The UN’s Sustainable Development Goals list 17 ambitions to improve the lives of people globally, spanning matters of poverty, equality, environmentalism and health. Much of the focus of the SDGs is on the developing world, yet lessons can be taken from the ambitions and used to improve the lives of people in the UK.
For pension schemes, applying lessons from the SDGs can be done in several ways — from making allocations to impact investment, to being social progression champions — though not at the expense of members.
Making an impact
“To generate true positive social and environmental impact a mindset shift is required from investors,” yet delivering social value and impact “does not need to come at the expense of risk-adjusted returns”, explains a spokesperson from Legal & General Investment Management’s real assets team.
As real estate owners, one way we can deliver financial returns and positive social impact is through a place-based impact approach
LGIM spokesperson
Impact investing is defined as aligning the generation of a measurable social or environmental change alongside a financial return. In recent years, this has surged in popularity.
The Global Impact Investing Network says 72 per cent of investors who already make impact investments are planning on either maintaining or increasing the volume of capital dedicated to these assets.
One critical driver of the impact investing market’s growth is performance, in both impact and financial terms, according to the GIIN survey.
Of the 294 respondents, 88 per cent reported that their financial expectations are being met or exceeded. Meanwhile, in terms of impact performance, 99 per cent noted they have achieved or surpassed their expectations.
Yet to ensure that a positive social change can be made, an “intentional and proactive approach from investors” is essential, according to LGIM.
“As real estate owners, one way we can deliver financial returns and positive social impact is through a place-based impact approach,” a method that targets social, economic and environmental change within a specific community.
LGIM’s spokesperson says there is a “natural alignment between the commercial interests of longer-term property owners and contributing to improved economic, societal and environmental outcomes for the local community”, delivering wide-ranging benefits for institutional investors.
Social bonds can deliver change
Social impact bonds are fixed income products that are aligned to achieving a specific outcome. The first of which, the Peterborough Bond, aimed to reduce reoffending rates among offenders released from HMP Peterborough by funding community-based interventions.
In 2017, Social Finance, the organisation behind the bond, said all initial investors would have their investment capital back alongside a return of just over 3 per cent a year for the period of the investment. Simultaneously, a fall in reoffending rates exceeded the Ministry of Justice’s target.
This early success heralded a growing industry, with more than 130 social bonds issued globally in 2020, according to Linklaters.
Stephen Liberatore, lead portfolio manager for Nuveen’s fixed income environmental, social and governance strategies, says that when structured correctly, social impact bonds can be useful tools for societal change.
“Covid-19 created historically rapid growth in social bonds, as recovery efforts focused on inequality could be directly tied to a variety of societally beneficial outcomes,” he notes.
Bonds covering affordable housing, access to health care, education opportunities and improving financial literacy are available to institutional investors looking to implement social change into their fixed income allocations.
Monitoring change
A hallmark of investing for societal change is a commitment to monitor the impact of the investment, but for scheme trustees this can present a significant barrier.
With the need for schemes to provide accountable outcomes to members, measuring and assessing the impact of social change represents a significant governance burden.
The legal context of trustees’ fiduciary duty is not a barrier to making social impact investments, according to the Impact Investing Institute. However, the nature of investing for social change is “often subjective”, making it complex to manage for investors and schemes alike, according to Gary Vaughan-Smith, chief investment officer at SilverStreet Capital.
He says that it is “not feasible to measure all the social aspects of an investment”, as the risks and outcomes are varied and unique to individual investments.
To minimise the reporting burden, investors should account for “what is already reported by the business” under ESG regulations. One option is to develop a proprietary ESG scorecard that includes the social aspects of an investment, covering both quantitative and qualitative information, Vaughan-Smith says.
LGIM’s spokesperson adds that the factors which are reported on, and disseminated by trustees, should be “additional, intentional and measurable”.
Supply chains – the missing link for investors on ‘S’
Institutional investors play an important role in helping portfolio companies improve their social credentials, but issues must not be moved up and down the supply chain.
“This means the measurement outputs should focus on social value which would not otherwise have happened without the investors’ influence, and initiatives done primarily with the aim of achieving social and environmental outcomes that benefit key stakeholders,” they explain.
In the wake of the pandemic, the need to focus on raising social standards is more paramount than ever.
“Investors are now waking up to the reality that delivering social value and impact does not always come at the expense of risk-adjusted returns,” the spokesperson concludes.
