Waltham Forest invests in impact bonds for diversified returns

Impact investing is a form of responsible investing with the intention of generating social and environmental benefits alongside financial return.

Pension funds are increasingly looking at it for diversification, managers report, but concerns about market size and fee structure are still a deterrent for some.

The £673.3m scheme invested in an impact fund with asset manager LGT Venture Philanthropy. It is aimed at investing in healthcare, education, housing and financial inclusion projects in the UK, and is seeking a 7 per cent annual return, net of fees.

“It sits within the growth allocation of our alternative investments,” said a council spokesperson. “It was felt that greater diversification would help achieve consistent returns under differing economic scenarios and market conditions, and provide tangible benefits to wider society.”

Open dialogue

The scheme said it intends to promote improvements to physical, social and material well-being with the investment. It has a policy of open dialogue with fund managers and investee companies on socially responsible investment, on topics including:

• environmental issues such as promoting alternative energy sources;

• human rights such as reviewing operations in countries with oppressive regimes;

• employment standards such as equal opportunities.

Mark Nicoll, partner at consultancy LCP said interest in the area was growing, but added: “There are a lot of challenges to overcome before it becomes a sizeable allocation".

Lisa Beauvilain, investment manager at Impax Asset Management, said impact investment was on the cusp of real growth, adding the size and fee structures of traditional impact funds often made them unattractive to institutional investors, but thematic impact funds were increasingly being used. “They have more scale and more accessible fee structures,” she said.

Pension funds and other institutional investors are becoming the dominant investors in the space, according to managers. “Over 70 per cent of investment in our funds now comes from institutional investors,” said Michele Giddens,  partner and co-founder of private investment firm Bridges Ventures.

Giddens said impact investing was often approached as an overlay to other investments. Schemes looking at potential for impact alongside return is a good way “to hone in on opportunities that other fund managers may not spot", she said.

Last year five local authority schemes launched Investing 4 Growth, a £250m impact fund, seeking investments with"beneficial economic, social and environmental outcomes". Experts say it may lead to further growth in impact investing in the UK.

“If Investing 4 Growth is a success there are many other funds that will be looking at it,” said George Pickford, head of institutional sales at social finance intermediary ClearlySo. “The local authority space is a key area.”

Pickford said that the overall size of the social fund space is predicted to grow to to £798m at the end of 2014, from £227m in 2012.