Trustees and employers should receive training on social impact investing and engage with scheme members to better align non-financial values, a report to government has recommended, but experts stress time constraints and practical hurdles.
For pension funds, social impact investment tends to be the preserve of public sector schemes such as the Greater Manchester Pension Fund or the Environment Agency Pension Fund.
Whether they are socially biased or not, they should be able to identify which companies will outperform
Steve Delo, Pan Governance
The Advisory Group on Creating a Culture of Social Impact Investment said in its report it is hoping to broaden the sources of funding for social impact investment substantially by getting industry and government to co-invest, and educating and building confidence among advisers and trustees.
It argued that social investments should become more readily accessible and, over time, less costly.
At the moment, “unless you’re really wealthy it's quite difficult to invest with social values in mind”, said vice-chair of Allianz Global Investors Elizabeth Corley, who led the group set up by the Department for Digital, Culture, Media & Sport and HM Treasury.
The report differentiates social impact investing from environmental, social and governance approaches. It offers a definition of the first as being investment in companies that measure and report their wider impact on society, and “hold themselves accountable for delivering and increasing positive impact”.
The group recommended the creation of standards for reporting non-financial outcomes to increase confidence in the sector and make products more easily comparable.
Corley said the group had “stepped back” from asking government to mandate social impact investment for pension scheme trustees, and said pension funds were expected to be among the slowest adopters.
The report groups the recommendations into five “key action areas”
Improve deal flow and the ability to invest at scale
Strengthen competence and confidence within the financial services industry
Develop better reporting of non-financial outcomes
Make it easier for people to invest
Maintain momentum and build cohesion across initiatives
Trustees concerned about returns
The Law Commission said in 2014 that schemes can consider non-financial factors, provided trustees have good reason to think members share the concern and there is no risk of “significant financial detriment” to the fund, but many trustees are still hesitant to do so – often for fear of forsaking returns.
CFA Society UK chief executive Will Goodhart, who was part of the advisory group, said there is a “common assumption” among trustees that social investments come with lower returns, but he denied this is the case. A 2017 survey by the Financial Times found most of those active in impact investing had seen a positive return after three years.
Steve Delo, chief executive of Pan Governance, urged lawmakers to be realistic about what can be achieved, saying the governance workload of trustees was already “gargantuan”.
But Delo welcomed the report’s recommendation to improve reporting and transparency on social impact investment.
“I’m all for better data generally on these sorts of things because without good data [schemes] are very vulnerable to marketing and lobby group messages,” he said.
For Delo, trustees need evidence of returns over statistically significant time periods, however, which would mean decades rather than years. “I would never consider three years meaningful,” he said.
He also stressed the need for complete data that have “not been subject to selection and data mining”.
Scepticism of active strategies extends to impact investing
Cost can also be an issue for trustees. Delo noted that a longer-term trend towards passive investment “squares with difficulty” with the new push towards social impact investing.
“The market has largely been driven to passive by regulation” such as the charge cap on defined contribution default funds or local government pooling. He said the cost issue is “a challenge to be gotten over by those people who sell the funds”.
Greater Manchester impact investment to build 2,000 homes
The £21.3bn Greater Manchester Pension Fund was in the latter stages of concluding a series of impact investment deals last month, worth about £100m, which will build roughly 2,000 local homes.
Some companies have started producing indices for ESG investment, but social impact investing normally requires an active approach.
For Delo, the key is whether something “makes a good investment decision”. He argued that active impact investing faces similar challenges to active investment in general.
“Whether they are socially biased or not, they should be able to identify which companies will outperform,” he said. “The trouble is, active management has generally disappointed.”
Schemes will need to manage members’ expectations
Simon Cohen, chief investment officer at Dalriada Trustees, shared some of Delo’s concerns about implementing the recommendations, saying while social impact investment was a good idea from an ethical perspective, there are practical issues.
Cohen said if there is greater engagement with members, as recommended by the report, it needs to ensure they are not disappointed.
“As soon as you go to members and ask their opinions, you raise an expectation that something’s going to happen. That might not necessarily be the case,” he warned.
