By Emily Khan, UK Social Investment and Enterprise team, PwC
The nature of the challenge
Our recent research, commissioned by the City of London Corporation, considered the essential features that would make London a global financial centre for social impact investment (SII). A number of these features are common to other financial markets – such as skills and expertise, innovation in products and instruments, and international connections. However one in particular –‘social impact standards and reporting’ – stands out as unique to the SII market. This is illustrated in the diagram below, which reflects a RAG analysis of London’s current position, assessed against six essential features of a global financial centre for SII. For social impact investors, social impact forms the second “currency” that, alongside financial returns, constitutes the basis of their investment decisions. It also stands out as the one feature where concerns were most consistently expressed by those we consulted – 24 global impact investors – specifically, the lack of standardisation in the way that social impacts are measured and reported was seen as restraining SII market growth, in London and elsewhere. This view is supported by other research, such as the 2015 JP Morgan and GIIN ‘Eyes on the Horizon’ investor survey.
What does this mean in practice?
The red rating given to SII standards and reporting for London is not all bad news, however. Indeed much progress has already been made in this area, for instance via the Inspiring Impact programme, which works with the charity sector to improve impact measurement practices. For many, the rating is simply a reflection of the scale and size of the challenge. Unlike ‘green’ markets, where measures of impact are generally more consistent, and where market standards – such as the approach to carbon ‘footprinting’ – have readily been adopted by the market, social issues are by their nature more complex, variable and wide-ranging. It is not surprising therefore that methods and measures are variable and inconsistent. Lastly, most of those we consulted felt that this is a feature that no one global financial centre can address alone and that, whilst it is an issue in and for the SII market in London, it is not a challenge that London alone can solve. It is one that requires global collaboration.
How can we address this challenge?
Waiting for the market to generate a body of evidence and reach agreement on standards could arguably mean missing many of the opportunities that are available for growing the SII market globally. Finding ‘quick wins’ or ways of overcoming this challenge in the short term becomes of special importance when looking at attracting new groups of social investors. There are an increasing number of examples where investors can take sufficient confidence from the mission and goals, structures and processes of an organisation that impacts will be delivered. Arguably then, adopting global accreditation standards – that focus on potential and commitment to deliver impact – are a good place to focus in the short term, whilst the market solves the knottier, long term challenge of standardising social impact measurement.
In France, the ‘Solidarity Investment Funds’ demonstrate how an accepted social impact accreditation – or certification of the social impact of a fund or enterprise – can be a powerful way of unlocking new supplies of investment capital. In that case between 5% and 10% of employee savings schemes assets must be invested into unlisted ‘solidarity designed’ organisations, provided at least a third of their staff is comprised of workers who are employed as part of a work integration programme. There are signs of similar progress elsewhere, and indeed that this practice is already emerging in London– such as by the Social Stock Exchange, or B Lab’s recent UK launch of the B-Corporation Certification model.
The red rating in our research therefore reflects the distance left to travel before standards for social impact measurement and reporting are fully embedded in the market in London. However, it also highlights the opportunity and need to think creatively about the problem in the short term and the fact that London can gain by drawing on international precedents in this area.
Download ‘Developing a global financial centre for social impact investment’