Impact Investing Institute chief executive Sarah Gordon details recent innovations in the social market driven by the pandemic, and explains how the social sector is increasingly using capital markets to achieve its objectives.
The atomic bomb during the second world war is the most notorious example. The approval of a number of Covid-19 vaccines in record-breaking time is a more recent one, and one that will save rather than destroy lives.
The pandemic drove some pretty spectacular examples of financial innovation in 2020, a trend which seems likely to continue in 2021.
Not only did record amounts of money flow into sustainable investment funds, but the industry responded with creativity and imagination, launching new vehicles and strategies to respond both to the demand from investors and to the pressing need across the globe from businesses, charities and individuals for emergency funds. They offer new opportunities for retail, as well as institutional investors.
The pandemic drove some pretty spectacular examples of financial innovation in 2020, a trend which seems likely to continue in 2021
Foundations jump on bond market
The largest innovation was the move by four of the world’s largest philanthropic foundations to tap the bond markets for the first time. The huge Ford and MacArthur foundations, among others, borrowed billions in the US corporate bond market against their endowments, releasing more grant capital needed urgently by struggling communities and charities.
The decision to borrow, highly unusual for not-for-profit organisations, and never before attempted at this scale, was not without its critics, wedded to a more traditional stewardship approach to philanthropic pots of money. But its advocates argue that this is an example of what is needed in ‘Philanthropy 2.0’ — using the markets to exploit and leverage grant or concessionary capital for urgent requirements.
The foundations’ innovation is bold and large, but it is far from the only one. At the beginning of the pandemic, Barclays launched its Impact Agora, an online marketplace (hence the name) where enterprises delivering social and environmental impact can display their wares, enabling deal sharing between accelerators, fund managers, investor networks and wealth managers.
Boutique fund manager Blue Orchard designed an innovative fund combining public and private capital in a blended finance structure.
It will use money from development finance institutions from the US, Japan and the UK, as well as investment from KfW, Germany’s state development bank, to provide loans to banks and lending institutions in the developing world to support local micro, small and medium-sized companies. The fund expects to help 20 institutions and support more than 200m jobs once it reaches its target size of $350m (£257m).
Private investors get access to social impact investments
Perhaps the most innovative vehicle for retail investors is a new UK investment trust allows private investors access to private market social impact investments for the first time, with the added benefits of daily pricing and liquidity.
The Schroder BSC Social Impact Trust listed on the London Stock Exchange in December, after successfully raising £75m. It is the first vehicle to offer public market investors access to a range of private market impact investments, which help people in the UK with issues ranging from dementia and learning difficulties to homelessness and domestic abuse.
Until now, these types of investment have only been accessible to large institutional investors or contained in dedicated housing trusts. The trust portfolio’s underlying assets will be diversified across sectors including housing, debt for social enterprises, and social outcomes contracts.
Social sector taps capital markets
The innovations also provide examples of a new level of confidence within the social sector — whether grant-providing government departments, philanthropic foundations or social investors — to use the capital markets to achieve its aims.
This is not just due to the galvanising effect of the pandemic, but also some long-term trends. Charities and foundations are not just accessing capital markets in more imaginative ways, but also demonstrating their influence on those markets through their own investment strategies.
In 2009, according to Cazenove, less than a quarter of charity investors had a policy that linked their investment strategy to their charity’s aims. Now, more than three-quarters do.
Add to that the fact that the 167,000 UK charities covered by the National Council for Voluntary Organisations’ annual survey now have £102bn of invested assets, the highest number on record, and it is clear that charities and foundations are not just accessing capital markets more but also have the muscle to influence them.
These innovations provide new ways for both retail and institutional investors to access market-return products that deliver positive social impact. Some of them might have happened without the crisis. All, however, have undoubtedly come to market with added impetus and focus as a result of the pandemic.
Sarah Gordon is chief executive at the Impact Investing Institute
