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[00:00:07.930] - David Brett
Welcome to the Investor Download the podcast about the themes driving markets and the economy now and in the future. I'm your host, David Brett. The Global Impact Investing Network, otherwise known as GIIN, released its latest insights recently. As you might expect, the survey is flattering to the impact industry; it's growing, it's affecting more areas, returns are getting better and so forth. So I spoke with Susanna Nicklin, the Non Executive Chair of the Schroder's BSC Social Impact Trust. I wanted to know how investors decide what investments they wanted to make, how they generate impact as well as the financial returns and future trends in the industry. But first of all, I wanted to start with the basics. I wanted to know what is an impact investment?
[00:01:04.880] - Susannah Nicklin
So impact investments are investments made with the intention to generate positive measurable social or environmental impact alongside a financial return. And we're all aware, I think, of the huge, complex and really costly issues that our societies face here in the UK and globally. The list is long and familiar: climate change, homelessness, mental and physical health, displacement of people, poverty, inequalities - it really is a huge range of issues that we're all facing. And impact investing has emerged in the last decade as a way to help tackle these big issues at scale. And intentionality is at the heart of impact investment. It starts with the goal of fixing something that's essential to our society and that's not working well or could work a whole lot better and where capital needs to be a part of that solution. So impact investment is structured to deliver both positive impact and financial return and both are measured, managed and reported on in impact investing.
[00:02:21.530] - David Brett
And what's the difference between impact investing and ethical investing?
[00:02:25.530] - Susannah Nicklin
Ethical or socially responsible investing has been around for decades and traditionally was a term used to describe the practise of excluding or divesting from assets or companies that don't align with investors' ethics or values, so often screening out sectors such as tobacco or gambling or guns, et cetera. Sustainable investing, which is perhaps a more recent and now very commonly used term, sometimes also ESG investing, environmental, social, governance investing is very different as well. It is currently also the topic of a lot of focus from regulators around the world to actually tighten up definitions around this, both for reporting purposes and for measurement purposes and to protect against greenwashing. And in general, sustainable investing describes strategies that incorporate the analysis of certain factors, so environmental, social, governance factors into the selection and management of assets. So either to avoid risks of unsustainable practises and their consequences, or to capture value from movement toward or the integration of more sustainable good practises or business models.
[00:03:49.190] - David Brett
I think a lot of people confuse impact investing with philanthropy and from what you're saying, most, if not all, impact investors would expect some sort of financial compensation for their investment. But can philanthropy and impact coexist.
[00:04:08.120] - Susannah Nicklin
Philanthropy and impact certainly sit alongside one another. Impact investing is not a replacement for philanthropy and both are really needed when you think about the scale of the issues we're facing. Philanthropic capital and government capital can't really solve them on their own and private capital is necessary and that's where impact investing comes in and it can complement philanthropy. So philanthropic capital often helps organisations get off the ground, prove new business models, prove new social interventions and maybe support organisations that are going into really tricky geographies or markets where there isn't the capital previously to create an ecosystem for that organisation to succeed. So philanthropic capital is really important in that way and then as that organisation has developed a model that has been proven to work, then impact investment can help it scale and sometimes sit alongside philanthropic capital to allow it to reach more people so universally accessible perhaps, or to provide security to facilitate more favourable commercial terms.
[00:05:26.830] - David Brett
That's the impact investing basics. How investors choose their impact investments and how they might make money from them.
[00:05:33.680] - Announcer
That's coming up on Apple podcasts spotify or wherever you get your podcasts. You're listening to the Investor download.
[00:05:44.830] - David Brett
Impact investing globally is estimated at the end of last year at $1.2 trillion and it's anticipated the sustainable growth rate sustainable investing market is going to be worth close to $50 trillion by 2025. While still small compared with the likes of the global bond market, there's high growth potential. So if I'm an investor wanting to make an impact, how do I decide where to invest my money?
[00:06:13.800] - Susannah Nicklin
You can now find impact versions of any asset class, so you can really weave impact throughout your portfolio based on your financial needs or your impact priorities or liquidity considerations, tax or other factors. So most impact investors start with the what, what outcomes do they want to target and how important are these outcomes to the stakeholders? What are the big problems that need to be solved and how can capital be structured well to solve these better so targeting issues, often using the 16 United Nations Strategic Development Goals called the SDGs that really are useful guideposts as to what the key factors are for helping society and the planet. But I think over time these will extend more broadly and deeply into new impact areas. Retail investors who are making choices about impact investing as opposed to institutional investors may have their own personal priorities and want to direct their capital towards impact goals that are close to home and they may want to use a specialist advisor to help them build a portfolio. And there are many of those that have emerged recently that are really good.
[00:07:35.810] - David Brett
Okay, so I've decided where I want my money to make an impact. Where can I put my money to make that impact?
[00:07:42.950] - Susannah Nicklin
It's not that hard. There are impact funds, impact investment trusts that offer diversification and are good entry points. You could put deposits with a social bank or a community development finance institution, accessing some of the tax reliefs available for that too. You can invest in issuances of debt for charities. You could do small amounts of equity crowdfunding or loans to CDFIs as well. We could actually have a whole podcast probably just on what some of the range of social investments are here in the UK. It's really inspiring and actually it can get quite emotional because when you actually look at what is happening under the bonnet, many of these organisations are really helping people who are in need or are building technologies or systems that are going to radically improve and make our society more resilient for the next generation.
[00:08:45.520] - David Brett
Before we get to the financial returns, I want to know how the impact of the investments are measured.
[00:08:51.350] - Susannah Nicklin
All investments, if we step back, all investments really have some impact on the world and impact investing is being upfront about that and trying to make it positive and managing and measuring that impact and also looking out for negative impacts and taking action as necessary. So as the industry grows, impact measurement has become increasingly standardised and professional, and there have been some really impressive global collaborations and partnerships through the GIIN, with their Iris programme, through the Impact Investing Institute here in the UK. Through something called the Impact Management Project and many others that have brought together a much more standardised and accessible framework and group of metrics. So it's very important to allow comparison across markets and to track progress and attract more capital with this. Transparency is key. We look for investments where the fund, manager or organisation knows what it wants to achieve, makes it really clear how they're doing that and measures whether they have achieved it. So, as a really simple example, to make it more real, you're sitting in London. Just west of you. Not far away, is a social enterprise called West London Zone, which Big Society Capital has invested in.
[00:10:20.980] - Susannah Nicklin
And it works with disadvantaged young people across three London boroughs and reports on whether they have improved attainment in English and math scores and also in their emotional well being. And that's an example of how an intentionally set, pre agreed set of outcomes is measured over time. And the results of that deliver not only impact, human impact, personal growth, but also a lot of cost savings down the road and also value to the economy and returns to Big Society Capital. Through the achievement of those outcomes.
[00:11:04.330] - David Brett
We know how people decide where to put the money, the type of investments available and how impact is measured. But can investors really make financial returns from impact investing? That's coming up in the final part of the show.
[00:11:20.410] - Announcer
Get in touch with us by email at email@example.com or visit our website, schroders.com/theinvestordownload.
[00:11:35.550] - David Brett
There will still be a lot of sceptics out there thinking it sounds idealistic, but realistically, how much money can I make from an impact investment? Are there any studies out there proving that financial returns can be made?
[00:11:48.740] - Susannah Nicklin
I think there's a lot of interesting research and more theoretical research going into this and if people are interested, there are ways to find that. I know the CFA is doing some really good work on this as well, with their impact curriculum, and investors can make impact investments and achieve good adjusted rates of return from private equity, which has historically been the biggest component of the impact investing universe over the last three years. According to the GIIN, the return there was 15% from that asset class and that exceeded the target return expectations by about 4%. And of course, that goes down to debt and cash deposits in the low single digits over the last three years, with real estate and public equities coming in around 10% in the studies. Usually investors will use traditional financial market benchmarks to target their returns. So they will have sort of risk profiles that are similar in terms of the targets they're expecting. And they might be looking for prime lending rates, they might look at inflation, stock market indices or other asset specific benchmarks, and an internal rates of return as well, when they're looking to assess the success of the performance of their impact holdings.
[00:13:11.750] - David Brett
But there sounds like a huge amount of risk for an investor to take, given the scale of the problems we face. So how do investors conflate the risks they're taking with their investments, with potential returns?
[00:13:23.870] - Susannah Nicklin
As in other markets, there are a variety of engines of return with different risk return characteristics across the impact space. For example, some impact investments are driven by revenue streams from the procurement of government services. So these are often resilient inflation linked cash flows. Some are investments in technologies, in new technologies that might solve environmental problems. And this could be a high growth, maybe more high risk engine of return. Some are what are known as, as I alluded to, with social outcomes contracts, results based financing, which means payouts, are linked to pre agreed outcomes. So these could be carbon emissions targets, employment targets, lower incidence of reoffending, that sort of thing. Where the savings that come from these really effective interventions or changes in models deliver savings that can then be shared with the investors for providing that upfront working capital. So a recent big society capital study actually on social outcomes contracts in the UK over the last decade, just to give listeners an idea of the value that's driven by these sorts of well structured arrangements and vehicles, is that from 72 contracts that were in existence over that decade, about £1.4 billion of value was created based on a commissioning budget of £139 million.
[00:15:07.330] - Susannah Nicklin
So what that means is that for one pound spent by the government, a further ten pounds was created in social, economic and fiscal value across a range of important social outcomes. So there are really many attractive points along the efficient frontier.
[00:15:27.950] - David Brett
And finally, what are the growth areas?
[00:15:30.580] - Susannah Nicklin
I think the growth areas simply because the scale of the problems and the scale of capital needed will be in the public market. Private markets are a natural home for impact investing, so that will continue and will continue to grow. But maybe an understanding of how to manage public equities in an impactful way is also being figured out. There's some debate and controversy around that, but I think on balance we're going to see people understanding how to make those portfolios impactful and operate as secondary market active owners in an impactful way. And the other theme that the Impact Investing Institute has looked at is what's called just transition and that is being mindful and looking for ways to assure that the transition from a carbon economy to a zero or low carbon economy is also respectful and supportive of people whose lives are involved in that.
[00:16:46.470] - David Brett
Susannah, thanks so much for joining me.
[00:16:49.320] - Susannah Nicklin
It's been a great pleasure. Thank you so much for inviting me and for taking the time today.
[00:16:56.130] - David Brett
Well, that was the show. We very much hope you enjoyed it. If you want to find out more, please head to Schroders.com/Insights and we're endeavouring to record as many of these shows in the studio, on video. And if you want to watch them in their full unabridged version, then go to Schroder's YouTube channel. If you want to get in touch with us, it's firstname.lastname@example.org. And remember, you can listen, subscribe and review the investor download wherever you get your podcasts. New shows drop every Thursday at 05:00 p.m.. UK time. But above all, keep safe and go well. Cheers.
[00:17:32.750] - Announcer
The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. The information is not an offer, solicitation or recommendation of any funds, services or products, or to adopt any investment strategy.