Impact investing has its roots in philanthropic and charitable endeavours. Driven by foundations and family offices – not to mention development finance institutions and early adopters of the combined private markets and impact philosophy, such as Stephen Dawson and Nat Sloane, who co-founded the venture philanthropy organisation Impetus Trust in 2002 – impact investing started out by channelling capital and expertise towards areas of social need.
The market has moved on significantly since then, with the launch of the UN’s Sustainable Development Goals in 2016 a defining moment.
Yet while the SDGs focus on addressing both environmental and social challenges – SDG1 is ‘No poverty’, after all – it is clear that the issues of climate change and environmental degradation have gained rather more traction in the impact strategies of private markets investors over the past few years.
While we have seen the launch of a number of funds targeting largely environmental impact, stand-alone social impact funds are few and far between.
There are some smaller US funds targeting issues such as diversity in their portfolio companies or are majority female, Black or ethnic-minority run, while many of the funds supported by DFIs in emerging markets have a social impact objective.
However, many private equity-stage firms running impact strategies do target social issues alongside environmental ones. Palatine Private Equity is one. The firm’s first impact fund, which closed in 2017 with £100 million ($131 million; €119 million), is now reportedly being followed by a second vehicle focusing on companies that create positive social or environmental change.
“Social impact is really important,” says Beth Houghton, a partner and head of the impact fund at Palatine. “But it can be left behind because investors are so focused on environmental issues. There have been some great initiatives in addressing climate change, for example, but the world has made less headway in the social sphere.”
Houghton points to some of the deep-rooted issues in the UK as an example of the need for social investment. “If you were to look at a map of social inequality in the UK 60 years ago and compare it to today, very little has changed,” she says. “We need to find ways of moving the needle on social issues through investment.”
“Social impact is really important, but it can be left behind because investors are so focused on environmental issues”
Palatine Private Equity
Palatine’s impact fund has made investments in areas such as IT training for people without access to a university education, and schemes to train people who have been long-term unemployed. “When we look at social impact, we start by asking where the areas of need are,” explains Houghton. “Executive training, for example, wouldn’t be appropriate, but addressing areas where the UK has skills gaps and finding people in areas of deprivation and training them to fill those gaps is.”
The inequalities exposed by the pandemic have, however, sharpened some institutional investors’ focus on social issues. This is especially the case at a community level. In the UK, for example, local authority pension funds are examining how to allocate capital to investments that benefit the areas where their stakeholders live through a place-based investing approach.
The Good Economy, a social advisory firm, recently published a report in partnership with the Impact Investing Institute and Pensions for Purpose outlining a model for how local government pension funds can push for social change in their respective regions, suggesting that if all funds invested 5 percent locally, it would unlock £16 billion of investment, nearly four times that of the £4.8 billion earmarked by the UK government’s Levelling Up Fund.
However, movement more broadly among institutional investors is less apparent. “Social impact strategies used to be more in demand among LPs,” says Paula Langton, a partner at Campbell Lutyens. “There was a lot of capital directed towards diversified strategies, including education and healthcare for example, but we’ve seen a shift in sentiment as LPs have started to question whether some strategies can be considered genuine impact, as many traditional, non-impact buyout firms are also investing in these areas.”
Meanwhile, climate has now moved to the top of the agenda for LPs for a few reasons.
“The environment is an urgent issue and LPs are seeking to decarbonise their portfolios,” says Langton. “Climate is by a long way the number one theme for LPs, although healthcare remains at number two. Part of the reason for this is that there are clear frameworks for measuring climate dimensions – it’s typically easier to demonstrate impact through greenhouse gas emissions reductions because there are more quantitative measures than it is to measure social impact, which can be more subjective or qualitative.”
Many firms also argue that climate is as much a social issue as it is an environmental one and it is certainly true that climate change affects vulnerable communities disproportionately.
“There are overlaps between environmental degradation and global inequalities,” says Andreas Nilsson, managing director and head of impact at Golding Capital Partners, which is raising a debut impact fund of funds with a €300 million target. Nilsson explains that his firm’s approach is to invest in funds that target impact through green solutions, sustainable food and agriculture, and financial inclusion.
The strategy is global, with the social impact objectives largely focused on emerging markets, where there is little or no social safety net for individuals. “The biggest distinction between markets such as North America and Europe and emerging economies is the role of government,” explains Nilsson. “In developed markets, there is capital available from taxes to provide universal basic services, such as healthcare and education, albeit to varying degrees. The role of private capital here is unclear. Yet in emerging markets, this isn’t the case, the needs are much greater, and there is a much clearer role for private capital.” Impact objectives are also therefore clearer to determine.
“There are overlaps between environmental degradation and
Golding Capital Partner
Like many, Golding will have a relatively high proportion of growth-stage funds and companies in its portfolio (although it is planning to diversify across stages). And it is here that many socially focused businesses are emerging. “In healthcare, we focus on improving outcomes through greater access and higher quality care,” explains Jennifer Signori, a managing director at Neuberger Berman, which has an impact fund. “That could be through businesses that support at-home care for elderly or high-need patients, and that could be complemented by technology solutions that connect caregivers to doctors and nurses.
“Technology is also driving positive outcomes in education, where edtech businesses are transforming learning models – they are capable of supporting individualised plans for students around specific needs to address learning gaps.”
Future social development
Part of the reason environmental impact strategies have gained more traction than social ones is fragmentation in the social space – needs differ significantly from region to region and therefore scaling up solutions can often be a challenge – but it is also down to the fact that climate change is based on scientific data and that has led to greater advances in impact framework development. The EU’s taxonomy, for example, currently focuses on sustainability.
However, the EU is now working on a social taxonomy – something that is broadly welcomed by many investors seeking to generate positive impact. “The EU’s work on SFDR [Sustainable Finance Disclosure Regulation] and the sustainable taxonomy has been really important in the impact space,” says Jackie Rantanen, co-head of impact investments at Hamilton Lane, which has a direct investing impact strategy, focused on transformative technologies and innovations. “It has helped provide a framework for climate impact strategies and classifications. Similarly, we expect the social taxonomy will serve as a framework for social impact and will help raise awareness and present opportunities for investors.”
Signori is equally positive. “I would hope that the EU social taxonomy will provide clarity on the EU’s societal priorities,” she says. “This could help investors identify gaps and areas of need.”
Overall, the move could well lead to more social impact strategies, it seems. As Nilsson says: “The EU taxonomy is a great collective thought experiment on what good social impact investing means. The metrics tend to be less easy than for the environment and so it may take time, but once we have this, my hope is that it will be quickly adopted.”