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Commentary

Inertia a Barrier to Impact

The case for allocating to social investment solutions has never been clearer and relevant, according to Big Issue Invest Chair Mark Porter.

The 2024 Joseph Rowntree Foundation poverty survey tells us that 14.4 million people are in poverty in the UK. That’s approximately 22% of the population, a level roughly 50% higher than much of the 1970s. This is more prevalent still in children, with approximately 29% of under 18s suffer from poverty. In single parent families, this is over 40%.

Big Issue Invest seeks to develop investment solutions for institutions which can help alleviate this domestic crisis. Objectively, traditional mainstream investment allocation strategies that prioritise overseas assets cannot tackle UK social issues. Even UK business and investment opportunities in aggregate do little to help tackle UK poverty.

The social impact funds which Big Issue Invest runs directly invest in UK-based businesses and enterprises which tackle the causes of poverty and provide solutions to it. Our investments include one in healthcare services in Cornwall, an idyllic destination for millions of tourists, but also a permanent home to remote and underserved communities.

An investment of £1 million has allowed Smile Together, an employee-owned social enterprise by the Cornish, for the Cornish, to expand their high quality dental services to people who would otherwise have poor or no dental provision. That about sums up Big Issue Invest – investments that help people smile.

Break down the barriers

Big Issue Invest recently hosted asset owners at the House of Lords for Pension and Insurance Spring 2024 social investment event, several weeks before the General Election was called.

This was part of our efforts to provide insurance and pension fund allocators with a blueprint for how to invest in social impact to contribute to better outcomes on UK social issues. The recent first close of Big Issue Invest’s £75m social impact debt fund has provided the framework with targeted intentional impact that institutional asset allocators have been able to subscribe to. The fund seeks to generate positive impact within specific social impact sectors, such as affordable housing and health, whilst also delivering a sufficiently compelling financial return.

While asset owners increasingly understand the importance of social impact investment, they need to break away from the inertia of traditional allocation frameworks in respect of impact and fiduciary duty in the 21st century.

At the social investment event, we heard from senior investment professionals at two global insurance businesses, Aspen and Beazley, who have collectively allocated more than £10m to Big Issue Invest’s latest social impact debt fund. Their experience highlighted the constraints of fiduciary duty and legacy capital allocation processes as well as several other factors.

These included the limited size and liquidity of social impact funds, intentional positive social impact being distinct from ESG/impact more generally, the nascent levels of understanding of this within boards and investment committees, the necessity of a house social investment policy and the requirement for investment consultants to factor this aspect more solidly into their recommendation approach.

In a discussion moderated by Jamie Broderick, Deputy Chair of the Impact Investing Institute, it was clear that principals choosing social impact had to apply an outweighed level of attention to deploy in the space. It was not straightforward or easy to convince investment committees and boards to commit to an investment with social return, not exclusively committed to improving the risk-adjusted financial return.

Many in the audience recognised the need to allocate in this area from a citizenship and retail client perspective. But prior knowledge of the space, confidence in the necessity of taking action, participating in the relevant impact investment forums and explicit commitment in accounts and public documents were all ingredients to achieving executive-level approval.

Inertia of the legacy allocation process

Regulated asset owners use proven, well-tested, long-term asset allocation and risk management processes to ensure that financial objectives are met by managing financial returns and risks within the relevant component of a multi-asset portfolio.

Many of these frameworks have been set up or make thorough use of highly influential investment consultants. In the last few decades, such frameworks have been established specifically to target financial risks and returns. But they were not set up with an assessment of social, community or environmental impact or the degree to which an investment helps tackle challenging social issues like homelessness or poverty.

To allocate to social impact, the principal intentionality of the investment, in this case alleviating social issues, must be part of the fund assessment framework. Big Issue investments require principal intentionality of impact and include organisations offering services in housing, health and social care, education and training. Examples include dental care where it is otherwise unavailable, underwriting palliative care in hospices where NHS funding does not permit cost recovery, free quality early years nursery provision and vocational training for young people failed by mainstream education.

Where this non-financial outcome analysis has sufficient airtime, our investors have pioneered a trail that demonstrates a way for committees and boards to understand the trade-off between pure financial return and competitive financial returns which also deliver social impact as a primary metric.

Fiduciary responsibility and social impact

Whilst investment allocation frameworks in place today have largely been derived from empirically-testing legacy approaches, this has not involved analysing the positive or negative social outcomes generated from the last four decades of investment allocation policies.

Were it to be tested within the UK investment system, for example, it is highly likely that they would show balanced financial returns against risk, most likely negative environmental outcomes from invested assets and average negative social impact outcomes from invested assets (witness a 50% increase in UK poverty levels).

Clearly government has a primary responsibility for social care and minimum living standards and poverty levels, but can the private sector assist with this process or should it explicitly shrug any responsibility for alleviation of these issues even when geographically coexisting? If, after government funding, the sum of private investment in UK assets leaves the 22% of the population in poverty, a significant worsening over 40 years, then a typical private investment policy has been part of a system generating negative social impact whilst creating positive financial returns. This must change.

Either fiduciary duty must factor in the underlying change of social circumstances of communities that an investment asset reaches, or asset owners will need to recognise that fiduciary duty can result in negative outcomes which requires a separate investment/risk analysis framework to rectify.

Alternatively, consumers are likely to vote with their feet as insurance product buyers and pension savers (particularly later defined contribution pension savers) start to become educated about the lack of impact that their standard investment portfolio generates on their behalf. The customer might then seek to rectify this challenge directly with their purchase choices.

The need for more asset owners to allocate to social investment solutions has never been clearer and relevant.

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