Impact investment ‘a huge opportunity for mainstream investors’ – G8 taskforce

The G8 Taskforce on Social Impact Investment, chaired by venture capitalist Sir Ronald Cohen and backed by a number of influential players, including the European Union, the UK government and the White House, has today (September 15) released its first report which calls on global governments to modernize the concept of fiduciary duty and for trustees to take account of impact investing.

The report, entitled Impact Investment: The Invisible Heart of Markets – Harnessing the power of entrepreneurship, innovation and capital for public good, makes a number of recommendations to governments and the financial sector to unleash “$1 trillion of private sector impact investment to tackle social problems”.

The report notes that more than 1,200 institutions controlling $45trn in capital are signed up to the UN-supported Principles for Responsible Investment (PRI) and $13.5trn of assets incorporate ESG, but it notes that a number of barriers prevent these large pools of capital from going into impact investment, such as a perceived lack of investible propositions and transaction costs.

It says solving these challenges could unlock what the report calls the first $1tn, or around 2% of the world’s invested capital.

The UK Chancellor the Exchequer [Finance Minister], George Osborne says the report “sets out a clear plan of action for governments and markets”, and said he looked forward to implementing many of its proposals.

The report focuses especially on pension funds and foundations, saying: “The impact investment market represents a huge opportunity for mainstream investors, including pension funds, sovereign wealth funds and independent investment managers.”

It continues: “Our recommendations are relevant to all investors, but especially foundations and pension funds. There should be no room for doubt that trustees responsible for other people’s money can be prudent and responsible when they incorporate impact alongside risk and return in their decision-making.”However, the report notes that in many countries, various legal or regulatory impediments hold back the development of impact investment, especially the concept of fiduciary duty. The report calls for a “21st century” definition of the duties of trustees of charitable foundations and pension funds.

It says that for foundation trustees, “there should be a clear duty to factor impact into investment decisions and reporting” and that foundations should allocate a percentage of their wealth to impact investments. It continues that pension funds are a “huge potential” source of impact investment capital and says changing the ERISA [Employee Retirement Income Security Act] rules in the US, and similar rules elsewhere, to make clear that prudent pension fund managers can and should look to make impact investments, will potentially release large amounts of capital.

The report also notes that the worldwide shift towards defined contribution pension plans could lead to significant flows of personal savings into impact investment.

It cites examples of pension funds becoming interested in impact opportunities such as Quebec’s workers funds and the Teachers Retirement System of the City of New York.

Other key recommendations in the report include establishing a kitemark for impact investment products, developing social impact bonds and development impact bonds, and publishing better and clearer data on the cost of government of addressing social issues to encourage more impact investment participants to the market place.

It also advises countries to create a social investment wholesaler, like the UK’s Big Society Capital. There are also country specific reports for Italy, Canada, Australia, France, Japan and the US. Link to report