Communication for Sustainable Development

Making social investment more appealing to institutional investors
Pensions funds, banks and private equity firms are showing more interest in investing in social enterprises. A new report explains the new investment packages that are being produced.
It is almost 20 years to the day since the UK Sustainable Investment Forum was founded to promote responsible investment.

With a strong history of philanthropy, the City of London has long supported the development of this sector, co-founding the London Accord – a co-operative research project to share thinking around sustainable investment - and, in partnership with the forum, rewarding innovation in sustainable finance through its sustainable city awards.

Over time, the social investment market has developed, providing innovative ways for social enterprises to raise funds and products that enable individuals and institutions to match their values and priorities to their investments.

Despite the undoubted progress that has been made, social enterprises continue to rely heavily on traditional sources for funding, namely the government and wealthy individuals. Given the gaping hole in the UK's public finances and the necessary cuts in public expenditure that followed, all this is set to change.

Building on previous innovations, we must now create a new financial market almost from scratch; something sustainable that will not only complement and build on government funding but that will also allow the social investment market to grow and social enterprise to prosper.

Through its creation of the Big Society Bank – due to be launched later this year with £600m of new capital at its disposal – the government is giving this priority.

In 2010, investment into social enterprises was around £190m: 10 providers were responsible for 96% of this total. While this is hardly an insignificant amount, it is a mere drop in the ocean compared to what needs to be achieved if the funding issues for social enterprises are to be resolved.

That is why the City of London, along with the City Bridge Trust and the Big Lottery Fund, commissioned the Investor Perspectives on Social Enterprise Financing report that provides an insight into what can be done to make social investment more appealing to institutional investors.

At an event at Guildhall to launch the report today, its author, Katy Hill from ClearlySo, highlighted the way in which the International Finance Fund for Immunisation has used tiered finance to raise $3bn (£1.8bn) in AAA-rated bond offerings. This money has prevented an estimated 3.4 million premature deaths, through raising vaccine coverage in 70 of the world's poorest countries while providing investors with improved returns over sovereign bonds – a demonstrable social impact if ever I have seen one.

The report makes clear that there is a growing interest in social investment across a broad spectrum of potential institutional investors, from pension fund managers, banks and private equity firms to independent financial advisers and charitable foundations.

However, it is made equally clear that while modern investors often want to achieve tangible social benefits as well as financial returns, the products on offer within the marketplace are not fully matching investor demands.

Until this gap has been bridged, the social investment market will not be able to grow sufficiently to provide the requisite support for social enterprises across the UK.

Although there is no one-size-fits-all solution, many of the institutional investors identified similar outcomes that would make them more likely to engage in social investment, outcomes such as an expectation of market or close to market returns, some guarantee or mitigation of risk, liquidity, the robust measurement of social returns, large investment opportunities and products and managers with a track record of success in well-established city institutions.

Clearly, any future financial products must look to incorporate some or all of these features depending on the investor group that is being targeted.

The Big Society Bank – an embodiment of the government's social enterprise agenda – has been specifically asked to build the marketplace for social investment, and it thus has an important role to play in the future development of this sector.

If products can be developed that offer social benefits without requiring what many consider to be prohibitive sacrifices, then a greater range of institutional investors should start to commit larger amounts of money to social investment.

And while this report represents only a small stepping-stone in the development of a nascent market, it also provides vital data about the needs and expectations of institutional investors.

We need to think creatively about the way we can fund and support the vital work carried out by our charities, voluntary organisations, social enterprises and co-operatives.

The City boasts a workforce that is among the most skilled and innovative of any in the world, and it is incumbent upon all of us working here to put these skills to good use, providing investment vehicles that not only yield profits for investors but produce tangible benefits for society.

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