Pension scheme trustees, employers and pension providers are being called on to do more to engage scheme members with their pensions to help them connect with the social impacts of the investments being made on their behalf, a government-backed report argues.
The report, Growing a Culture of Social Impact Investing in the UK, by an advisory group led by Allianz Global Investors vice-chair Elizabeth Corley, argues that social impact investing will only achieve its full potential if measures are taken to increase engagement with investment objectives, make it easier to invest, improve deal flow and scale, strengthen industry competence and improve reporting of non-financial outcomes.
The report argues that engaging scheme members will enable them to align their investments with their non-financial values. The report wants social impact investments to be offered as potential fund choices providing they have an appropriate risk/reward profile.
The report also cites research from Allenbridge that shows many pension consultants are not well informed on social impact investing as an investment approach, impeding trustees’ confidence in using to social impact investments.
Other research quoted in the report shows nearly 40 per cent of pension fund trustees believe there is a requirement for daily pricing and liquidity, holding back impact investing, when is no such requirement for trust-based schemes. It is primarily the trading platforms commonly used by pension funds that require daily pricing and dealing.
The report’s authors argue that the FCA, PRA, TPR, FOS and other regulators should embed social impact considerations into their regulatory frameworks.
Social impact investing differs from environment, social and governance (ESG) in its intention. Social impact investing specifically targets companies and organisations that intentionally create a positive social benefit, either as a primary or secondary purpose. Social impact investments currently available include dedicated bond funds, direct lending and equity exposure.
The report calls on the financial services industry to build capability and integrate social impact into business as usual. It argues the industry also needs to develop a robust performance and outcome evidence base and provide tools and training for pension scheme trustees and IFAs. Professional bodies such as the CII, CFA Institute and CISI should accelerate professional development around ESG and social impact investment, and work with industry to ensure the use of common terms across educational materials, says the report.
The report also calls for the Investment Association and CFA Society UK to develop consistent good practice and set common standards for social impact investing.
The UK impact investing market, including both social and environmental impact, is currently worth £150bn, based on a definition specifying that investments are made with the intention of creating a positive outcome, including in renewable infrastructure, social housing, social businesses and green bonds.
In 2012 the government and major UK high street banks set up an independent investment institution – Big Society Capital – to grow the social investment market in the UK and improve people’s lives by connecting charities and social enterprises to investment. But the report says the UK lags behind other countries in social impact investing. In France larger companies are required to offer staff an optional social savings fund, which had received money from more than a million people by the end of 2015. The Dutch financial industry, including mainstream banks and pension funds, has recently committed to channel more capital to further UN Social Development Goals. Other governments including those of Canada and Australia are launching strategies to scale up their social impact investing markets.
Research from Barclays in 2015 found 56 per cent of Britons are interested in purchasing social impact investment products.
Environmental, Social, and Governance (ESG) investing, the forerunner of social impact investing, has grown rapidly over the last decade. A quarter of all global assets under management in 2016 were invested in sustainable investments that had considered ESG factors as part of their portfolio selection and management.
But the report highlights key challenges for the further rollout of social impact investing, with a lack of an agreed definition as to what it actually is, a major obstacle. The report argues a clear definition is essential, to avoid ‘social washing’, where providers brand investments as ‘social’ when they are not, and to clarify whether social impact is a primary objective of the investment or a potential by-product.
It proposes the following definition of social impact investment: “Social impact investment consists of investment in the share or loan capital of those companies and enterprises that not only measure and report their wider impact on society – but also hold themselves accountable for delivering and increasing positive impact.”
A lack of common standards is also cited as a challenge. ImpactBase, the online platform for impact products, currently lists hundreds of funds, with range of objectives, strategies and approaches to investment, governance, impact measurement, monitoring and reporting. Many are not listed and about half are closed funds, which makes it challenging for advisers to assess funds and for investors to understand how the propositions can help them achieve their social and financial goals, the report says.
Specific report recommendations for the pensions sector
Regulators – Clarify permitted links rules: The FCA should provide guidance on the permitted links rules (i.e. how schemes can manage illiquid investments and produce unit prices for illiquid assets) to better enable pension scheme providers and Independent Governance Committees to incorporate more illiquid social impact investments into contract- based schemes.
Regulators – Advise trustees in relation to social impact: The Pensions Regulator should provide trustees and pension scheme providers with guidance on reconciling liquidity concerns with the benefits
of investing in illiquid assets such as infrastructure and some social impact investments (as per the Law Commission’s options for reform).
Financial services industry – Tackle platform liquidity requirements: Industry bodies, platform providers and pension trustees should work with
the government to explore in detail whether current platform liquidity requirements (i.e. the requirement for daily trading) are in the best interests of pension savers and the wider economy.
Pension scheme trustees and employers – Engage better with pension scheme members: Trustees should work with employers and pension providers to develop best practice for better engaging scheme members with their pension investments and encouraging them to register on their pension platforms.
Pension scheme trustees – Statement of investment policies: Trustees to state their policies in relation to stewardship, long-term risks and members’ ethical and other concerns in the scheme’s Statement of investment principles (as per the Law Commission’s recommendations)
Pension scheme trustees – Expand the Statement of investment principles, over time: Over time trustees may consider including wording in the Statement of investment principles relating to their intent to favour investments with positive impact and/ or to avoid investments with a negative impact.
Pension scheme trustees – Incorporate social impact options into pension scheme chosen funds: Trustees, pension consultants and personal pension providers should consider including social impact investments in chosen funds (subject to Law Commission guidance) where there is good evidence that their scheme members are actively engaging in pension choices.
Pension scheme trustees – Incorporate social impact investment into pension scheme default funds: Trustees, pension consultants and personal pension providers should consider including social impact investments in default funds, subject to Law Commission guidance around appropriate risk- adjusted financial returns. Schemes should review their portfolios to identify the extent to which they already invest in social impact. They should work progressively towards including a meaningful allocation to social impact investments in default funds as the market develops.
Employers — Align pensions and benefits with corporate social responsibility policies (CSR): Employers that have already committed to CSR policies should align their employee benefits and pensions with the policies, as recommended by the Principles for Responsible Investment.
Employers — Encourage employee engagement: Large employers should consult employees on their investment preferences when (re)appointing
a pension provider (taking into account any other existing requirements). Communicating in relation to a scheme’s social impact investments might provide an opportunity to invite additional contributions from scheme members.
Social impact investing funds in practice
Social impact investment targeting market-rate returns:
Columbia Threadneedle Social Bond Fund
In 2014, Columbia Threadneedle launched a fund in partnership with Big Issue Invest that offers investors the dual benefit of financial returns (commensurate with the UK corporate bond market) and positive social value generated by deploying capital to companies looking to fund socially beneficial activities.
The Social Bond Fund has £99 million assets under management and has met both its financial and social return objectives – providing an annualised return of 6.6% and investing in 83 bonds in thematic areas such as affordable housing and health and social care.16 Big Issue Invest, as social partner, forms the majority of a social advisory committee that oversees and monitors the social efficacy of the fund.
Social impact investment with focus on social impact:
Resonance Property Funds
Resonance has launched three social impact Limited Partnership property funds since 2013 totalling investment of around £135 million, focused on providing move-on accommodation to individuals and families who are excluded from the private rented sector due to having a ‘homeless’ background.
The funds acquire properties throughout the UK and lease them to a homelessness charity. Investors thereby obtain an annual rental yield and also capital appreciation on the portfolio at the end of the fund’s life, but do not take risk on the individual tenants.
Social impact investment tolerating higher risk/lower possible returns:
Bridges Evergreen Holdings
Designed to free ambitious mission-led businesses from the constraints of traditional fund structures,
the fund invests in profit-with-purpose companies, public sector spin-outs, social sector organisations and employee-owned businesses. In addition to financial capital, it also offers strategic, operational and impact management support.
Launched in 2016, it is structured as a holding company rather than a fund so it can provide ongoing support over the long term, with no exit requirement.
