Written By: Anna Shiel
Head of Origination
Big Society Capital

Anna Shiel of Big Society Capital surveys the increasing popularity of impact investment into such sectors as social housing and gives some pointers as to the best way to get started

Environmental, Social and Governance (ESG) investments have been growing in popularity among both retail and institutional investors for some time. In fact, they are now seen by some pension funds as simply part of good investment management. It’s also clear that ESG is becoming easier for institutional investors to access, particularly in listed markets and in private equity.

Impact investment, on the other hand, is still considered by many pension funds as a niche better left to philanthropists or foundation endowments. A report by Allenbridge published in 2017, suggested 82% of pension fund managers and trustees felt they lack hard data on impact investments, and cited this as the overwhelming barrier to entry. However, with the availability of research such as the Impact Investment Benchmark from Cambridge Associates, we hope this view will change.

At Big Society Capital, we believe that impact investment is the next logical step for pension funds to consider. Increasingly some impact investments appear to offer lowly-correlated diversification from a fund’s mainstream investments whilst assuaging the growing desire of members for their pensions to have a positive impact on people and planet.

There can be some misconceptions about what separates impact investment and ESG investment, and some question if there’s really a difference at all. By selecting investments with ESG characteristics pension funds can cause more positive impact than if they simply choose investments without these considerations. At the same time, many believe that adherence to ESG frameworks can de-risk investments and deliver better returns.

ESG investments may therefore be selected because they offer long-term risk-adjusted returns, not because of the ultimate impact they will have on individuals or the environment. Impact investment is defined as investment made with the intention to generate financial return alongside positive, measurable social and environmental impact.1 This is investing for impact.

Within impact investing there are investments that simply avoid causing harm, those that benefit people and planet, and investments that actively contribute to social solutions. At Big Society Capital we focus on investments that contribute to social solutions, focusing on particular social issues such as the housing crisis or how venture capital can help address issues associated with ageing. We do this in a variety of ways, including by investing into underserved markets that can generate a financial return and measurable outcomes.

This is a new market, and therefore the gathering of data on performance is in the early stages. However, there is emerging evidence risk-adjusted market rates of return are achievable in impact investing, for those that seek it; according to Cambridge Associates2, the distribution of impact investing fund returns mirrors the distribution of conventional real asset fund returns. Like any investment decision, fund and manager selection is key to success, and the distribution of individual fund returns varies widely. However, this applies equally to impact investing funds and conventional funds.

Social housing – an accessible entry point?
At Big Society Capital we believe that impact investments in housing provide a good starting point for those who are new to the space. Social housing is a serious challenge in the UK with a severe shortage of suitable and affordable housing of all types reflecting a persistent and cumulative mismatch of supply and demand. This is felt most acutely by people on low incomes and the most vulnerable in society. As the availability of socially rented homes has declined, people who require genuinely affordable housing have been forced to turn to the private rented sector.

There is a both a social and financial imperative to tackle this problem, which is only becoming worse as time goes by. Councils are struggling to meet their affordable housing needs and spending over £1 billion on temporary accommodation.3 In England alone we are short of an estimated 4 million homes4 and many people are paying a substantial amount of their income on housing. As a result we continue to see rising levels of homelessness.

With research undertaken by Heriot Watt University for the homelessness charity Crisis estimating a need for 90,000 more social homes each year, there’s no shortage of demand.5 Yet in 2018, housing associations and local authorities were only able to complete 29,000 new homes. Fortunately the government is stepping up its support for the creation of new affordable housing, partly through the £2 billion in additional investment in the affordable homes programme announced in 20176, and by removing the council housing borrowing cap. But the magnitude of the shortfall is still too great, and we need more resources, new solutions and new partnerships.

There is therefore a gap in provision for equity-like capital for affordable housing which can be provided through social property funds that bring in private capital and partner with socially-motivated housing providers to deliver more, different or better homes. For example, property impact funds like Cheyne Capital are already connecting private capital with socially-motivated housing providers to deliver high quality homes for, among others, people with disabilities, those on low incomes, or those with elderly care needs.

Whilst these opportunities are underpinned by a critical social need, they can also offer pension funds attractive financial characteristics. They’re asset backed, with long-term, inflation-linked revenue streams linked to infrastructure assets. These investments also offer diversification by way of differentiated asset level characteristics such as low levels of correlation with economic cycles. They can also offer low-risk counterparties in the form of housing associations, and opportunities to spread the exposure to fund managers.

LGPS getting ahead of the game
We have already seen a number of Local Government Pension Scheme members, making impact investments: Environmental Agency Pension Fund, Greater Manchester Pension Fund, Merseyside Pension Fund, Waltham Forest Pension Fund and West Yorkshire Pension Fund. Impact investment is a lens and not a particular asset class. In fact, reviewing investment allocation of these LGPS funds would suggest that their impact investments fall in several traditional asset classes – public and private equities, debt and fixed income, property and real assets.

Waltham Forest Pension Fund has chosen to invest in impact venture capital, through Impact Ventures UK (IVUK). IVUK is an active late-stage venture capital fund that looks to invest in companies that are solving a real problem, build more than just profit and are mission led. Their impact fund has invested in a range of companies including Unforgettable, a social business that provides products to help those living with dementia and Homes for Good, a social enterprise letting agency based in Scotland.

West Yorkshire Pension Fund has invested in retail charity bonds. Many charities in the UK operate as enterprises and generate revenue from their activities. The bond market for small- to medium-sized charities has been growing steadily from £55 million of signed commitments from investors in 2016 to £123 million in 2017.7 Golden Lane Housing, set up by Mencap to deliver quality homes for people with learning disabilities, has raised two retail charity bonds and Charities Aid Foundation also raised a £20 million bond in 2015 to further its work with donors and charities.

If we look overseas there are yet more examples, such as Christian Super, an Australian not-for-profit pension fund managing £1.3 billion AUD for those in the education and religious sectors. Since 2006 it has been incorporating impact investments through private equity-type investments in emerging markets as well as domestic opportunities in Australia, and the impact portfolio has been outperforming its benchmark.8

Dutch mid-sized pension funds are the main investors into emerging market impact investment products created by FMO Investment Management, a subsidiary of FMO. This is the Dutch development financial institution founded to help investors that want to work alongside DFIs’.

How to get started
Firstly, we would recommend seeking out and assessing emerging impact products across the most relevant asset classes for you, and asking questions about the impact intentions and processes of those products. Engage with your fund managers about whether they offer an impact product, and how they are integrating social impact into their existing funds. If there is a particular area of need which aligns with your investment strategy or wider organisational context, you could consider acting as a cornerstone investor for a new fund solution. Another starting point would be to consider how you integrate impact goals into your own investment strategy in real assets.

We hope that in the not-too-distant future, all pension funds will allocate at least a small portion of their portfolio to impact investing. Not simply because it means investing in a worthy cause, but because it is possible to make investments that deliver sustainable financial returns as well as deep and lasting positive social impact in the UK.



1. https://thegiin.org/impact-investing/

2. www.insidehousing.co.uk/insight/insight/the-cost-of-homelessness-council-spend-on-temporary-accommodation-revealed-57720

3. www.housing.org.uk/press/press-releases/england-short-of-four-million-homes/

4. www.crisis.org.uk/ending-homelessness/the-plan-to-end-homelessness-full-version/solutions/chapter-11-housing-solutions/

5. www.gov.uk/government/news/2-billion-boost-for-affordable-housing-and-long-term-deal-for-social-rent

6. www.bigsocietycapital.com/home/about-us/size-social-investment-market

7. www.cambridgeassociates.com/research/introducing-the-impact-investing-benchmark/

8. www.pensionsforpurpose.com/christian-super-impact-investing-case-study-updated-format.pdf


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Published: April 1, 2019
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