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“It’s not up to us to save the world.” This was the response I received from a trustee of one of the UK’s largest pension schemes recently to my pitch for impact investment.
The reaction was familiar. The paucity of data showing that you can “do well by doing good” makes it easy for schemes to ignore commentators who insist upon it. Yet for all the myths that have grown up discouraging this type of investing, institutional investors who avoid impact are missing out.
Impact investment — investment which delivers a social or environmental benefit — comes in many shapes and forms. It does not describe attempts to avoid harm, for example by divesting from weapons manufacturers or fossil fuel producers. Instead, it takes a more active stance, seeking investments which deliver benefits and contribute to the solutions we as a society want, whether in renewable energy, social housing or clean water, as well as delivering a financial return.
Investing in these solutions makes sense, not because it means investors stepping in to solve problems that policymakers should be addressing, but because proof is building that companies that successfully implement strategies to create profit-driven social impact can deliver superior shareholder returns. New research by London Business School demonstrates that companies which decide to improve sustainability in an area that is material to their business, for example mining companies focusing on reducing environmental damage, delivered higher returns over time than peers who ignored it.
For pension schemes in particular, impact investment holds specific appeal. Not only are many impact investments long-term in nature, and therefore a good match for scheme liabilities, but they should help increase members’ engagement and satisfaction with their pensions.
A recent survey of more than 6,000 people in the UK, conducted by the Department for International Development, found that more than 70 per cent wanted their own investments to achieve good for people and the planet.
However, growing interest in impact investment is also bringing new dangers along with it. “Impact washing” or “social washing” — calling an investment an impact investment when it really is not — is increasing as asset managers, conscious of its marketing appeal, jump on the impact bandwagon.
This means investors need better measurement and comparison tools as well as more supportive evidence that there is a fit between their requirements and the impact investments on offer.
Some pension schemes have overcome the challenges — both in perception and in process — which investing in impact brings. All will shortly have to, due to the tidal wave of regulation hitting investment managers and financial advisers.
Under the EU’s Mifid II regulations, which came into effect last year, investment firms providing advice and portfolio management must ensure that considerations of environmental, social and governance factors and risks are part of their processes. The UK’s new Stewardship Code, which takes effect in January, sets a requirement on signatories to manage capital “to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.
The Impact Investing Institute has been set up to respond to these developments. It will build evidence around the risks and returns that impact investment delivers, raise the competence and confidence of mainstream finance as it engages more with impact investment and make the case for impact investment to policymakers and regulators.
There may be hurdles, but all institutional investors should be thinking about how to invest in impact — whether or not they want to save the world.
The writer is the chief executive of the Impact Investing Institute and former business editor at the Financial Times
Letter in response to this article:
Let trustees who won’t take responsibility stand up and be accountable / From William Westgate, London N2, UK