Understanding CSR, impact investing and social enterprises

Jennifer Walmsley, partner at consultancy Arkadiko Partners, explains that CSR is "often used as a catch-all term to encompass environmental as well as social initiatives".

However, increasingly investors expect to see "evidence" that companies are integrating CSR efforts throughout their business and seeing this as part of their strategy, not an optional extra or philanthropic activity.

Ms Walmsley adds: "Investors expect to see evidence of this as well as reporting that gives them confidence that companies are managing all the risks that might impact their strategy proactively."

That said, there is such a range of different types of corporate social responsibility (CSR) policies, as well as funds purporting to follow CSR or environmental, social and governance (ESG) strategies, that choosing the right one can be complicated for the average investor.

Research shows that having a financial adviser makes people less likely to have prior knowledge or engagement with social impact investment. UK government report

As Thierry Bogaty, head of SRI expertise at Amundi, comments: "Analysis of CSR practices can be implemented in any kind of businesses and companies. ESG considerations can be taken on a very wide investment universe."

This is why Amundi’s ESG analysis covers more than 5,500 issuers worldwide.

According to HSBC Global Asset Management, there are many flavours of ESG investing to choose from - so there should be something that appeals to most investors within the spectrum, as Figure 1 outlines:

Source: HSBC Global Asset Management

Add to this the rise of impact funds and social enterprises, which are gaining popularity among not just wealthy philanthropists but also millennials - thanks in part to crowdfunding sites raising awareness of social enterprises - and it becomes clear that advisers have a big role to play in guiding clients down the right path.

Impact funds

Impact bonds have been gaining traction over the past decade, and have proved to be interesting products for investors looking for a specific return on their investment while also making a positive contribution to society.

The Global Sustainable Investment Alliance defines impact investing as targeted investments, typically made in private markets, aimed at solving social or environmental problems.

According to Stephanie Maier, director, responsible investment, for HSBC Global Asset Management: "While companies are increasingly considering and articulating their business purpose, this approach focuses on investing in businesses with a clear social or environmental purpose.

"This provides an opportunity for companies that are going beyond good management of environmental, social and governance factors and specifically delivering positive environmental or social outcomes."

Some impact investment-led businesses have become significant success stories, such as Elon Musk’s Tesla corporation or ethical spectacle maker Warby Parker in the US. But America does not have the monopoly on impact investment.

In fact, according to Social Finance, the UK is the world leader in social impact investing. By mid-2016, the UK had issued 31 social impact bonds (SIBs), out of a global total of 61 (and rising).

These 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.

But not all SIBs have been successful in achieving their intended target; the 2015 SIB created by Goldman Sachs and Bloomberg Philanthropies in association with the City of New York to prevent recidivism - tackling the likelihood of offenders re-offending when they are released from jail - failed to achieve its social objective. 

Social enterprises

These have been hitting the headlines recently and appear to be worthy causes. Think of The Big Issue, for example, or Divine Chocolate. 

But while these sound like good companies to help support, investors should be aware these are not, essentially, an investment in the conventional sense. They are primarily set up to provide a social benefit.

As John Ditchfield, co-founder of Castlefield Advisory Partners, explains: "A social enterprise is a business set up with a social purpose as its primary objective, and these are frequently not-for-profit ventures, which do not seek to distribute profits to shareholders.

"Very few people regard social enterprises as 'investible assets'."

This is an important distinction to make, not least because there is a large green line drawn between that which is primarily philanthropic, and that which is purporting to provide some form of return on investment.

Sandra Crowl, member of the investment committee for Carmingac, comments: "As with philanthropic investments, social enterprises have one main goal: that is to do good, targeting either societal or environmental projects, without too much concern for investment returns."

While social enterprises can be invested in, they tend to be more about just returning the investment, plus a very modest rate of interest. Anna Sofat

If a client has already maximised their pension and tax-efficient investments in a given tax year, and wish to explore more philanthropic endeavours, social enterprises can be a way for them to back a good cause financially, without expecting much - or anything - in return.

John David, head of Rathbone Greenbank Investments, comments: "Social enterprise investments seek to make a positive contribution to society through their products/services or how they operate, but are outside the more traditional areas of investment.

"They represent a growing and very interesting sector, and include social businesses in areas such as renewable energy, sustainable property, organic and Fairtrade goods, public transport and sustainable finance."

Mr David says while there may be conventional investment opportunities in these areas, what distinguishes social enterprise investments is that they typically seek to generate both social and financial returns.

"The interests of investors are thus often balanced with other stakeholders and the businesses may not seek to maximise profits above other considerations," he explains.

While most investments are generally unlisted companies, or unauthorised collective investment vehicles, they tend to be more risky, smaller and more illiquid.

Mr David adds: "At Rathbone Greenbank Investments, they typically form a smaller part of our portfolios, and are not considered suitable for all investors."

Anna Sofat, founder and managing director of Addidi Wealth, comments: "While social enterprises can be invested in, they tend to be more about just returning the investment, plus a very modest rate of interest.

"However, these will arguably provide more ‘social return’ – the feeling you’re doing something good or useful with your investment. Personal return or social return is typically the choice investors need to make."

CSR and return on investment

Meanwhile, companies taking CSR seriously are also serious about making a profit - or at least, they should be if they want to continue being a publicly listed entity.

Leon Kamhi, head of responsibility for Hermes Investment Management, is unequivocal about where investment value lies for investors wanting to invest more ethically or responsibly: "We believe the greatest opportunity is in integrating CSR into mainstream companies, as given their scale, this will likely have the largest positive environmental and social impact."

This does not mean that companies with positive CSR have to be specifically 'ethical' in terms of what they produce or the service they provide, as long as the core values of CSR are fully embedded in them, running from top management through to the lowliest staff member, like 'Brighton' through a stick of rock.

However, they do need to provide a return to investors, whether in terms of capital growth or dividend income (or both). As Ms Sofat states: "Companies committed to CSR typically comprise firms that still exist to make a profit.

"If you’re interested in making a return, a company with strong CSR will give you that."

Mr David says: "There are several high-profile examples of major corporates which have embraced CSR as a fundamental value, and have delivered social and environmental benefits at a genuinely impressive scale, which smaller start-ups would struggle to match.

"A well-worn but nonetheless impressive example is Unilever, with its Sustainable Living Plan which has the stated goal of improving the health and wellbeing of more than one billion people. When big business gets CSR right, its impact is seismic."

Ms Crowl advocates looking for companies that follow good ESG practices, while also aiming to create value for shareholders.

She says there is plenty of choice for the CSR-savvy investor. "Today, retail investors can invest in open Ucits or Oeic funds offering both positive impact and returns," she comments.

And the growing popularity of CSR and ESG-oriented investment funds is measurable. She points to the 2016 Eurosif SRI study, which shows annual inflows into this type of sustainable investing are growing at an annualised rate of 120 per cent.

Indeed, the latest Global Sustainable Investment Review (GSIR) report shows the billions of dollars' worth of money going into SRI assets. The figures, below, show the levels to the end of 2016.

Source: GSIR 2017 report

According to Ms Crowl, this is set to continue: "Recent Sustainable Finance initiatives by the European Commission will encourage more retail flow of funds to activities and companies that are taking positive steps towards the environment and social concerns.

"Rates of return may differ between these philanthropic investment projects and liquid open funds, but what is clear is that the investor and the fund manager must have a long-term view on sustainability issues."

Conclusion

However, there still seems to be a reluctance among UK financial advisers to recommend funds that are explicit about their CSR or ESG critera.

This is presumably based on historical and erroneous beliefs that SRI and ESG-oriented funds exclude certain strong-performing stocks, and therefore are poorer overall performers.

Yet as the FE data shown in the third article in this guide indicates, funds with a strong SRI, ESG and CSR orientation tend to be far better performers long-term than their peers.

So why are many advisers - especially those considering themselves to be whole of market - not actively discussing these with clients as part of the portfolio suitability process? 

This is not based on anecdotal evidence - although there is plenty available online - but has recently been highlighted in a government report which came out on 12 June.

The 51-page: Growing a Culture of Social Impact Investing in the UK report revealed a huge reluctance among advisers to make clients aware of impact or general 'ethical' funds, and a consequent lack of awareness among consumers.

The report found there were reasons for this, including: 

• A lack of product supply.
• The belief that financial returns must be sacrificed.
• A low level of awareness and understanding among investors. 
• A lack of training and sector knowledge among advisers and trustees.

The report said: "Perhaps surprisingly, research shows that having a financial adviser makes people less likely to have prior knowledge or engagement with social impact investment.

"In the words of one adviser, 'I still don’t fully understand social impact and do not see it anywhere'. Still, some 58 per cent of advisers believe that training and continuing professional development would help them offer the investment to their clients."

But engaging with the different flavours of ESG, SRI and CSR can make a big difference overall to a client; it just depends on which one is right for the individual investor.

While there are clear differences between companies and social enterprises, Mr David is adamant that "neither can be objectively said to be better than the other for investors; they serve different purposes".

Lisa Beauvilain, head of sustainability and ESG at Impax Asset Management, comments: "The choice between these depends on investors’ values, preferences and their risk and return expectations."

Rose Beale, a thematic analyst in the responsible investment team at Columbia Threadneedle Investments, says: "Ultimately, what is best for investors depends on their broader investment goals.

"For some investors, integrating ESG in the investment process, as a risk management and potentially return enhancing strategy, is a priority.

"Others, though, now require not only financial return, but also social and sustainable benefits from their investment, so are increasingly looking for opportunities to invest in businesses that evidence social and sustainability-driven missions, products and services."

simoney.kyriakou@ft.com