FEATURE: Impact Investing, The "Invisible Heart" Of The Markets?

Amisha Mehta Assistant Editor London 3 February 2016


In November last year, the UK's Charity Commission suggested many charities were making basic errors in their financial reporting. The governmental body identified 76 charities with an annual income of over £500,000 that appeared to have high governance costs. It found an 87 per cent majority of these had incorrectly allocated costs to governance costs when they should have been included in other categories, including charitable expenditure. The most common mistake was to equate governance costs with general management and administration costs.

“The dilemma here is that people cannot see how much their money is having an impact. The days of wealthy people writing a cheque and saying 'I've done my bit' doesn't make them feel warm and cuddly anymore,” Jon Needham, global head of fiduciary services at Societe Generale Private Banking Hambros, told WealthBriefing.

“With impact investing, they know very quickly if their money is working or not. It is transparent and easy to measure. Plus, if investors want to exit they can do so and deploy their capital more effectively elsewhere.”

As for patience and time, these can be bought to a certain extent; they are issues that can be pacified with the scale of wealth. Today, many high and ultra-high net worth individuals have a family office with a dedicated team of specialist advisors looking after their philanthropic endeavours. This is an area that is only set to grow, according to Needham. Indeed, of the HNWIs who currently receive advice on social impact, demand for more advice from wealth managers reached 54 per cent, according to last year’s Capgemini and RBC Wealth Management Global HNW Insights Survey.

So, is this impact investing boom hurting "pure" philanthropy, which pays no attention to business plans and focuses only on non-profits with a mission to do good? In fact, the UK’s Sunday Times Giving List 2015 showed that more people are giving more money. The Sunday Times tracked philanthropy from over 300 of those featured in its Rich List and found that this group gave a record £2.577 billion over the year. 

Over the financial year of 2014-2015, the UK’s Charities Aid Foundation committed £2.19 million to social investments, compared to £478 million in donations paid to charities. Both figures were up significantly from the previous year and are expected to continue on their upward trend. So social investment is not creeping into charities’ share of the pie, rather the total pie is growing.

“Even if we’re talking about some patient capital that has been diverted to impact investing, it’s a drop in the ocean compared to the influx of new investment money that is feeding the impact investing sector,” said Ayliffe.

What is clear is that there is a seismic shift going on: a growing appetite to support the next generation of entrepreneurs, specifically those looking to make a measurable, tangible impact and to use investments for good.

“There is a whole generation of people who want to do things differently. Their motivation is to have the biggest impact; the money-making is just a by-product. It's a case of recycling grants, meaning that people are giving out money and advice to help deliver social impact and then using any returns for future impact-related and philanthropic projects,” said Mesquita.

Also, people who are philanthropically-minded are likely to be more open-minded to impact investing, but they will not divert capital whimsically, Catherine Tillotson, managing partner at the Scorpio Partnership, told WealthBriefing

“Philanthropic capital is often providing support to the most vulnerable in society. So, in practice, a serious philanthropist is more likely to dip into their investment portfolio to test out social investment rather than diverting their already-committed philanthropic capital,” she said.

This new wave of private wealth is no doubt taking some of the load off governments, who are neither led by innovation nor best placed to run the risks needed when it comes to tackling social issues. The UK government, for example, has frozen funding for the Charity Commission until 2020. Traditional philanthropy alone cannot cope, according to Sir Ronald Cohen, chairman of the Global Social Impact Investment Steering Group, also known as the father of social investment. In a 2014 letter to leaders of taskforce governments, Cohen called attention to the emergence of impact investing as a unifying force among government, the social sector and foundations, institutional and private investors, and entrepreneurs. He summed it up eloquently when he said that impact investing brings the “invisible heart” of markets to guide their “invisible hand”.

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