: “These are sophisticated products for sophisticated clients.
“They can be an effective tool at aligning the interests of investors, commissioners and service providers, and can form an impactful and profitable part of a portfolio of professionally managed or advised investments.”
Investments in SIBs can also qualify for social investment tax relief (SITR), which as John Ditchfield partner at Castlefield Advisory Partners, explains: “mirrors the successful private company equivalent, the enterprise investment schemes”.
Investors in SITR-qualifying schemes can get 30 per cent income tax relief and the relief is applicable to loans as well as equity investments.
According to HM Revenue & Customs, to be eligible for for SITR:
■ Organisations must have a defined and regulated social purpose.
■ Charities, community interest companies or community benefit societies carrying out a qualifying trade
■ Organisations must have fewer than 500 employees
■ Organisations must have gross assets of no more than £15m.
A handful of SITR-specific funds created to help private investors take advantage of this tax relief are available, but have not garnered much so far in the way of initial investment.
Mr Brewer says: “Most SITR funds are small; the first three SITR funds launched with a little over £3m between them.”
| Where do Donor Advised Funds fit in? |
Donor advised funds (DAFs) are available for philanthropic individuals who cannot afford, or do not want to, create a foundation. DAFs will invest in charitable and community-based organisations on behalf of the individual. UK Charities Aid Foundation (CAF) has run DAFs and DAF-like funds since the 1970s and has 2,800 donor-advised funds on its books, with £800m of assets under management. But although some of these can be invested in by the mass affluent - the UK CAF’s average starting value is £10,000 and the average fund is £250,000 - these can be complicated to set up. Moreover, although donating shares into a DAF results in a reduction to an individual’s capital gains tax bill, shares cannot be reclaimed and there are no returns on investment other than a potential CGT reduction. |
Investment trusts
Investment trusts may also be a way for fund groups to meet retail demand for impact investing.
For example, the £383.1m Impax Environmental Markets is an investment trust which measures and demonstrates a net positive carbon impact.
It has been in existence since 2002 and the company invests predominantly in quoted companies involved with technology-based systems, products or services in environmental markets.
In particular, the trust looks for companies involved with alternative energy and energy efficiency, water treatment and pollution control, and waste technology and resource management.
Direct investing in shares
According to Castlefield Advisory Partners’ Mr Ditchfield, some big strides have already been made in the UK to bring impact investing to the masses.
He explains: “There are some widely available collective investments which are part of the impact investment trend.
“The UK has a number of platforms working hard to make impact investing more readily accessible, such as the Social Stock Exchange and Ethex.”
Such platforms not only offer educational materials for advisers and their clients but also a way for individuals to invest in enterprises with a view to making a difference and a financial return.
For example, Ethex offers investors a way to buy shares in particular companies that qualify for social investment, such as fair trade firm Cafedirect, as long as they buy a minimum amount of shares.
However, not all of these will be covered by the Financial Services Compensation Scheme, although the financial advice that recommended these investments might be.
