Not long after being elected to Parliament in 2019, Gareth Davies successfully lobbied for the UK to issue green bonds and establish a development bank – policies he had felt were missing in his former role as Head of Responsible Investment at Columbia Threadneedle.
“It always puzzled me in my old job – we would invest in KfW and lots of other development banks around the world, but Britain has never had one,” he tells RI. In a bid to change this, Davies teamed up with a UK-based think tank called Onward to produce a report outlining how the government could create a UK development bank.
The UK National Infrastructure Bank, which will focus on climate change and local economic growth, launched in June. Davies’ push for green gilts has also paid off, with a debut deal later this year.
Now Davies, who spent 14 years at Columbia Threadneedle, is turning his attention to social issues, releasing a report today on how to catalyse social impact investment in the UK.
Covid-19 has spurred on thinking around social issues – UK pension funds and finance bodies recently called for the creation of a ‘TCFD for social risks’ after pensions minister Guy Opperman found patchy performance on social issues among the UK’s 40 largest pension schemes.
“Treasury ministers are very focused on this too,” says Davies, predicting it will be the next big trend in ESG. “Environmental issues are obviously incredibly important and will remain so, but it’s also important that policymakers and industry look more at the ‘S’ going forward – and hopefully this report will help in highlighting that a bit more.”
In the report, How to Scale Social Investment, Davies calls for a massive overhaul to the UK social investment market. Social impact investing in the UK was estimated at about £5.1bn in 2019 and the country is considered a global leader. It launched the first ever social impact bond – through which investors finance socially-beneficial projects and get a return if they’re effective – in 2010 (it was to incentivise former prison convicts not to reoffend). Two years later, it created the first ever social impact investment bank, Big Society Capital (BSC), which still exists today. During its 2013 presidency of the G8, the UK sponsored a taskforce on social impact investment – a move it has repeated during its current presidency of the G7, launching a new impact investment taskforce made up of handfuls of big hitters.
But former minister for civil society Nick Hurd, who chairs that taskforce, recently lambasted the UK government for “failing to get it”.
He expressed frustration that responsibility for social impact investment lay with the Civil Society Minister – who oversees matters relating to the charity sector – rather than the country’s business department.
Davies echoes this concern in today’s report, calling for the brief to be reassigned to the Small Business Minister to encourage private investment.
“There’s this constant struggle between whether it is a philanthropic activity or is it an investment activity,” he tells RI. “And as I say in the report, if you do not clearly define the difference, the default will be to believe it is philanthropic – and that has held back the mobilisation of private capital.”
Any instrument with ‘investment’ in its name should be considered to have financial returns, he notes, adding that BSC has a major role to play in clarifying definitions.
He recommends that the mandate of BSC be expanded, which could be easier post-Brexit, now that European rules don’t govern the social investment bank’s structure.
“It makes perfect sense for me that they should run their own funds and invest directly. Of course, they have been investing, that was the whole point of the organisation. The trouble is that they’ve had to do it through intermediaries.”
BSC should focus on scaling liquid investments, he continues, noting that the social impact investment market is dominated by illiquid investments often not suitable for retail and institutional investors.
“They could help bolster the tradeable social bond market. It would add more competition and variety for retail investors.”
During his time at Columbia Threadneedle, Davies oversaw the launch of the UK’s first social bond fund, which has raised £1.5bn to date. Now, he recommends that the government redirect funds allocated to social impact bonds into a social bond fund managed by BSC.
He describes social impact bonds as “important”, and says they have a role to play in public policy. “But they haven’t been able to mobilise private investment to the level we were told a decade ago – we were told £1bn would be raised from private capital, but it’s been about £73m.”
“We have 87 social impact bonds in this country – the most anywhere in the world – and we’ve got one of the largest pension funds markets in the world, one of the largest asset management markets in the world and one of the most impressive banking markets in the world,” he goes on. “And yet we have not been able to see that private capital mobilised into social impact bonds.”
Davies said his next step will be to highlight the ideas in the report throughout government.
“I’ve already submitted a number of written Parliamentary questions to ministers, and I’ll speak about this in the Commons. I want to work with ministers with this, including the Chancellor, the next time I see him.
“Coming from a responsible investment background into the House of Commons feels like great timing, because it feels like the government’s got a pretty keen agenda on this,” observes Davies. “They see it as a huge opportunity for UK plc.”