What’s being done to drive impact investing forward in the UK?

It has become imperative that the UK increases its impact investing. The social challenges we are experiencing are increasing rapidly, with significantly higher levels of poverty and inequality.

A quarter of all children in the UK are living in absolute poverty. This is not only a disaster for them, it has serious cost implications for the government due to the impact on their mental and physical health, and the resulting pressures this will put on services.

Past experience has shown that rising inequality brings with it social instability. Most people who live in the UK like the fact it’s a stable, safe and free environment so solving this problem of inequality is a priority – but it will be a huge cost to the public purse.

With social investment in particular, there is emerging evidence of tangible social value for every pound that is invested.

My focus has long been on helping our clients to solve complex issues, and there is nothing more complex than giving and investing your assets in line with your values. But we are now at a point where all our efforts need to dial up – we need to move from theory to implementation.

The economic and environmental crises are interlinked

While the economic crises are taking up much of our attention, the environmental one hasn’t gone away. We have to limit temperature rise and to do that we need ?to halve our carbon emissions globally by 2030, inline with the Paris Agreement. Not meeting this target will mean we remain on a planetary warming trajectory that could be catastrophic.

The climate focus in the UK is currently on ?providing energy which is reliable, clean and affordable to people. There’s a bigger issue however in that climate change ?has no borders, increasing temperatures are already negatively impacting the lives of people across the world. We need to take urgent action to decarbonise every sector from energy through to food and the built environment. ?This is why we need to move all of the investments we make onto a more sustainable footing.

That is the bad news. The good news is we do have the expertise, technology and importantly the money that can help solve a lot of these problems, and the UK is showing strong leadership in impact investing across a wide range of asset classes. We now need to increase the flow of capital into the projects that will have the most positive impact to help solve the environmental and social challenges that we face.

To scale up the flow of capital into impact investment I think there are three critical groups in the eco-system who need to take action now:

1.????Asset Owners

By this I mean anyone who allocates capital. They could be a private client or family but also those who invest for the benefit of others. In particular, there are huge pools of assets within pension funds and charities. The top 300 charities and foundations in the UK control assets of over ￡72 billion alone, according to the ACF Giving Trends 2021 report (Association of Charitable Foundations). UK pension funds assets are in the trillions. What’s very exciting to me is that this group is starting to incorporate the third dimension of investing “impact” into their investment policies and capital allocation decisions.

Asset owners are going to be crucial for the success of impact investing because they will create the demand required for asset and wealth managers to respond to. That’s a key part of scaling up capital flows into impact investing.

2.????Asset and wealth managers

Asset and wealth managers are trying to innovate and create investment solutions across listed and unlisted markets in response to demand from asset owners. This will enable the flow of capital into areas that are contributing to solving environmental and social challenges.

The types of environmental and social issues they are trying to solve are broad. For example, products have been launched to provide the much-needed finance to scale up renewable energy infrastructure in emerging markets. It is important that, as their populations grow, they rightly have the same level of access to energy that we have enjoyed but that this is clean energy, not based on coal and other fossil fuels. From a social perspective, we launched the ground breaking Schroders Big Society Capital Social Impact Investment Trust and Blue Orchard are doing fantastic work with Covid relief, climate and social funds. ??

While there are pockets of innovation, we need to do more. The Global Impact Investing Network (GIIN) has just this week released its annual market sizing for impact and has estimated this to be ￡1.16 trillion. This growth is encouraging, but it’s a fraction of the capital we need to allocate given the speed with which we need to act. We still need to see a significant ramping up of capital flows.

What’s really encouraging is that recent innovations within asset managers impact capabilities, means that wealth managers and other advisers can now construct portfolios for asset owners that can deliver on both impact and financial objectives. We can create portfolios with varying “intensities of impact” across multiple asset classes and regions, whilst delivering the returns these owners need, whether that’s to meet their pension liabilities, their grant-making or to fund their own lifestyles. That’s happened in a relatively short space of time and I am excited to see what happens over the next few years.

3.????Government and philanthropists

One area which is not discussed enough is the different types of capital needed to deliver solutions across environmental and social challenges. You need to use the right capital at the right time. Some investors and philanthropists are willing to take on more risk and achieve less returns in pursuit of higher impact, others will need a market rate of return. We are just beginning to scratch the surface when it comes to creating solutions for these different impact and return requirements.

Government has a really exciting role to play in supporting this next phase of impact investing. Coupled with philanthropists, they can provide flexible capital through various mechanisms. Examples of the UK Government already doing this include ?providing first loss capital, tax reliefs and social investment through the dormant assets scheme. ?

I mentioned that the UK is leading the way in certain areas of impact investing. However, we can definitely learn from other countries which are facing the same challenges. ?For example, the Community Development Finance Initiative (CDFI) in the US has unlocked billions of private capital to invest in place-based investing, creating jobs and much need homes for local communities with a very low loss rate to investors. We have been involved recently with various Government consultations in this area of finance and it’s great to see their support. ???

But, it will take a combination of all the groups above to effectively increase capital flows into impact investing in the UK.

Beacon Collaborative is helping to steer this by finding out where the blockages are and what needs to be done to unlock these. Collaborating is essential to increase philanthropy and impact investment among the wealthy in the UK and realise its vision to grow the number of people using more of their private assets for public good. The Beacon Philanthropy and Impact Forum could not come at a more important time to help drive UK philanthropy and investment. We are delighted to be a part of this important conversation.

Bio:

Head of Impact and a key member of the Cazenove Capital sustainability leadership team, Lyn Tomlinson sits on the sustainable investment and asset class committees which are responsible for the investment strategy, selection and monitoring of sustainable and impact funds held within client portfolios. Lyn is also a member of the impact steering committee for Schroders, and the investment committee of the Schroders Big Society Capital Social Impact Trust. She is a board member of UK Sustainable and Investment Finance Association (UKSIF) and Philanthropy Impact.

Disclaimer:

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited,?1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.?

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