“Investing for Return and Social Impact”
Simon Chisholm, Investment Director at social impact investment company Resonance, explains why you don’t necessarily have to sacrifice return when investing for impact.
The institutional investor world is now increasingly focused on reducing risks from long term investment. Environmental, Social and Governance risks are being embedded into portfolio management strategies (the so called “ESG integration”). The rationale is simple, and particularly compelling in light of recent history – investments which take these factors into account are less likely to go wrong in the long term. And it is the asset owners themselves who are rightly pushing for this move away from short term maximization of absolute return, to strategies which look at returns on a long term risk-adjusted basis, taking into account these factors. Their liabilities are long term and, interestingly, often also correlated with environmental and social outcomes.
At Resonance, we build and manage impact investment funds which seek to focus investment capital even more strongly on investments which have a defined and intentional positive impact on specific social issues – from financing the assets local communities need to remain resilient, to building the property portfolios which social sector organizations need to deliver their impact, to direct lending to growing businesses which are using a “social enterprise” approach to deliver both robust profits and intentional solutions to social issues.
You could see this as a strong form of the “S” in ESG. And it is showing a number of benefits to institutional investors – some of which are interestingly counter-intuitive. Firstly, we find that the scale of need in some of the investment areas outlined above, particularly for community assets and property, opens up investment opportunities at institutional scale. Secondly, in many areas, the impact focus is actually opening up new markets and reducing risks to investors. At root, this is about socially focused enterprises having something of value – better information, unique experience and skills, stronger employee, customer and supplier relationships, access to new markets. If so, the capital which backs this approach can benefit from good risk-adjusted returns, whilst seeing measurable impact from its investment.
Just one example of this is our Real Lettings Property Fund which is achieving this in practice – good risk-adjusted returns on a diversified residential property portfolio; leases which insulate investors from the risks they cannot manage, and a measurable impact on one of the key issues in homelessness.