18th Annual LAPFF ConferenceDecember 2013

Social Impact InvestingBrian Bailey

Employees in corporate governance

Definition of Social Impact Investment

Use of repayable finance to produce social as well as financial returns.

Social returns result in improved outcomes for individuals and communities particularly amongst less well off groups e.g. improved health and well being, higher levels of employability, reduced social problems and improved environment.

Employees in corporate governance

Elements to a Social Impact Investment

There are five elements to an impact investment:

Some elements may be undertaken by the same party

The parties interests are managed and controlled through a strong performance management agreement.

Commissioners

InvestorsFacilitators

Delivery organisations

Beneficiaries

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Underlying Investment Activity

The underlying investment activity can be wide ranging e.g.

- Healthcare/well being

- Education and skills

- Housing

- Property

- Environment

- Energy

- IT

- Microfinance/SMEs/social enterprise

- Food/agriculture

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Impact Investing is Happening

Examples of impact investing are growing driven by

- Government

- Big Society Capital

- Social Finance and similar organisations

- Investors

What can pension funds do having regard to their fiduciary responsibilities?

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Position of Pension Funds

In response to these issues LAPFF commissioned the Smith Report:

A broad based survey of opinion amongst interested parties

Explored the reasons pension funds do not invest in social investment and impact investment

Tested the demand for such investments

Identified key opportunities and barriers

Made recommendations on what stakeholders might do to enable changes in practice.

Employees in corporate governance

Smith Report Findings

The key barriers: reputational risk, potential conflicts of interest, resource intensive, trustee understanding, lack of consultant knowledge, lack of specialist vehicle or opportunity for investing, impact evaluation methodology, lack of demonstration projects.

Recommendations: better information and clearer guidance, demonstrable case studies and training to match impact investing with fiduciary duties, legislative changes, creation of the opportunity.

Employees in corporate governance

Investing4growth Initiative

Created in response to the Smith Institute Report by 5 LGPS Funds

The objective is for the funds to improve the outcomes for the communities involved as funders and beneficiaries of LGPS.

Improved outcomes in the terms of producing significant positive economic, social, environmental and geographical impacts.

Overriding objective of meeting a pension fund’s fiduciary and stewardship requirements.

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Outline of I4G Initiative

Sponsored by five funds who agreed to openly invite asset managers to submit proposals that could meet an impact investing brief, indicating that for acceptable opportunities the fund’s could commit £250m.

The brief required asset managers to demonstrate they had an institutional quality product by providing information covering their good standing, experience, investment process, risk management arrangements, operating structure, fees, costs etc.

Plus details of the impact of their investment activity identifying economic, social, environmental and geographic (in terms of deprivation and fund operating areas) impacts.

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Response by Asset Managers

33 submissions by 28 managers.

Wide range of underlying investment activity e.g. property, infrastructure , SMEs, social enterprises.

Covering a range of sectors e.g. energy, care services, technology.

Varying impacts highlighted, but submissions from small, specialist asset managers had the stronger impact outcomes.

Opportunities for pension funds exist, but they come with challenges.

Employees in corporate governance

Impact of the Opportunities

The impact of the shortlisted opportunities was wide, but can be summarised:

Economic Unquoted venture, SMEs including IT,

creative media, manufacturing, services,

real estate

Social health and social care,

wellbeing, education and skills provided by SMEs,

enterprise,mutuals

Environmental deprived areas,

Community regeneration

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Challenges That Have Arisen (1)

The opportunities giving the greatest impact present a range of challenges for institutional investors:

I. Opportunities come from relative small investment funds resulting for some in relatively higher fees and operating costs when compared with the usual level experienced by pension funds.

II. High relative supervision costs by pension funds due to small scale of investments.

III. A portfolio of investments gives a better fit with a pension fund’s risk management requirements and improves VFM. (Creating a fund of funds to manage the portfolio is costly, but a “shared service” approach helps).

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Challenges That Have Arisen (2)

I. Unfamiliar nature of some activities, asset managers and key personal.

II. Categorising and evaluating the impacts

III. Risks of being first.

IV. Identifying an asset allocation and compliance with a fund’s SIP.

V. Coordination of 5 pension funds’ due diligence and approval processes.

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Current Position

The exercise has shown that there are potential investment opportunities with a high positive impact on local communities: but they require specific analysis and resources to evaluate their suitability for pension funds investing together, with a broadening of what constitutes an acceptable investment for a pension fund.

Employees in corporate governance

Contactwww.pirc.co.uk

Brian BaileyChairmanEmail: BrianB@pirc.co.ukTelephone: +44 20 7247 2323

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