Institutional investors can help solve some of the world’s most pressing environmental and social problems. Many want to: the impact investing market continues to grow in the UK and worldwide and now has a global value of $700 billion.
How can community development finance institutions – locally based finance providers lending to businesses, social enterprises and people who cannot access mainstream finance – engage with impact investors operating at scale?
Sarah Gordon is Chief Executive of The Impact Investing Institute which exists to increase the growth in the impact investing market and improve its effectiveness.
What does this growth mean for community development finance institutions (CDFIs)? How can our sector access more capital from impact investors? And what are the real and perceived barriers to institutions and potential investees regarding investment for impact?
Sarah addressed these and other questions from responsible finance (CDFI) leaders in our webinar today which you can watch below.
Impact Investing and Responsible Finance – what this webinar covered
Interviewed by Ed Siegel, Chief Executive of Charity Bank, Sarah described how the Institute levers its relationships with asset managers and owners to facilitate understanding of, and engagement with, investing for impact. She outlined the challenges and hurdles to scaling impact investing, and made a clarion call for the Government to enhance an effective but underused tax relief which attracts capital to our sector.
There are both push and pull factors (client demands; regulatory requirements) behind the growth in the impact investing market, she explained, and being responsive to client demand can mean a lack in integration and even a slightly ‘wild west’ feel. But the Institute is working to make impact investing more accountable and transparent.
Sarah addressed how the global pandemic has reinforced the importance of social impact specifically – the ’S’ in ESG (Environmental, Social and Governance) investing. Social inequalities have made the impact of COVID-19 worse, and people in the UK and worldwide who face desperate injustices have experienced dreadful consequences as a result of the pandemic. She argued that impact investors must continue to think about social impact, particularly as it is intertwined with the transition to a net-zero economy.
Banks
The high street banks have lost much of their former expertise in small business and many are disconnected from communities, Sarah added. They can lack understanding of CDFIs yet our sector is well positioned to enable them to reach clients they cannot currently serve.
“CDFIs deliver the social function of the banking sector,” Ed commented, “and do things banks cannot.” CDFIs can take on a higher level of risk and look in depth at a businesses’ situation to make a positive lending decision where mainstream banks are unable to. Through this they fill an important role, and the banks could support them with capital to do this more sustainably. Sarah noted the “genuine willingness” among banks to better understand CDFIs. We want to work together to build on this momentum.
Pension Funds
Pension funds invest hundreds of millions of pounds rather than tens of millions, so pooling could make CDFIs more investable. But for many pension funds, impact investing is seen as “niche,” lacking in evidence, or into asset classes which the fund managers are unfamiliar with.
Sarah described how the Institute is addressing the perception that there’s a lack of evidence around impact investing at scale, its work with Pensions for Purpose and its workstream examining what investments for impact have been made by local authority pension funds and what lessons have been learned.
Despite the “widely held” perception that fiduciary duty prevents impact investing, ultimately not investing for impact will come to be seen as a neglect of fiduciary duty, she said. The Institute works with a pro-bono legal panel and has developed resources for pension trustees that give an accessible, practical insight into the opportunity presented by impact investing and the concrete steps trustees can take to pursue an impact investing strategy (downloadable here).
Common Impact Language
A lack of standardised vocabulary and commonly-understood language makes impact measurement, reporting and comparison difficult. Improving transparency and accountability also involves standardising how we talk about impact. The UN Sustainable Development Goals are a widely understandable impact reporting framework, but they are very high level, and the Institute’s vision is for a common impact reporting system that investees and investors can align to.
Tax reliefs
Community Investment Tax Relief (CITR) and Social Investment Tax Relief (SITR) are key tools to encourage investment into our sector. Many of our members have used these instruments. CITR is arguably the more effective tool and is most used by CDFIs, but we need more investors to be aware of it. The Institute is engaging in discussions with Government to seek to enhance or upgrade CITR.
Sovereign and municipal bonds
The UK could issue a sovereign bond to scale up the UK’s drive to a net-zero carbon economy with well-defined social and economic benefits. Last week The Impact Investing Institute, The Green Finance Institute and the LSE Grantham Research Institute on Climate Change and the Environment submitted their Green+ Gilt proposal to the Government. Supported by 30 asset owners and investors, the proposal outlines how a Green+Gilt sovereign bond would direct capital to address the UK’s social and environmental challenges.
It would also set an example to both the private sector and to local authorities, Sarah said. She described significant opportunities around municipal bonds – which are an effective instrument in the US – and how a “broader, deeper municipal bond market in the UK could drive investment to communities.”
Boosting our voice
“We need to be getting more money into communities.” Our members do exactly that, lending £200 million pounds to over 40,000 customers last year and supporting over 13,800 jobs. Every pound our members lend transforms communities. Every pound creates or saves jobs, businesses or social enterprises, or helps individuals build wealth. The £200m we lent last year was truly transformative, but given the scale of need £200m also makes the CDFI sector a minnow in the finance ocean. Access to sustainable, long-term funding would enable the sector to flourish.
We have powerful case studies which show our impact, backed up by robust evidence which shows that CDFIs can uplift and level up communities during the UK’s recovery from COVID-19. The CDFI sector is gaining influence and attention and it is imperative we keep raising awareness. We look forward to developing our relationships with impact investors and The Impact Investing Institute.
Our sincere thanks to Sarah Gordon of The Impact Investing Institute, Ed Siegel of Charity Bank and all webinar attendees. Watch the webinar here: