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Impact Investing

IPE special report May 2018

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ESG roundup: Big Society Capital, UKSIF, Cox Review, GES

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  • ESG roundup: Big Society Capital, UKSIF, Cox Review, GES

UK - Social investments are gaining momentum, according to UK social investment wholesaler Big Society Capital.

And according to Nick O'Donohoe, chief executive at Big Society Capital, the credit crisis has been a key driver behind this movement.

Speaking at the UK Sustainable Investment and Finance Association's (UKSIF) annual lecture in London last night, he said: "The credit crisis was an important catalyst of changing the way people thought about investment.

"We have moved on from [simply] making sure our investments and the companies we invest in do no harm to thinking more proactively about making sure that at least some part of our money is dedicated towards investments that are doing some good. That is the origin social or impact investing."

O'Donohoe said he witnessed an increasing number of mainstream financial institutions getting involved in social investments in a real and tangible way, such as Merrill Lynch Bank of America, Morgan Stanley, Goldman Sachs, JP Morgan and Deutsche Bank, as well as support from governments.

"In developed markets, there is a very profound change going on in the way governments are purchasing social value," he said.

"Historically, we have had a system where government simply paid the service providers to provide social care service in various communities. [Now we] are moving from a system where we paid for delivery of a service to a system of payments by results."

One example of that is the UK Work Programme, which supports organisations that help get people back to work.

Initially, companies were paid for providing a service, whereas today they are being paid for providing that service but only if the person receiving the service goes back to work.

O'Donohoe said: "That is a significant change because it transfers the risk of delivery away from government towards whoever is providing the service.

"But most of the social organisations providing these services are too small and too fragile to be able to effectively pre-fund the service in the hope that they will get paid upon successful completion. They need funding, and that is the opportunity for social investors."

The creation of any market requires demand for and supply of funds, as well as an intermediation and infrastructure system, he said.

But O'Donohoe was confident there would be sufficient demand for funds from social organisations with credible business plans and revenue projections.

"One of the reasons why demand will grow is that we have an increasingly ageing population, and health, disability and ageing is an area where social enterprises and social organisations in many cases do a better job in providing services than private organisations do," he said.

"But they are disadvantaged because they [currently] do not have access to the sort of finance private organisations do."

Big Society Capital intends to encourage the creation of intermediary vehicles such as funds or social lenders that will provide finance to a broad range of UK charities and social enterprises.

Meanwhile, UKSIF has submitted evidence to the Cox Review into short-termism in British business, recommending that measures be taken to boost demand for long-term investment from companies and asset owners.

The independent review, commissioned by the Labour Party and led by Sir George Cox, closed on 31 August.

UKSIF urged Cox to examine evidence showing that long-term wealth creation and the interests of responsible capital providers were not well served by current practices within capital markets and across the investment chain.

It also asked the review to consider proposals to close the investment chain through positive influence by companies on asset owners.

Penny Shepherd, UKSIF chief executive, said: "Companies can play a vital role in improving long-termism across the investment chain through their influence on corporate pension funds, employees, customers and suppliers.

"Our research suggests pension funds welcome plan sponsor support for long-term responsible investment approaches, and that the majority of funds see benefit in alignment with sponsors' sustainability policies.

"Employer-nominated trustees with sustainability expertise can play a vital role in ensuring pension investment strategies meet long-term needs."
 
UKSIF suggested that measures to encourage companies to take such an approach should include ensuring stable social and environmental policies and leading the way through sustainable public procurement.

It also cited evidence that pension funds adopting responsible investment report a range of benefits and tend to deepen their practices over time.

Lastly, global engagement service provider GES has significantly increased its screening universe during 2012 to approximately 16,000 of the largest listed companies in the world.

It is in the process of including another 2,500 companies, which equals a nearly 70% increase since 2011.

The expansion of GES's screening universe from 11,000 to 18,500 companies is a result of investor demand, it said.

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