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Michael Hart, Head of Distribution at Gresham House, challenges the assertion that allocations to social impact investments are being disregarded because pension fund trustees have a fiduciary duty to deliver the best risk-adjusted returns, and argues that greater education from industry bodies on the topic is needed to show that social impact investment can offer healthy financial returns while also delivering a social impact aligned with the views of pension savers
A key reason why social impact investment receives resistance from pension trustees and pensions managers is that they do not fully understand what it means.
The progress of social impact investing has been hindered by the fallacy that investing in projects that deliver a positive social impact means a compromise on profits. For instance, many trustees associate social impact investment with philanthropy – which is not suitable for a local authority pension fund that has a fiduciary responsibility to achieve the best risk adjusted returns. However, impact investing has made significant progress in recent years, with innovative and impactful strategies now available that deliver similar financial returns whilst also having a positive impact on society.
Sustainable impact investing strategies are far from semi-philanthropic, they are a subset of commercial investing that happens to be sustainable and impactful. They can deliver risk-adjusted financial returns, allow pension funds to invest behind significant macro trends and are an excellent way of diversifying equity risk.
A report by Allenbridge published in 2017, entitled “Growing a Culture of Social Impact Investing in the UK”, highlighted the need for more educational information around social impact investing – 82% of the pension trustees and pensions managers that were interviewed for the report felt they lacked hard data on social impact investment.
Effective education is needed to dispel the myth that impact investments cannot be considered by pension fund trustees. The Department for Work and Pensions (DWP) this week issued a consultation document aimed at clearing up confusion over the extent to which pension schemes can allow ESG concerns to influence investment decisions. Pensions for Purpose is also an initiative striving to fill this void – it is a platform for asset managers to share thought leadership, blogs, and case studies via one central platform on social impact investing, which makes it easier for pension fund investors to access material so that trustees can have a more informed debate on the topic.
We need more initiatives like Pensions for Purpose, to help bring about a greater level of clarity and understanding of social impact investments, more information on their risk/return characteristics, and an awareness of how to measure impact. The onus is also on regulators, such as the Financial Conduct Authority and The Pensions Regulator, as well as industry bodies, such as the Investment Association and CFA Society UK, to publish educational material and develop best practice and common standards for social impact investing. Data providers like Bloomberg play a part, particularly around best practice tools to measure social impact investments.
Social impact investment has been on investors’ radars for years. There have been endless reports published by government advisory groups and regulatory bodies on the topic, exploring how the UK can build a nationwide culture of social impact investment;
Interest among individuals in seeing their savings and investments achieve social and environmental good continues to grow – industry bodies need to commit to building an educational infrastructure on the societal and financial benefits of social impact investment. It is only when pension fund trustees understand that social impact investment can offer healthy financial returns while also delivering a social impact which is in line with pension savers’ views, that it will make the leap from a niche strategy into the main stream.
“The investment community struggles to fully integrate social impact considerations into a compelling investment strategy,” says Curtis Ravenel, Global Head, Sustainable Business and Finance, Bloomberg L.P.