Risk and return: the advisors' view of social investment

As more individuals begin to embrace social investment as part of their philanthropy, they increasingly are turning to their professional advisors for advice and guidance. Here, in a panel moderated by UKSIF’s Adam Ognall, five investment managers and advisors reflect on their clients’ growing interest in social investment and how they see the market developing.

Editor’s note: This panel discussion is a special report from UKSIF, the sustainable investment and finance association, whose ‘What’s new in social investment?’ column will return in June.

How would you define ‘social investment’?

GB: Broadly, it is an investment in an organisation or fund whose primary mission is to deliver positive social or environmental impact, and whose method for achieving such impact is through profitable trading. Profitability should not conflict with impact: what is good for business can be equally good for communities and natural environments. Many social businesses have achieved consistent growth, generating 2%-8% annual returns, so providing good financial return as well as not being correlated to traditional markets.

RK: It is not a retail investment. It is off-piste, niche and particular to the project concerned. Social investments can provide a market rate of return in terms of income and/or capital growth, and if carefully designed can also provide tax reliefs (e.g., EIS, CITR). Alternatively a social investment can provide a lesser return on the explicit understanding that the social dividend has substantial benefit for the investor. In these cases I think the ‘investment’ nature is critical: it encourages the investor to remain engaged with their investment, something often lacking with charitable donations.

BD: For me, the old way of thinking about CSR is no longer relevant; categorising companies by what they don’t do offers limited value.  It also goes beyond the mantra ‘doing good to do well’. As investors, we aim to identify those businesses that can deliver consistently superior investment performance in a manner consistent with ‘principled investment management’. This has broad application across all investment types.

What is interest among your clients in social investment, and how do you see this developing in the next few years?

MM: Demand is reasonably good, although investors are still gathering themselves after the turmoil of 2008. An unparalleled set of factors is encouraging social investment over the next few years: low interest rates combined with high levels of market volatility and growing suspicion of mainstream offerings in the wake of recent scandals.  Social investment remains broadly focused, which is one of its strengths. Renewable energy and energy efficiency is likely to remain a key theme, and investors remain keen to support developing countries, through microfinance and other pro-development opportunities. We expect to see resurgent interest in UK investments too, for example in areas such as social housing and community organisations, which may struggle to get mainstream finance.

RK: Generally my clients want to receive a reasonable rate of return and cannot afford to forego interest. Recent social investments have related to housing – affordable housing in rural communities and sustainable property development – and community-owned electricity generation schemes such as wind farms and hydro electricity. We are starting to see local groups enquiring about supporting the local economy, and the possibility of business succession strategies so locally owned shops do not just close when the owners retire.

GB: Interest in social investing is growing as the current turmoil in financial services is encouraging people to rethink traditional views on capital and risk, look more deeply at their impact, and take new actions from a new point of view, mixing risk, return and impact together. I anticipate greater expertise in social investing emerging from intermediaries servicing top end private clients, and a growth in mission-aligned investing by charities and foundations. 

AZ: To date client interest has been fairly limited, largely because there is a limited number of investible social businesses around – we need more people like Anita Roddick in this world! The interest is broad as motives for seeking social return are varied.  Although it is fair to say that investors tend to be more certain about what they do not want to invest in rather then what they do!

What type of advice and support do clients typically seek?

AZ: Once the social motive has been agreed, the main question is whether the clients’ capital (at the very least) will be preserved.  Other questions that both the clients and we as advisors need to clarify include management experience and past performance, liquidity and size, investment structure and reporting mechanisms on the social impact as well as the commercial and financial progress of the investment.

MM: It is up to us to point out to clients some of the key issues, such as that the investments are illiquid and should generally be considered high risk. Finding and selecting the right investments remains our biggest challenge at the moment – deal flow is reasonable but identifying the right opportunities to back is key.  The impact of the recession is a big concern. We feel that the social investment model is fundamentally resilient and many organisations are reasonably well placed – many have strong customer and staff loyalty, strong reputations and access to supportive networks. However, the full impact of the recession has yet to be felt on many organisations. A lot of it will come down to good financial management.

BD: We’re aiming to address some pretty complex issues.  Take water.  For a client to make an informed investment decision around this theme, they need to think about policy issues, regulation, supply and production technology, demographics and local social issues, all perhaps in an unfamiliar far-off region.  This is in addition to the normal due diligence they expect. To best address the questions of measurement and impact, I think we need to spend more time defining what outcomes are most valuable at the outset.

GB: A common concern is the definition of the universe. We work with private banks and others who can only access this market for clients who have been screened for their suitability. Other usual questions are about the ways traditional portfolio management skills can be applied to package deal flow, construct bespoke advisory and discretionary portfolios, and how to measure and report on impact.  Another consideration is a fund for retail investors.

What sources of help and advice would you recommend for social investors?

RK: I would suggest contacting a member of the Ethical Investment Association (EIA). They receive regular training on social investment opportunities and will be able to help investors identify the key social/ethical areas of interest, assess whether investors are better off integrating social investment into a stockbroker portfolio approach or making ad hoc social investments as and when opportunities arise.

AZ: At present the information available is limited for both investors and advisors.  Some information is available via Investing for Good and on Socialinvestments.com, and Triodos Bank brings a number of opportunities to the market such as the soon-to-be launched Triodos Microfinance Fund. 

BD: I think one of the best resources for investors is easy: each other.  With so much interest there’s an incredible amount of knowledge that’s widely distributed. Whether it’s a co-investment in a specific opportunity, general background or fact-checking something you’ve heard, chances are that the investor community is your number one resource.  Networks like UKSIF and UN PRI are great ways to connect. What’s clear is that a lot of money will be made investing around these themes, but fortunes will be lost, too, so go it alone at your peril.

Adam Ognall is UKSIF Deputy Chief Executive. He can be contacted at adam.ognall@uksif.org.