How Social Impact Investment Delivers Superior Returns
Research regularly suggests that large numbers of investors are interested in the idea that their money could be put to use so that it has a positive impact on society and the world, as well as earning them a financial return. Barclays Bank research suggests 54 per cent of investors in the UK feel this way, while a separate Morgan Stanley study puts the figure at 71 per cent; amongst the millennial generation meanwhile, the latter research put interest levels at 84 per cent.
So what stops people putting their money where their mouths are? Just 9 per cent of UK investors have actually made social impact investments according to Barclays. In which case, a shortage of capital may be holding back commercially viable small and medium-sized enterprises that would otherwise be able to make a positive contribution to society.
In truth, there appear to be two problems. One is that investors believe impact investment necessitates the sacrifice of at least some financial return – that they’ll earn less from investments that are designed to do good. Second, impact investment is seen as a standalone asset class – rather than investors looking for equity or fixed-income assets with an impact context, they assume social impact has to be separately accessed elsewhere.
However, new research just published by the investment analysts at All Street provides yet more evidence that both those assumptions are incorrect.
For one thing, the research focuses on the member firms of the Social Stock Exchange, all of which offer publicly traded securities or have plans to issue equity or debt securities on a recognised investment exchange – they don’t represent an unfamiliar asset class in other words.
All Street has also looked at the returns generated by impact investments to date; one group of venture capital funds, for example, generated an internal rate of return of 9.5 per cent over the period studied, comfortably outstripping the broader venture capital sector. Meanwhile, funds with a social mission generated investment exits with an average internal rate of return of 33.5 per cent.
The data comes as no surprise to pioneers of social impact investment such as Martin Leuw, the founder of Growth For Good, an accelerator focused on technology businesses with a social dimension. “I have always maintained that I’m a relentless capitalist and not a tree hugger,” Leuw says. “This research is further evidence that as long as you are authentic, you can do well by doing good – I hope it will encourage more businesses to be a genuine force for good and lock in their mission to strategy.”
The data should encourage more investors to get involved too, for despite the relatively slow take-up so far, impact investment is now gathering pace. Research from Standard Life predicts the total impact investment sector will be worth $1 trillion by 2020, against $60bn today. The high-profile investments made by the likes of Mark Zuckeberg’s charitable foundation are also raising awareness of the possibilities.
In the end, however, it’s the story of individual businesses making an impact everyday that provide the most inspiring narratives. Take the story of Roast Restaurant in London’s Borough Market, a successful food and drink venture combining commerciality with social value.
“I’ve got to where I am against the odds, having turned around a troubled teenage upbringing in south London where I got into all sorts of trouble; whilst I made that change with the support of people around me,” says Iqbal Wahhab, the entrepreneur behind the business, who also launched the award-winning Cinammon Club. “At Roast we’ve offered work experience to inmates at The Clink in Brixton Prison, some of whom have come to work for us on release.”
Wahhab says the social impact element of his business has enhanced its returns rather than holding them back, encouraging custom when people find out about it. “We got loads of e-mails and social media messages saying roughly the same thing – they didn’t know Roast employed ex-offenders but now that they did, they would start coming,” he adds. “That was a game-changing moment for us because it showed this kind of activity to be core commercial activity.”