Finance for good: how investors can encourage more social and environmental investment

What do you know about ‘good’ finance? Martina Macpherson, President of the Network for Sustainable Financial Markets blogs for us on progress being made in the world of ‘impact investing’, which focuses on investing for social outcomes and not just financial returns.

Worldwide, interest in impact investment – investing with the goal of environmental and social impact in addition to financial return – is growing rapidly.

The Global Impact Investing Network (the global champion for impact investing) estimates that the minimum size of the market has doubled to US$228 billion in assets under management. That’s up from US$114 billion a year earlier.

As such, investors ranging from public pensions to private equity firms are increasingly including impact investments as part of their asset mix.

However, the Implementation Taskforce for Growing a Culture of Social Impact Investing which has been charged with growing a culture of social impact investment in the UK, has found that we are currently lagging behind other nations.

UK investor commitment

In the UK there remains a lack of product innovation and institutional investor commitment. Not only that, we also need more reliable data and better reporting of social and environmental impact.

In 2017, for example, the Law Commission stated that pension schemes in the UK had invested much less than peers abroad in socially and environmentally beneficial investments, even though there were no legal or regulatory barriers to making socially responsible investments.

This is despite the UK being a pioneer in the field with a market size of £150 billion.

And despite efforts by Big Society Capital (the world’s first social investment institution) and the National Advisory Board on Impact Investing to encourage institutional investors and individual savers to make such investments.

It seems that Trustees are unsure about their fiduciary duty obligations[i], around meeting risk/return expectations and feel they lack hard data on social impact investment risk.

Nevertheless, progress is on the cards: the UK Government has announced that it intends to act on Law Commission recommendations to clarify and strengthen the laws on pension funds and social investment.

Furthermore, UK Prime Minister Theresa May, asked Elizabeth Corley, Vice-Chair of Allianz Global Investors, who leads the Implementation Taskforce to drive forward change via a specially set up working group.

New thinking

The outcome and findings of the working group, consisting of experts from industry and academia (including myself), have been published in our report, Growing a Culture of Social Impact Investing in the UK: Better Reporting which sets out:

• An introduction to the broader context and a theory of change illustrating the link between social and environmental impact reporting and investment decisions;
• An overview of the current landscape of impact reporting;
• A discussion of the current challenges faced by investors and reporting practitioners; and
• Views on the key opportunities and foundations for further alignment of reporting systems and metrics; and possible ways forward for reporting.

There's also a very useful Vanderbilt Financial Group blog, Impact investing: temporary trend or paradigm shift which looks at the changes taking place along the investment value chain within the context of investor values and new regulatory and policy developments.

Meanwhile, research[ii] shows that reporting is at the core of such shifts since it influences actions. 

But, the lack of a common approach in the way social and environmental impact is defined, measured and reported makes it difficult to develop products that consider social and environmental impact.

This deficit extends to businesses, social enterprises and charities that lack the tools and language to report their social and environmental impact in a way that is actionable and comparable by members of the investment community and the wider public.

It further means that members of the public are unable to make informed investment and savings choices on the basis of social and environmental impact.

Defining approaches

The deficits are why we’ve introduced a framework to define the different approaches to reporting and to demonstrate the differences and similarities between them.

We’ve also defined five types of investment approach in terms of their financial and impact goals: traditional, responsible, sustainable, impact-driven and philanthropy and what this means for avoiding harm and mitigating ESG risks, benefiting all stakeholders (including workers) and contributing to solutions. You can view an explanatory chart here.

The insights in our paper will inform discussion in the next phase, when options for more harmonised social and environmental impact reporting will be shaped.

These options will be part of Taskforce recommendations to the UK Government and other stakeholders in early 2019.

Read our new report and watch this space.

Martina Macpherson is President of the Network for Sustainable Financial Markets, Visiting Fellow at Henley Business School in Sustainable Finance, and a Member of The Implementation Taskforce for Growing a Culture of Social Impact Investing: Better Reporting.

^{[i] Fiduciary duties ensure that those who manage financial assets act in beneficiaries' interests. The UK’s ‘Fiduciary Duty in the 21st Century’ programme established that, "far from being a barrier, there are positive duties to integrate environmental, social and governance (ESG) factors in investment processes" and that “integrating ESG issues into investment research and processes will enable investors to make better investment decisions and improve investment performance consistent with their fiduciary duties.” See UNEP FI, PRI, UNEP FI& UN Global Compact: Fiduciary Duty in the 21st Century, 2015 Report, available at: https://www.unpri.org/fiduciary-duty/fiduciary-duty-in-the-21st-century/244.article}

^{[ii]  For further references, see e.g. Carol A. Adams, Conceptualising the contemporary corporate value creation process, Paper, 2017, in Accounting, Auditing & Accountability Journal, Vol. 30 Issue: 4, pp.906-931, available at: https://doi.org/10.1108/AAAJ-04-2016-25294}