Among those risks, the Commission includes those affecting the long-term sustainability of company performance, such as ESG factors. It concludes there is no impediment to trustees taking account of ESG factors “where they are, or may be, financially material”.
However, where trustees are considering investing for social impact, as they would if they were focusing on delivering a quality of life, the law does not appear to be as favourable.
“Non-financial factors”, which include improving members’ quality of life according to the Law Commission, may only be taken into account if two conditions are met: trustees should have good reason to think scheme members would share the concern; and the decision should not involve a risk of significant financial detriment to the fund.
This puts managers wanting to deliver on a quality of life promise between a rock and a hard place.
“The crux of social impact investment is exactly that it is not just about financial gain,” says Simon Chinnery, head of UK DC at JP Morgan Asset Management. “ Typically, it is primarily about improving social standards such as nutrition, education or lower re-offending rates. It includes other measures, which can be very difficult to calculate. Social impact investing requires the alignment of interests of investors. Is it to make money regardless of how that is done, or do social considerations come into it?”
SHARED INTERESTS?
Despite this headwind, an increasing number of pension funds are making social impact investments.
In May 2013, the Greater Manchester, West Yorkshire, West Midlands and Merseyside pension funds, as well as the South Yorkshire Pension Authority, formed a joint initiative, Investing4Growth, which seeks investments that have economic as well as positive social and environmental outcomes in the UK.
For local authority pension funds, demonstrating shared interests is relatively easy. As the Investing4Growth website explains: “The available investment capacity comes from local communities, which have contributed to the funds over many years. Therefore the pension funds’ investment is to be used for the benefit of these communities.”
Culturally, local authorities are more inclined towards social impact investment and have been leading the field in the UK. The London Borough of Waltham Forest was among the investors in Impact Ventures UK, a fund established by LGT Venture Philanthropy and Berenberg. Strathclyde Pension Fund puts a proportion of its investment into a New Opportunities fund which aims to create local jobs or benefits to the local community while delivering returns.
The UK government is also pushing hard for greater support in social investment. At the 2013 G8 Summit, prime minister David Cameron launched the Social Stock Exchange, which focuses on impact investments through quoted equity and debt markets, and announced the Social Impact Investment Taskforce aiming to catalyse the development of social investment. The taskforce is due to report later this year.
Comments