Our Insights

November 2012

The U.K. Social Investment Market: The Current Landscape and a Framework for Investor Decision Making

Noelle Laing, Coleman Long, Annachiara Marcandalli, and Jessica Matthews

The goal of this report is to provide a new perspective on the social investment market in the United Kingdom and address the needs of both institutional and private investors. We have observed that investors often do not know where to begin when they are asked about social investing. Admittedly, the term is very broad and the market is always evolving. We define social investments as investments that generate a monetary return while also generating a social return or minimising a social risk. Social investing is a comprehensive term meant to incorporate economic, environmental, health, moral, political, and/or religious factors. Social investments can be made through a wide range of strategies, including negative/exclusionary screening; positive screening, also called ESG integration; and impact investing.

Impact investing is less familiar to many investors than other social investment strategies, and we focus on this strategy in this report, while also discussing most other social investment strategies available in the United Kingdom. We define impact investments as investments made in enterprises that offer market-based solutions to a particular social or environmental challenge of interest to the investor; essentially, using the market to create social change. Impact investors invest in enterprises that proactively use the business to achieve ‘good’, however defined, at either a below market or market rate return (defined as one that appropriately compensates investors for the risks taken) with the intention of generating a social and/or environmental return. Three common forms of impact investing are clean tech, microfinance, and social finance or social enterprise investment. This third form of impact investing is common in the United Kingdom and refers to investments that provide capital to entrepreneurs and/or entities that have the intent to create a social impact (e.g., a loan to an entrepreneur looking to create a business that solves a social problem like homelessness). Throughout this report, we distinguish this type of investing from broader impact investing strategies by referring to it as ‘social finance investment’.

Organized into three main sections, this report helps to demystify the growing social investment market and guide investors through some of the major steps in exploring social investing and the opportunities available. We discuss:

  • the landscape of the U.K. social investment market, with a focus on impact investing;
  • the barriers to the growth of the social investment market and potential solutions; and
  • a decision-making framework to help investors evaluate and implement social investments within a diversified investment portfolio.

Three appendices provide additional information. Appendix A includes guiding questions for investors to use in conjunction with the steps of our framework to help clarify their decision to make social investments.

In Appendix B, we review the social investment markets in continental Europe and the United States. We would highlight that because U.K. foundations are not required to pay out 5% of their assets each year and U.S. foundations are, there are significant differences in how foundations in the two countries can think about investing and spending. Arguably, U.K. foundations have more flexibility to incorporate below market rate investments in their portfolios, as their spending for grant making is more flexible. U.S. foundations must consider the risk of losing purchasing power if below market rate investments are housed within the main endowment fund. This difference has also contributed to the relative popularity of programme-related investments (PRIs) in the United States. PRIs count towards a U.S. foundation’s 5% annual payout and are typically made from programmatic rather than endowment funds.

Finally, as any discussion of social investing involves a myriad of new terms, organisations, and acronyms, the glossary in Appendix C provides definitions of terms and descriptions of investments and organisations mentioned in this report.