Fund Management

How Enterprise Investment Schemes Can Democratise ESG Portfolios

Julian Pickstone, 29 January 2019


Investing in small firms and startups that have an ESG focus isn't always easy or open to the smaller investor. The author of this article says this familiar feature of the landscape ought to be used more vigorously.

There is a great deal of commentary about the trend towards so-called ethical and “sustainable” investing, and beyond the pros and cons of this approach, a question that arises is how can investors below the wealthiest circles put these ideas to work? There are tracker funds and other off-the-shelf entities that track indices replicating ethical investing approaches, although these techniques of investing do not give clients the kind of direct connection with an underlying basket of firms that one might get in a small private equity portfolio. So what can be done to bridge the gap? One solution, the author of this article says, are those long-standing UK-based entities known as Enterprise Investment Funds. The EIS model, which carries certain tax breaks and which goes back to the early 90s, is now a familiar part of the landscape. And it has potential to be used wisely in ethical investing, says Julian Pickstone, head of social and impact investing at Triple Point

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Ethical investing is going mainstream. Historically the domain of high net worth investors or those determined to avoid so-called “sin stocks”, ethical investing trends are increasingly being driven by a new cohort of investors, many of them women and Millennials. But the increasing interest in ethical, social and governance investments has come about following the development of a new tranche of ethical investment which, rather than just avoiding investing in companies that use fossil fuels or damage public health or the environment in other ways, seeks out companies that are actively making a positive impact on the society around them. Impact investors, as they are known, seek to achieve a market financial return from companies determined to make the world a better place. And the use of tax reliefs such as the Enterprise Investment Scheme are helping democratise impact investment and bring it to a wider pool of investors.

Value driven investing is not a new phenomenon. Its history can be traced back at least as far as the Quakers, while the 1980s saw the birth of the Socially Responsible Investment movement, which led to ethically-minded investors screening out so-called “sin stocks” - such as tobacco, alcohol, fossil fuels and gambling, among others - or goods from countries with questionable political regimes, such as Apartheid-era South Africa. Meanwhile, the development and growth of the internet since 2000 has widened access to information, allowing an ever-growing number of UK investors to make more informed decisions about where they put their money. Research already suggests that younger generations are far more aware of the impact of companies on a range of ESG issues and are more likely to seek out ethical investment, and impact driven, investment strategies.  A recent survey by BlackRock found that two-thirds of Millennials want their investments to reflect their social and environmental values. This is a generation that it is estimated will receive around $3 trillion in inherited wealth, so understanding their investment priorities will be crucial to the success of many impact investment funds.

Socially responsible investment funds encompass a range of strategies, broadly focused around ESG criteria - the three pillars that frame the sustainability and ethical impact of a business. At one end of the spectrum are funds that simply avoid “sin” stocks, while otherwise maximising financial returns. At the other end, investors enter the realm of pure philanthropy.  
Between these approaches lies impact investing: seeking out companies which effect a measurable social or environmental impact, while also generating a market financial return.  Because of these dual objectives, impact is viewed as an investing strategy of increasing significance. In the UK, according to the latest figures from the global steering group for Impact Investment, there is at least £150 billion ($193.7) of committed capital in impact investments and over 120,000 purposeful businesses in which to invest, and while the UK has historically led the world in this field, we are seeing an explosion of interest globally. 

According to a recent Global Impact Investing Network (GIIN) survey, investors globally committed more than $35 billion to impact investment deals in 2017, a 58 per cent increase on the previous year; while the total impact assets held by its respondents were worth $228 billion, double the 2016 total. Moreover, the market is expected to explode in the next couple of years. Two separate reports from Standard Life and JP Morgan both forecast that the global impact investment sector will be worth $1 trillion by 2020, against $60 billion today.  

Many family offices manage assets on a scale which enables them to invest in particular socially-driven companies of their choosing, or to create their own impact portfolios. But mass affluent investors have fewer options. One option that is becoming increasingly popular, however, and which is helping to democratise impact investment, is the EIS. These schemes have been rolled out by policymakers to help unlisted companies operating in certain sectors - with assets of less than £15 million and fewer than 250 employees – to raise capital to fund their growth. To induce investors to buy into these smaller, higher-risk companies, they receive tax incentives – including income tax relief of 30 per cent, inheritance tax relief, and also exemption from Capital Gains Tax. People who invest in this way can also defer the CGT liability on other shares they sell until they dispose of their EIS investment. 

This year Triple Point launched the first Impact EIS managed service. It offers investors a portfolio of eight to 12 fast-growing companies which make a measurable and positive contribution to society in four key sectors: the environment, health, children and young people, and inequality. The funds raised provide scale-up capital to unlisted companies which are already generating revenue, and are selected for their potential to achieve a significant return over a four to seven-year period. The rationale is to bring investors a trio of benefits: financial growth, social impact, and EIS tax relief.

In August, the Triple Point Impact EIS made its first investment, of up to £250,000, in MWS Technology. MWS is a Software-as-a-Service (SaaS) business that aims to transform the efficiency and compliance of organisations that deliver apprenticeship training. Its software helps manage programmes directed at young people who need vocational training, and enables training providers to meet the requirements of many different employers. It attempts to confront unemployment and skills shortages in the UK. 

MWS is a prime example of how an impact investment, focused both on social impact and generating competitive financial returns, is also eligible for EIS tax relief. As impact strategies continue to reshape the commercial investing landscape, the advantages offered by EISs are likely to become increasingly difficult to overlook. 

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