October 30, 2018 / In-depth

What is driving social and environmental impact investing?

By Martina Macpherson, ESG Clarity

ESG Clarity's editorial panellist Martina Macpherson explains what has driven the increased focus on social outcomes among investors

What is driving social and environmental impact investing?

Impact investing, with the focus on social outcomes versus mere financial returns, is finally gaining momentum in the UK.

However, The Implementation Taskforce for Growing a Culture of Social Impact Investing has found that it still requires more investor commitment as well as more reliable data and ‘better’ reporting of social and environmental impact.

Why has progress taken so long?

Following years of negotiations between the G8 member states on the importance of social impact investments for businesses, individuals and society (1), the UN Sustainable Development Goals were established (2015).

Public private partnerships were formed to develop dedicated blended finance and impact investment vehicles, following demand by millennial and female investors (2). However, there has still been a lack of product innovation and institutional investor commitment, especially in the UK, when it comes to social impact investing.

Despite having been a pioneer in this field and the efforts being made by Big Society Capital and the National Advisory Board on Impact Investing and a market size of £150 billion (3), the UK was failing, at large, in enabling and encouraging institutional investors and individual savers to make such investments.

In 2017, the UK’s 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 them making socially responsible investments (4).

Trustees still seemed unsure about their fiduciary duty obligations, about meeting risk/return expectations and felt they lacked hard data on social impact investment risk (5).

Progress is on the cards: in June 2018, the UK Government announced that it intends to act on Law Commission recommendations to clarify and strengthen the laws on pension funds and social investment (6).

What’s the news?

Meanwhile, and following an extensive market review (2017) (7), the UK’s Prime Minister Theresa May has asked Elizabeth Corley, Vice-Chair of Allianz Global Investors, to lead an industry-led taskforce on impact investment (8).

Under her leadership, Paul Druckman, Non-Executive Director, at the FRC, has taken the lead of one of the working group streams on social impact investment reporting. The outcome and findings of this working group, consisting of leading experts from industry and academia (including myself), have been published in a new Paper: “Growing a Culture of Social Impact Investing in the UK: Better Reporting” (9).

The Paper forms part of the Taskforce’s response to the third key recommendation of the report of the Advisory Group on Social Impact Investing to “develop better reporting of non-financial outcomes” (10), which has been subsequently refined by the Taskforce members as “better reporting of social and environmental impact”.

Our insights are drawn from a call for evidence that received responses from 92 representatives and experts from across the investment and reporting domains, including thirteen expert interviews, detailed desk-research, and input from an expert working group.

Using these insights our new paper sets out:

  • an introduction to the broader context and a theory of change which illustrates the link between social and environmental impact reporting and investment decisions;
  • an overview of the current landscape of impact reporting approaches together with an assessment of where impact reporting is on the journey towards coalescence;
  • a discussion of the current challenges faced by investors and reporting practitioners, and evidence of emerging coalescence of social and environmental impact reporting; and
  • views on the key opportunities and foundations for further coalescence; possible ways forward to achieve harmonised social and environmental impact reporting.

In phase 1, a definitional classification framework has been introduced in our paper to bring some clarity to the umbrella term ‘reporting approaches’ and to demonstrate the variance and similarities between the 16 most prevalent reporting approaches at present (11).

What’s next?

The insights in our paper will inform and provoke discussions in phase 2; when options for coalescence towards more harmonised social and environmental impact reporting will be formed. These options will be part of the Taskforce recommendations to the UK Government and other stakeholders in early 2019.

So please watch this space!

Martina Macpherson is president, Network for Sustainable Financial Markets and Member of The Implementation Taskforce for Growing a Culture of Social Impact Investing: Better Reporting. She is also a member of ESG Clarity’s Editorial Advisory Panel.

References:
[1] The Social Impact Investment Taskforce was announced by Prime Minister David Cameron at the G8 Social Impact Investment Forum in June 2013. It aimed to catalyse the development of the social impact investment market. Led by Sir Ronald Cohen, the taskforce brought together government officials and senior figures from the worlds of finance, business and philanthropy from across the G8 countries. The taskforce published its report, alongside subject papers from its working groups, on 15 September 2014.
[2] For further references, see e.g. Morgan Stanley Institute for Sustainable Investing, Sustainable Signals, Report, Feb. 2015, available at: https://www.morganstanley.com/sustainableinvesting/pdf/Sustainable_Signals.pdf and Investment Association UK, The Companies we Keep, Report, Sept. 2018, available at https://www.theinvestmentassociation.org/assets/files/consultations/2018/20180901-thecompanieswekeep.pdf
[3] Based on a definition specifying that investments are made with the intention of creating a positive outcome, including in renewable infrastructure, social housing, social businesses and green bonds. See UK National Advisory Board on Impact Investing, Impact Investing Guidance Note, 2017, available at: http://uknabimpactinvesting.org/
[4] UK Law Commission, Pension Funds and Social Investment, 22 June 2017, available at: https://s3-eu-west-2.amazonaws.com/lawcom-prod-storage-11jsxou24uy7q/uploads/2017/06/Final-report-Pension-funds-and-socia….pdf
[5] Allenbridge, Social Impact Investment and Pensions Survey, 2017, available at:
[6] UK Government, Pension Funds and Social Investment: Final Response, Policy Paper, 18/19 June 2018, available at: https://www.gov.uk/government/publications/pension-funds-and-social-investment-final-response
[7] Growing a Culture of Social Impact Investing in the UK, 2017, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/664321/Full_Report_Growing_a_Culture_of_Social_Impact_Investing_in_the_UK.pdf
[8] UK Government, PM commissions industry taskforce on social impact investment, Press Release, 9th March 2018, Available at: https://www.gov.uk/government/news/pm-commissions-industry-taskforce-on-social-impact-investment
[9] The Implementation Taskforce for Growing a Culture of Social Impact Investing, Growing a Culture of Social Impact Investing in the UK: Better Reporting, Oct. 2018, available at: https://www.grow-impact-investing.org/news/2018/10/8/better-reporting-landscape-report
[10] Growing a Culture of Social Impact Investing in the UK, 2017, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/664321/Full_Report_Growing_a_Culture_of_Social_Impact_Investing_in_the_UK.pdf
[11] The 16 most prevalent approaches as they emerged from the call for evidence. See section 3 in the Paper for details.