Brian Henderson says investment consultants have a big role to play in furthering social impact investments by tapping into the emotional dimension of investing
The concept of 'social impact investing' (SII) has existed for over two decades but despite rising awareness, it is still absent from most investors' portfolios. Of the trillions of dollars invested last year, only $114bn (£86bn) was in companies, organisations, and funds with the intention to generate social and environmental benefits alongside financial returns, according to the Global Impact Investing Network: Annual Impact Investor Survey 2017.
Consumer trends suggest SII should be more popular than it is. Social media and greater global connectivity have increased individual awareness of social issues, resulting in the success of brands like TOMS, which donates a pair of shoes for every pair it sells. Socially oriented companies are associated with millennials, but these sentiments cut across generations and some of the biggest consumer companies, such as Nike and Dove (Unilever) have undertaken campaigns that associate the brand with a broader social purpose.
So in the midst of these broader trends, why hasn't SII taken off with investors? New government-commissioned research reveals the breakdown lies in the failure of SII offerings to tap into investors' attitudes. While investors have appetite for it, the opportunities aren't being framed in a way that resonates with them. Based on a report from behavioural economics firm Centapse, investment consultants have a big role in furthering SII by tapping into the emotional dimension of investing.
Despite the dearth of SII, the research shows that more than half of investors felt they have a ‘personal responsibility to make the world a better place'.
A reason why SII still receives resistance from investors is their misconceptions. Investment consultants should look to educate investors on what it means and - more importantly - what it doesn't mean. SII has been hindered by the fallacy that responsible investing implies giving up profits completely. Actually, SII falls on a continuum between pure philanthropy and hardnosed profit. Centapse found only 26% of investors think that 'money is the best measure of success', so the majority of people's preferences fall somewhere in the middle and indicate that there's an appetite for going beyond hard returns. Furthermore, it does not necessarily mean compromising on returns; there is a portion of investments on the impact spectrum that can provide returns at or above the market-rate.
Since most investors actually want to contribute to SII, investment consultants must ensure the investment options they provide are aligned with the personal preferences and resonate with the values of a scheme and its members. One way is to identify which aspects of SII investors care about most. Overall, Centapse's research showed investors are more likely to invest in causes that support ‘basic needs' such as: healthcare, clear water, quality education, clean energy, and zero hunger. Notably, this finding is consistent with the priorities of the 'Sustainable Development Goals' created by the United Nations. The takeaway for investment consultants is that each individual's attraction to causes is idiosyncratic, and their job is to personalise the investor's strategy so it fits with the attitudes of individual members.
If we want to live in a more environmentally sustainable, equitable and free world, investment consultants can play an important role in educating investors and maintaining their tailored approach to crafting investment strategies that can, and should, include social impact investment opportunities. These efforts will be amplified by the government's continued attention to uncovering what makes SII successful. On 14 November, a consumer-focused Government Advisory Group released a report on how social impact investing can be made more accessible to individuals in the UK. A combined public and private sector approach to deepening our understanding of SII is the surest path to putting it on a trajectory of growth not only in the UK but globally.
Brian Henderson is partner and the leader of the DC and financial wellness team at Mercer
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