Download Impact Investing: How does it make a difference?

Impact Investing: How does it make a difference?
Impact Investing: How does it make a difference?
Guide 1
1. Unlocking capital at scale
for businesses delivering
social impact:
Finance is starting to come through from governments,
Impact investing, put simply, is
an investment approach that
intentionally seeks to create both
financial return and positive social or
environmental impact that is
actively measured, according to the
World Economic Forum.
impact investing and in turn help unlock capital on a
particularly in the UK, through Social Impact Bonds
(SIBs), which are helping to draw in more professional
investors on a bigger scale. That should lend credibility to
larger scale and should lead to social impact on a grander
scale.
And mainstream finance have also been showing great
initiatives. Late in 2013 Threadneedle Investments and Big
Issue Invest formed a social investment partnership to
launch the first daily liquid, FCA registered diversified
Impact investing is not new, but the sector has been
Social Bond Fund to the UK market with the intention of
gaining increasing significance and scale over the last
achieving a positive social outcome by investing in fixed
few years. At the last World Economic Forum meeting of
income securities of organisations which support socially
business, government and civil society leaders at Davos,
beneficial activities and economic development. The fund
there was much talk about how the sector can become
is targeting an annual gross return in line with that of a UK
mainstream and what governments can do to support
corporate bond index such as the Merrill Lynch £ Non Gilt
this growth globally. The view that the world of finance
index, which is currently yielding about 4 percent. The
needs to be accountable for the positive social and
fund launched with £10m of seed investment from the UK
environmental impact it creates through its investments
government’s social investment bank Big Society Capital,
is ground breaking, but also necessary, particularly post
and £5m in seed capital from Threadneedle, providing the
the 2008 credit crisis.
bond with a firm and sustainable investment platform from
which it can begin to make an impact both socially and
There has always been a niche of investors who have
financially. The minimum investment in the bond is £2,000
sought to find a way to achieve both a social and financial
for both retail and institutional investors.
return, but shifting opinions mean that the concept is now
swiftly moving to the mainstream. During the economic
boom years, many investors became consumed by
the thrill of short-term s gains forgetting the potential
2. Bringing impact
investment to the masses
longer-term impact, but then the economic crisis of 2008
happened. Nations became bankrupt, governments
The more capital businesses have to finance their social
introduced austerity measures and unemployment
projects, the greater impact they can have socially, so it
rocketed -particularly among the young, posing the
is imperative that investors get used to the idea of
question: what good is investing purely for a financial
impact investing as a way to deliver a credible financial
return if it leaves the world in a less stable place to live in?
and social return simultaneously.
Impact investment intends to answer that question.
If the impact investment market is to continue to grow
By investing with the intent to create both a positive
social impact and financial return investors can have
the best of both worlds. The message to politicians,
organisations and individual investors appears to be
finally getting through. Impact Investing is beginning to
provide better cash flow and financial capacity, which is
helping to develop the track records necessary for social
ventures to take on mainstream investment to increase
their positive impact on society. Impact Investment is no
longer confined to philanthropists and venture capitalists.
then increasing awareness is a crucial factor in how
large and influential this market can be. The UK has
been among the leading lights in building a global social
impact investment community. The British government
created Big Society Capital - the first institution of
its kind in the world. It hosted the G8 Social Impact
Investment Forum - the first to use the G8 platform to
discuss social impact investment – in June 2013, and it
was involved in setting up a Social Impact investment
Taskforce which, in tandem with a group of development
Impact Investing: How does it make a difference?
finance institutions, is focusing on social impact
investment and international development. The Social
Stock Exchange – which connects publicly-listed social
impact businesses with investors – was launched by the
Guide 2
3. Addressing key social and
environmental issues: which
businesses
UK Prime Minister during the G8 Forum and has become
Once investors realise the huge potential impact investing
a key component of the impact investing infrastructure.
has in terms of intended social and environmental impact
and potential financial returns, this will unlock a huge
Where once philanthropic grants were almost the
amount of untapped capital. This will in turn increase
sole funding for organisations intending to make a
financial returns and make an even greater positive impact
possitive impact there are now many more avenues that
on society.
charities and businesses can explore. . Alongside
traditional grants and mainly government issued Social
Impact investment already covers a broad range of
Impact Bonds, growing numbers of foundations are now
businesses, in areas such as affordable housing and
providing different forms of repayable finance to social
property, community services, employment and training,
enterprises and charities. These have enabled
financial inclusion, health and social care, transport and
organisations to tackle poverty and disadvantage,
communications, and utilities and the environment.
strengthen communities, create jobs and drive growth on
a grander scale.
Causes that funds can target include areas such as
biodiversity, ecology and ecosystems, eco-tourism,
While the involvement of governments and large
foundations will certainly help lend credibility to impact
investing, to truly unlock the door to the large scale
capital needed to deliver profound social impact, a
common investment framework must be created.
Development of best practice must also be implemented,
both in governmental policy and more broadly, to gain the
trust of the broader investment community. That is what
the guardians of impact investment are trying to achieve
and where Socially Responsible Investing (SRI) has
struggled in the past.
education, pollution reduction, green- and clean-tech,
climate change, poverty alleviation, recycling, renewable
energy, social finance and financial exclusion, sustainable
forestry and farming, sustainable transport, waste
reduction and water. Investors may have a personal
connection with a particular issue and seek to direct
investment where it most counts for them.
Providing the investment is intended to make a social
or environmental impact, there are a growing number
of investment vehicles available across asset classes,
to include fixed income, public equities, real estate,
infrastructure, investment funds, debt and exchange
To help standardize measuring and reporting, the Global
Impact Investing Network (GIIN) has created Impact
Reporting and Investing Standards (IRIS), a catalogue
of generally accepted performance metrics. In other
parts of the sector, the SROI Network (Social Return on
Investment) is also contributing to industry best practise,
traded funds.
4. Delivering financial returns
alongside social impact: how it’s
done
as is GIIRS (Global Impact Investing Rating System).
There are two key features of impact investing. The first
In creating an investment framework and implementing
is the intent of the investor to generate a measurable
best practice rules, impact investing will have the
social and/or environmental impact through investments
credibility required to be adopted by investors on a
– this is what differentiates impact investing from much
much bigger scale, opening the door to potentially huge
broader Socially Responsible Investing (SRI). The second
sums of investment. According to a recent report by JP
is to generate an appropriate measurable financial return
Morgan, Impact Investors have committed $9 billion in
on the money that has been invested - this is what
2013, with a predicted market opportunity of between
differentiates impact investing from a purely philanthropic
$400 and $650 billion by 2020.
pursuit. Investors don't typically have to give up part of
their financial return to compensate for having an impact.
Impact Investing: How does it make a difference?
For instance, Golden Lane Housing 2013 Bonds
provides the finance the charity needs to provide
Guide 2
5. Available products
housing to people with a learning disability. It has so far
Investors fresh to the impact investing world might
provided 1,208 people with a learning disability with
be surprised to learn that just like in more traditional
secure accommodation. Last year Golden Lane Housing
investment markets, impact investors have vast swathe
increased the number of tenancies for people with a
of investment products to utilise. They can make their
learning disability by 116, an increase of 8 percent on
investments through traditional routes such as listed
2011/12. Golden Lane’s bond pays a fixed rate of 4
or unlisted funds or funds-of-funds like those offered
percent interest a year over the five year fixed term, well
by asset managers like Clean Energy Access – a 150
above current interest rates on savings accounts at high
million euro European private equity fund, which invests
street banks.
between EUR 2-10 million in companies that provide
Investors should hold investees accountable for both
financial returns and social impact in making impact
investments. It is important that investors define their
objectives: assessing risk and financial returns versus the
potential social and environmental impact – against those
the investor can match his/her expectations and decide
whether the investment is appropriate for them.
For instance Clean Drinking Water, an India-based impact
investing fund manager, started investing in microfinance
institutions more than ten years ago. After delivering 14
percent returns to investors the fund manager decided to
raise a second fund, which invested in a company that
sets up water purification plants in rural villages. The
plants are owned by the local community and operated by
the installation company, which sells the purified water to
the village at affordable rates. The installation company
also trains local entrepreneurs to develop businesses that
deliver water to neighbouring villages.
For many years SRI has been tainted by the common
misconception that it was difficult to make a decent
financial return for the risk involved, but as the Clean
Drinking Water fund has proved, impact investing can
deliver above market rate returns.
A study by US investment bank JP Morgan found that
the expected returns of many existing social impact
investments in emerging markets are up to as much as
25 per cent, while in developed markets there are return
expectations of up to 20 per cent. Figures published at
the 2014 World Economic Forum in Davos showed that
79 percent of money managers running impact funds
believe they can deliver an at market return for investors.
Having said this, financial returns from impact
investments can vary just like any other investment: from
return of principal to above-market rates of return.
clean electricity to rural communities in developing
countries with limited access to energy.
Investments can also be made into listed securities
such as equities. APR Energy, for instance, provides
short-term power solutions to markets that would
otherwise have to go without. There is a close correlation
between economic growth and demand for electricity
so the absence of reliable supplies places a substantial
headwind on growth and development. APR Energy is
one of Morgan Stanley’s 14 focus stocks for Social and
Environmental benefits. Details of listed and unlisted
business which might be considered as an impact
investment can be found on websites provided by
organisations such as the Social Stock Exchange and the
RBS Social Enterprise 100 (SE100), which are opening up
impact investing to retail investors, as well as making it
more attractive to mainstream investment.
Although in its embryonic stages, a debt market also
exists for impact investing. Investors can purchase
Social Impact Bonds (SIBs), which are usually issued
by governments although investment banks such as
US giant Goldman Sachs have begun writing them too.
SIBs, also known as pay-for-performance contracts,
can be used to funnel private capital into social services
providing economic solutions to social problems.
Investors pay the up-front costs of the intermediary, with
the expectation that the government/enterprise will pay
back investors out of savings accrued from the program’s
success.
Private equity vehicles and venture capital, which were
originally at the heart of socially responsible investing, are
still very much a favourite for impact investors. According
to a survey by JP Morgan in conjunction with the Global
Impact Investing Network, 83 percent of a select group
of impact investors said that they had used private equity
Impact Investing: How does it make a difference?
Guide 2
funds, while the same survey also noted 66 percent of
on offer from impacting investing and SIBs. Goldman
respondents used private debt and 44 percent used
Sachs recently launched two such bonds - one targeting
equity-like debt, an asset class that typically offers more
the reduction of reoffending among teenagers at New
flexibility than straight equities in terms of both liquidity
York’s Rikers Island jail, and the other intended to help
and tenor.
children from low-income families in Utah prepare
for kindergarten. The success of the bonds are being
Commingling funds, such as the Threadneedle UK Social
monitored by other large investment banks, such as
Bond fund also serve as innovative forms of partnership
JPMorgan, which are actively investigating the huge
among previously isolated capital providers and they
potential on offer within impact investing.
can multiply the impact of capital while preserving their
For investors looking for a more traditional approach to
contributors’ interests.
impact investing via established equity markets there are
plenty of options.
Together with a plethora of investing options, investors
can also choose the degree to which they are actively
For these types of companies, and those not listed on
involved ranging from passive investments to more
official stock exchanges, to be recognised as potential
active, direct investments. Longer-term, the availability
candidates for impact investments they need awareness
of traditional financial structures will attract more
to be raised by organisations such as the Social Stock
investment capital and support further market growth.
Exchange and Ethex. They are helping to promote
6. Examples of impact investments
companies working to provide a measurable social and
environmental impact and a financial return.
There are many examples of how an investor can put
Veolia Environment and Sonova are just two such
their money to work, targeting areas from affordable
examples of listed equities that could be deemed suitable
housing and property, to utilities and the environment
for an impact investment portfolio and the financial return
and much more in between.
can be measured through the companies’ share price
performance and dividends paid.
Social Impact Bonds (SIBs) allow government to put
money into the black holes of public service, or they can
Sonova’s business addresses hearing impairment, which
appoint a commercial 3rd party to deliver the service.
in turn helps speech development, social integration,
They run it on a commercial footing, delivering the
and mental fatigue associated with hearing loss. Veolia’s
impact yet providing a return to the investors who have
operations help ensure access to clean drinking water by
committed the capital to make it all work. Rather than
managing water and waste water services for both local
focusing on inputs (e.g. number of doctors) or outputs
authorities and industries. It is also leading the transition
(e.g. number of operations), SIBs are based on achieving
from landfill to recycling and helping to improve its
social ‘outcomes’ (e.g. improved health).
clients’ energy efficiency.
The first SIB, the Peterborough Social Impact Bond, was
ImpactBase provides a similar service to that of the
set up in the UK in 2010 to fund work with 3,000 male,
Social Stock Exchange and Ethex but for impact
short-sentence prisoners leaving Peterborough prison to
investment funds such as Low-income Housing, a private
provide intensive support to prisoners and their families,
equity fund based in Brazil which targets the delivery of
help them resettle into the community and prevent re-
market-rate financial returns and social benefits to rural
offending therefore driving down the costs of running
communities in South America. It has attracted a range
prisons and reducing potential unemployment.
of different investors from large financial institutions
to private family offices, development organizations,
Since the Peterborough Social Impact Bond, £30 million
and large-scale foundations. The fund has made an
has been dedicated to the Department for work and
investment of $4 million to a provider of affordable
pensions Innovation Fund in 2011 and £600 million of
homes designed for low-income families in rural settings,
capital was committed to Big Society Capital in 2012.
focusing particularly in areas affected by natural disaster.
Investment banks are only just waking up to the potential
Impact Investing: How does it make a difference?
The breadth of investments on offer should help drive
interest in impact investing. A survey by the ethical bank
Triodos found that as many as 3 million investors across
the UK could consider social investment within the next
year and could double each year for the next three to
four years. The outlook for the sector is definitely on the
upswing!
Guide 2
Impact Investing: How does it make a difference?
References
1 - Perspectives on progress: The Impact Investor Survey, JP Morgan, 2013
2 - G8 Social Impact Investment Forum: Outputs and Agreed Actions, Cabinet Office, 2013
3 - Investing with Impact in the Public Equity markets, Morgan Stanley, 2013
4 - Growing the Social Investment Market, Cabinet Office website, 2013
5 - Social Impact Bonds, Cabinet Office website, 2013
Guide 2