Funds to buy to make a social impact

If you don’t just want to generate a return but also make a positive difference, one area to explore could be social impact investing. This doesn’t have such a high profile as environmental, social and governance (ESG) investing. Social impact investing has been described by The Global Impact Investing Network, a non-profit organisation which aims to increase the scale and effectiveness of impact investing, as investments "made with the intention to generate positive, measurable social and environmental impact alongside a financial return". 

UK social investment bank Big Society Capital says that “social impact is an approach to investing that seeks to tackle social issues, generating positive social impact alongside financial returns. It involves directly or indirectly investing in organisations or projects that have a social mission or focus, with the goal of creating positive change in the world.”

Social impact investments tend to focus on areas such as human rights, modern slavery, working conditions and employee relations such as union rights. For example, Big Society Capital’s investments which aim to promote financial inclusion include Wagestream, an app that helps workers to avoid debt by making some of the wages they’ve already earned available when they need them most. And one of Big Society Capital’s social and affordable housing investments is Hull Women’s Network which offers specialist domestic abuse support, nursery provision, and access to safe and affordable housing.

As well as helping social causes, “a focused social impact fund with clearly identifiable social goals, such as the provision of high-quality affordable housing could be a valuable diversifier for many portfolios", says John Ditchfield, director of research company Impact Lens. “However, given the likely exposure to illiquid or complex markets investors should proceed with caution.”

That said, while impact investments historically were made via direct private investments, most of the impact funds available to UK private investors tend to invest in listed companies, selected on the basis that they are making an impact.

Hard to quantify

There is no set way to quantify to what extent a social impact fund and its investments are making a difference. There are limited benchmarks and performance data on social impact investments which can make it challenging to compare financial performance and positive impact outcomes. And the area is fairly new, with many of the funds available to private investors only having launched within the past 10 years.

“It's too early to draw any firm conclusions on this,” says James Yardley, senior research analyst at Chelsea Financial Services. But “a good impact fund provides clear information and reports to investors about the impact it is having.”

Ditchfield adds that “good quality impact funds… often publish impact reports setting out how these measure and track impacts against widely recognised standards” such as the United Nations’ 17 Sustainable Development Goals which include ending poverty and hunger, and ensuring education for everyone.

The relative newness of the funds also means that they do not have long performance track records and while they seek to make positive returns, Ditchfield cautions “that returns may well be sub-market due to the complexity involving in running this type of fund”.

Many impact funds which invest in listed equities “tend to have a small-cap growth bias and can be risky”, adds Yardley. “They are best suited to investors with a long time horizon and a very high risk tolerance with a specific desire for their investment to do good.”

But as smaller and unquoted companies can deliver strong growth over the long term, a small allocation to this area could benefit portfolios with this objective.

Funds for exposure to social impact investing

There are around 17 open-ended funds with the word ‘impact’ in their names included in Investment Association (IA) sectors. Yardley argues that there is not really a wide enough choice of funds available and some are very small and are sub-scale.

“Funds such as Artemis Positive Future (GB00BMVH5979) and LF Montanaro Better World (GB00BJRCFP12) [which had assets of £25.3mn and £108.4mn, respectively, at the end of June] have struggled with style headwinds for the past couple of years but could be well positioned if the wind turns and small-cap growth does well again,” he says. “Generally, impact funds have struggled recently as the small-cap growth style has been out of favour in a higher inflation and interest rate world. Social impact funds can perform very differently to the market. You're typically taking on a lot of style risk and a bias to smaller companies.”

However, M&G Positive Impact (GB00BG886B02) has beaten the IA Global sector since its launch in November 2018. This fund is focused on larger companies which accounted for about 70 per cent of its assets at the end of June, with its largest holdings including insulin maker Novo Nordisk (DK:NOVO B), ON Semiconductor (US:ON) and India’s HDFC Bank (IN:HDFCBANK).

For non-equity exposure, options include CT UK Social Bond (GB00BF233790) which aims to provide income with some investment growth over five years or more. It invests in bonds that support and fund socially beneficial activities and development, primarily in the UK. It focuses on eight social outcome areas including housing and property, community services and financial inclusion. Issuers of the bonds it invests in include the UK government, International Finance Facility For Immunisation, NatWest (NWG) and utility companies.  

Schroder BSC Social Impact Trust (SBSI), which launched in 2020, perhaps gets closer to what impact investing originally involved by investing in other funds and direct co-investments which provide capital to local social organisations in the UK. Its main asset exposures are debt for social enterprise, including charity bonds and co-investments in portfolios of loans to social enterprises; high impact housing funds that help people who have experienced homelessness or domestic abuse, or have low incomes; and social outcomes contracts which provide capital to charities and social enterprises so they can deliver government contracts.

The private equity and illiquid investment exposure makes Schroder BSC Social Impact Trust higher risk than a fund that invests in listed equities. However, the trust’s chair, Susannah Nicklin, argues that the trust is exposed to investments with “proven resilience to difficult economic conditions” because its "portfolio delivers essential government-mandated services and derives a substantial proportion of revenues from government-backed sources, which have been historically stable through economic cycles.”