Making impact investment work: How capital can support society and the environment

Investors are increasingly interested in generating public benefit as well as returns. Experts at a recent WBEF webinar looked at what such investment has accomplished – and how it can develop.

Start by identifying positive objectives

‘Impact investing is defined as an investment with the intention to create positive, measurable social and environmental benefits alongside a financial return,’ explains Vivienne King, head of real estate social impact at impact advisory services firm the Good Economy.

The starting point is a thorough understanding of the social or environmental need that the impact investment seeks to meet followed by an assessment of its potential impact and the investment risks, says Pete Gladwell, group social impact and investment director at financial services and asset management company Legal & General.

This enables the presentation of a clear business case, highlighting the investment’s intention and its impact in improving well-being and quality of life, economic inclusiveness and environmental benefits – and ideally encompassing all three, he says.

Impact investments can range from, for example, supporting skills incubation centres that enhance the local knowledge economy and stimulate economic growth and job creation, through implementing large-scale regeneration projects, to showing that real estate is a force for good in people’s lives.

Legal & General, for instance, has been instrumental in championing the provision of sick pay for hidden workers, such as cleaners and security guards, as also covered in the RICS Podcast on hidden workers.

Increased attention paid to this cultural shift

Impact investing is moving from the periphery to the centre stage. ‘Increasingly, the feeling is [that] there is a need to be involved in impact investment at some level in order to future-proof your investments,’ says Vivienne. ‘It isn't an add-on, or part of philanthropy, or something that sits quite separately to business delivery,’ she points out.

Pete is also keen to dispel the misconception that his sector is merely extractive, and challenges the commonly held notion of giving back. Impact investment is about a fundamental shift towards integrating meaningful investments into the mainstream business, investing in communities and improving people’s lives, he states, and not a means of offsetting commercial activities.

Increasing attention is being paid to responsible investment, not only in the business world but also by consumers. This is helping to overcome the tension between financial returns and having impact, says Vivienne. Impact investing can generate better long-term risk-adjusted returns as well, adds Pete.

Measuring impact critical to effective finance

A lack of clarity in measuring and reporting is one of the main challenges to wider take-up of impact investment, believes webinar moderator Charlie Barda MRICS, development manager at Common Projects, property developers with a strong emphasis on positive societal impact. ‘It is critical for [the purposes of] accountability to show an investment is actually making the intended impact and can be interrogated as robustly as financial performance,’ he says.

A lack of clarity around reporting and measuring standards for environmental impact - BREAAM, EPC, NABERS, B Corp - could discourage the wider take up of impact investment. Alongside this ‘alphabet soup’, a lack of standardisation doesn’t help, acknowledges Vivienne. The Good Economy has adopted an approach based around the Theory of Change. This methodology is used to plan, implement and evaluate the effectiveness of social initiatives and the expected outcomes.

Like all business processes, measuring outcomes is essential. This requires establishing key performance indicators while these don’t have to involve monetisation, they must be quantifiable, she says. For example, they can be drawn from published, credible indices such as the Thriving Places Index, or Index of Multiple Deprivation in the UK.

Capital needed will depend on type of business

Vivenne emphasises the importance of real estate to people lives. If you are a professional in the built environment, you are already having a social impact. What you need to ensure is that impact is a positive one, she advises. Inclusive places improve people's lives and create long-term value. Thinking about the long-term position, at some point the investor will want to withdraw their finance. With a shift towards greater sustainability, it makes sense to consider, from the outset, what the market expectations will be at the point the investor wishes to withdraw.

As an advocate for socially oriented investing, Pete stresses that impact investing should not be seen as just one type of risk and return. ‘It’s about identifying the right type of capital to meet that need for investment,’ he says.

For example, significant impact can be achieved by employing capital that is long term, carries lower risk and yields lower returns but creates social value, such as affordable housing or the longer-term elements of a regeneration scheme. Alternatively, short-term, high-risk, high-return investments can be pivotal for a company in the environmental sector that urgently requires funding for growth.

Irrespective of company size, all businesses can contribute to societal improvement by scaling their approach appropriately, setting realistic goals, establishing clear objectives and tracking progress, Vivienne says.

Echoing her sentiment that the real-estate sector is inextricably intertwined with people’s lives, Pete underscores the importance of considering an organisation’s purpose and its impact. He illustrates that making a positive difference can be as straightforward as a property management business ensuring its cleaners receive sick pay, for example.

Model recommends aligning investment with policy

Collaboration between the public and private sectors is central to the place-based impact investing model proposed in a white paper by the Good Economy, which advocates for local government pension funds to allocate 5% of their portfolios to local investments.

The model is framed by several concepts, which include aligning investable asset classes neatly with public policy – such as housing regeneration or clean energy – to form a natural partnership, says Vivienne.

The integration of social and environmental considerations into investment strategies is much more than just a trend. It marks a change direction in the way we perceive and value capital’s role in society.

While there will always be investors that focus exclusively on financial returns, a growing number are looking to invest in ways that make a greater contribution to meeting the broader goals of societal improvement and environmental stewardship.