Impact Investing in the UK and the US - How Insolvency Laws Shape Differing Landscapes
Geoff Trotter
Executive Coach at Is This You? / CEO, ESG Excel / NBSL, Expert-in-Residence | Scaling Regenerative Businesses - from the Inside Out | Organisational Capacity Building | ESG Advisory Services | Former Big 4 Partner
The Impact Investing Institute in the UK – in partnership with Social Finance and in collaboration with the The Global Impact Investing Network (GIIN) – have produced this fabulous report [https://www.impactinvest.org.uk/resources/publications/the-uk-impact-investing-market-size-scope-and-potential/] outlining the opportunity for the UK Government, the Private Sector and Impact Investors to drive “the right kind of Growth” (my words) here in the UK.
A very rudimentary read through of the report (with a lens focused on Insolvency Laws) [see my earlier observation on such here in an earlier LinkedIn post - https://www.dhirubhai.net/posts/geofftrotter_entrepreneurs-investors-financeinstitutions-activity-7213432764602155008-toj5?] has me thinking the Impact Investing markets in the UK and the US have evolved differently, influenced by various factors, including the business insolvency laws in each country. Specifically, whilst both markets have seen growth, the disparities in insolvency laws have significantly shaped their size, scope and investor behavior. Understanding these legal frameworks helps explain why impact investing in the UK and the US differs across multiple dimensions:
1. Market Size
The UK's impact investing market reached ￡76.8 billion in assets under management (AUM) by the end of 2023, accounting for about 0.8% of the overall UK investment market and 8% of the global impact investing market (see the attached report). In contrast, from the same report, the US, which represents around 40% of the global impact investing market, had an estimated market size of approximately USD 465.6 billion in AUM in 2021.
The US market's larger size can be partly attributed to its more flexible insolvency laws, specifically Chapter 11 bankruptcy, which allows businesses to restructure rather than liquidate. This approach encourages investors to take on higher-risk ventures, including startups and innovative social enterprises. Conversely, the UK's more stringent insolvency framework prioritizes creditor protection and may deter investors from funding high-risk startups due to the difficulty of recovery in the event of financial distress. Reforming UK insolvency laws to offer more debtor-friendly restructuring options could accelerate growth in the impact investing market by attracting more investors willing to take on risk.
2. Growth Rate
Between 2021 and 2023, the UK impact investing market experienced a 10.1% compound annual growth rate (CAGR), outpacing the broader UK asset management sector, which had an annual growth rate of between -2% and 0% during the same period. This growth suggests increasing investor interest despite the market's cautious approach. However, if the UK's insolvency laws were reformed to resemble the US' Chapter 11 framework, the growth rate could potentially increase further. A more forgiving system would reduce investor risk, thereby fostering higher investments in startups and social enterprises.
In the US, the more accommodating insolvency laws have already encouraged rapid growth in impact investing. According to US SIF Foundation research, impact investing and sustainable investing AUM in the US grew by 42% between 2018 and 2020, reflecting an upward trend fueled by investor confidence in a system that supports business recovery during financial distress.
3. Investment Focus Areas
The UK's insolvency laws influence a cautious investment strategy, with impact investments concentrated in real estate, energy, healthcare, and financial services. This focus on lower-risk sectors reflects the desire to invest in assets that can be easily sold or repurposed if liquidation becomes necessary. Changing insolvency laws to allow restructuring could encourage more impact investments in high-risk sectors such as technology, microfinance and social enterprises.
In the US, the flexibility of Chapter 11 bankruptcy has created a more diversified market, allowing investors to support high-risk, high-reward sectors, such as clean energy startups, community-focused social enterprises and technology. The broader focus has contributed to the US impact investing market's size and diversity. If the UK were to reform its insolvency laws, it could unlock similar diversification, expanding the scope of investments and encouraging innovative solutions to social and environmental challenges.
4. Policy Environment and Regulation
The UK government has been proactive in promoting impact investing, with initiatives like the Sustainability Disclosure Requirements (SDR) and impact-focused labels for retail investments. However, stringent insolvency laws present a regulatory barrier to ‘high-impact / high-risk’ ventures. Reforming these laws to include structured pathways for business recovery could align with the government's aim to create a supportive ecosystem for impact investing.
In the US, Chapter 11 insolvency laws are integral to the investment policy framework. They have created an environment conducive to risk-taking, enabling businesses to weather financial difficulties and investors to maintain confidence. By adopting similar legal reforms, the UK could bolster its impact investing landscape and attract more capital toward high-impact ventures.
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5. Investor Types
The stricter insolvency regime in the UK has shaped a more cautious approach to impact investing among institutional investors like pension funds and foundations. Direct involvement from these investors remains limited compared to their US counterparts, who benefit from Chapter 11’s debtor-friendly provisions. If the UK amended its insolvency laws, institutional investors might be more willing to invest in high-risk, early-stage enterprises, thereby diversifying the market and increasing capital flow.
The US' diverse range of investors, including foundations, private investors (e.g., family offices, high-net-worth individuals) and institutional investors, are actively involved in impact investing. The ability for businesses to restructure and recover lowers perceived investment risks, encouraging a wide variety of investor types to participate in the market. Similar reforms in the UK could attract more private capital and institutional funds, boosting the market's size and diversity.
6. Barriers and Challenges
The stringent insolvency process in the UK creates barriers to impact investing, particularly in sectors requiring long-term investment and high-risk tolerance. Investors may face difficulties recovering their investments if a business fails, leading to conservative strategies that avoid high-impact startups. Legal reforms that introduce restructuring mechanisms could address these barriers, promoting investor confidence and encouraging investments in innovative, high-risk projects.
In the US, Chapter 11 mitigates business failure risks by offering companies a second chance to restructure. This safety net has helped maintain investor confidence and supports the innovation and growth of the impact investing market. By adopting similar practices, the UK could overcome existing challenges and create a more dynamic, resilient impact investing market.
7. Government Support and Initiatives
The UK Government has demonstrated strong support for impact investing, but the current insolvency laws create implicit barriers for new enterprises. By reforming these laws, the government could foster blended finance structures and enhance public-private partnerships, creating a more vibrant impact investing ecosystem.
In the US, the combination of government support and flexible bankruptcy laws has facilitated long-term investments and the scaling of social enterprises. This has contributed to the maturity and diversity of the US impact investing market. Similar legal reforms in the UK would enable public and private capital to mobilize more effectively, addressing systemic challenges such as economic inequality and climate change.
Summary
The differences in insolvency laws between the UK and the US have significantly shaped the impact investing landscapes in both countries. The US' debtor-friendly process has encouraged a wider variety of investments, higher risk tolerance and, I believe, greater innovation in impact investing. In contrast, the UK's stricter insolvency laws have contributed to a more cautious investment approach, focusing on lower-risk sectors and limiting investor diversity.
BUT if the UK Government were to reform its insolvency laws to support business restructuring, it could:
Such changes could create a more vibrant, expansive impact investing market in the UK, mirroring some of the dynamism I witnessed during my time in the US.
Thoughts?
#Purpose #Impact #ImpInv #InsolvencyLaws #PolicyShift #StartUps #ScaleUps #SocialJustice #EnvironmentalJustice ReGenerate