Issue 3 March 2015
WMA JOURNAL In this issue
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Impact Investing: The Zeitgeist has Shifted “It’ll be gone by June.” Thus did Variety magazine airily dismiss rock n’ roll in 1955. Anyone can make a mistake. In the wonderful world of investment advice, erroneous predictions aren’t just tena-penny; they arrive in flurries, like confetti scattered at a Sicilian wedding. But one prediction seems to me fairly sound – Impact Investment is no fly-by-night creature, for a number of reasons. Impact Investing – the investments made in companies, organisations and funds, with the aim of generating measurable positive social and environmental impact, together with a financial return – has quietly moved out of the slipstream into the mainstream. Impact Investing is not charity. It’s not idle tree-hugging. It’s not do-gooding on a grand scale. It’s much more hard-nosed than that. In January this year this sea-change in attitudes was expressed in a Mansion House speech by Sir Ronald Cohen, Chair of the Social Impact Investment Taskforce established by the G8. “I believe we are now in the early days of a social revolution,” he said. “The equality of opportunity that has been our mantra for decades, as the foundation for a fair and thriving society, is calling us to confront social challenges…We are still very far from resolving even our most urgent social issues. Instead, as Philip Larkin put it, ‘Man hands on misery to man’, social issues are passed unresolved down the generations. Why?” Sir Ronald’s speech did not really answer that question; much more importantly, he delineated the ways in which those social challenges are going to be met by Impact Investing. Among the community of High and Ultra High Net Worth Individuals, their families, and associated foundations, there is a vast inter-generational transfer of wealth now quietly passing to a younger generation of individuals who are no longer interested in the continuous accumulation of capital. This new generation want to change the world for the better, in a myriad of ways. This nascent ‘riches-revolution’ is an opportunity for those charged with managing the portfolios of HNWIs – if only they can find ways to channel it. But it’s not only the HNWIs who are seeking Impact Investing opportunities; a YouGov poll in October 2013 found that 63% of British investors would like to be offered a sustainable and ethical option when choosing investments.
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Impact Investing is also something where – ever the financial innovator – Britain is ahead of the curve, thanks, amongst other things, to the implementation of the Social Investment Tax Relief in July 2014. This enables individual investors to take a 30% income tax relief on investments of up to £5 million a year in charities and social enterprises, or up to £15 million over an organisation’s lifetime.1 The global universe of Impact Investing is currently estimated to have $46 billion of assets under management. This is a pittance out of the total $13.5 trillion of global funds, but Impact Investing is set on an astonishing exponential growth trajectory, likely to reach $600 billion by 2018.2 It’s also a universe with powerful government backing – the G8 has called on governments to unleash $1 trillion of private sector investments to tackle widespread social problems, and improve access to capital for impact businesses. This scale of government backing is perhaps not too surprising; most governments, of any complexion, are well aware that their ability to fund socially vital projects out of treasury coffers is stretched, and going to be tested well into the future. So rising demand for Impact Investing is being matched by rising supply of Impact Investing opportunities – and the Social Stock Exchange (SSX) has positioned itself to match supply and demand. Impact Investor is the educational and news website of the Social Stock Exchange, aiming to broaden understanding of the impact investing market. Since it was first launched in June 2013, SSX members have raised more than £200 million, with a combined market capitalisation of its 12 members of more than £1.3 billion. It now has the world’s first regulated market on ISDX for impact businesses, regardless of their size. There is a healthy pipeline of companies currently awaiting first-stage approval by the SSX’s Admissions Panel. The SSX not only has a transparent but also a highly regulated secondary market, targeting both institutional and retail investors. As for those retail investors – the middling income families who look for opportunities to make Impact Investments, or who want their ISAs or pensions not only to do well but also do good – they are perhaps less well served right now than the HNWIs. According to Big Society Capital, who commissioned a survey of IFAs by Opinium 1 Research by the City of London Corporation and Big Society Capital suggests that Social Investment Tax Relief could generate up to £480 million of new investment over the next fi e years. 2 JP Morgan, Spotlight on the Market, the Impact Investor Survey, May 2014.
in September 2014, only 14% of IFAs felt confident they understood Social Investment Tax Relief, despite the fact that almost 25% of IFAs said their clients had expressed an interest in social investment. Personally, I don’t regard this as too much of a problem for the future of Impact Investing – grand strategies always take time to filter down to the troops on the ground. Or, to put it another way – the weight of even conservative opinion has shifted irrevocably in favour of growth in Impact Investment. As Sir Ronald argued in January: “If, as seems to me, impact investment can deliver 7-10% per annum net of fees with a low correlation to equity markets…allocation should grow to 3-5% of HNWIs and foundation portfolios over a decade or two…my conclusion is that capital flows into impact investment are potentially huge.” Perhaps the most important (yet least quantifiable) factor underlying the irrepressible growth of Impact Investing is that it is completely aligned with the zeitgeist. Almost everyone – at least, in the world’s developed economies – is exhausted by tales of socially irresponsible fat-cattery. There are many signs that HNWIs are steadily moving towards 100% impact investments – although these signs rarely make the headlines. Separate initiatives are springing up, ranging from the 100%IMPACT Network, the brainchild of Charly Kleissner in the US, an association of HNWIs seeking to invest all their funds in Impact Investing, to the BALLE-RSF Foundation, which in December 2014 linked 11 community foundation leaders, representing nine foundations with more than $2 billion in collective assets, who have committed to an 18-month programme of study and training to equip them to pursue Impact Investing initiatives. There is therefore a widening yearning for opportunities to put one’s portfolio to more socially responsible use, while ensuring that it achieves a market-competitive financial return. The so-called Millennials, the next generation of investors – those who have been forced to become more socially and environmentally aware by dint of the broad array of international problems they face – do not have a status quo to which they can return, even if they wanted to. For this generation, Impact Investing makes perfect sense. Gary Mead3, Editor of www.impactinvestor.co.uk
3 Gary Mead is a journalist and writer who has worked for the BBC, Granada TV, and the Financial Times. He was Head of Research for the World Gold Council and a commodity analyst for a variety of investment banks before joining the Institute of International Finance in Washington D.C. as Director of Media. Prior to taking up his latest post he was Executive Director of New City Initiative, a lobby group of privately owned asset and wealth managers.
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