The UK faces significant and entrenched social issues. The investment required to tackle these challenges is both urgent and substantial but non-government finance has historically not been available in sufficient quantity. An increasing number of impact-driven organisations are developing innovative and investable solutions to help alleviate some of these most pressing social issues. This has led to the emergence of a growing and rapidly evolving private impact investment market in the UK, which is attracting increasing levels of investment – why? Is it really possible to do well by doing good? And if so, shouldn’t this opportunity be available to other investors without specialist expertise and deep networks?
The need has never been greater
Right now as reported in the Schroder BSC Social Impact Trust 2023 Impact Report, the UK is confronting entrenched social issues that require targeted investment at scale:
- £7.7bn is needed annually to meet the growing demand for care1
- £16.9bn is needed annually to tackle the housing crisis2
- £65bn is needed to insulate UK homes by 20353
Social inequalities are clearer than ever as society responds to the enduring effects of the pandemic and the cost-of-living crisis. Social impact investing has shown us what’s possible when local social organisations (which are often best placed to tackle these challenges), the public sector and investors work together to achieve impact. We now urgently need to grow this market and channel private capital to help enterprises tackle the challenges at scale, improving people’s lives and supporting resilient, equitable, flourishing communities in the UK.
The appeal of impact investing
Broadly speaking, impact investments are those made with the intention of generating specific, measurable and positive social or environmental impact, together with a financial return. Focusing on investment themes that are often under-represented in investors’ portfolios, impact investments can offer valuable diversification benefits and the opportunity to generate good risk-adjusted returns, with low correlation to traditional quoted markets and low levels of volatility.
Impact investing is increasingly recognised as being able to deliver attractive financial rewards for investors, while simultaneously making a real, positive and measurable impact and contributing to the solutions to some of our most pressing social challenges. Consequently, social impact investment is growing rapidly but almost all the growth has been generated through private markets and a limited range of sources of institutional capital.
Introducing the Schroder BSC Social Impact Trust
The Schroder BSC Social Impact Trust plc (SBSI) was launched in December 2020 to connect public market investors to a diversified, resilient portfolio of high impact, high quality investments addressing entrenched social issues in the UK.
The trust offers investors unique exposure to otherwise hard-to-access assets and managers, with the reassurance of the ongoing portfolio management, engagement and governance disciplines of a listed investment vehicle.
The trust has won three awards since its launch, with judges recognising its unique offering of a diversified portfolio delivering deep social impact for more disadvantaged groups across the UK.
A portfolio designed to deliver high social impact
SBSI targets the highest level of social impact, while seeking to provide an attractive risk and return profile. Like many other investors, the trust uses the United Nations Sustainable Development Goals (SDGs) as a framework to guide their impact investing. SBSI also uses the impact investment sector standard Impact Management Project (IMP) framework for measuring and managing impact, as well as aligning investments to impact objectives. Within this framework, the trust invests in enterprises that are directly seeking to contribute to solutions that address societal challenges in the UK.
SBSI’s investment strategy focuses on three core asset classes that have proven, investable models for positive impact and a critical need for funding. These are:
- High impact housing – investing in funds and organisations with a track record of developing and managing high quality affordable housing, from more specialist housing for vulnerable groups to housing for low-income renters currently living in poor quality or insecure accommodation
- Debt and equity for social enterprises – investing in funds and co-investments that provide capital to established charities and social enterprises targeting high social impact interventions for more disadvantaged groups, primarily funded by government-backed revenues
- Social outcomes contracts – investing in funds or direct opportunities that provide capital for expert charities and social enterprises to deliver government contracts based on the social outcomes delivered, rather than on a fee for service basis
In a nutshell, SBSI finances a wide range of established organisations with strong track records of delivery, working in diverse ways across the UK to create a more inclusive, sustainable and prosperous society.
An investment for our times
Against a backdrop of the national cost of living crisis and global financial market volatility, SBSI’s investment strategy has created a portfolio with two crucial attributes:
- The ability to deliver vital services to the people who need it most
- Proven resilience to difficult economic conditions
The portfolio delivers essential government-mandated services and derives a substantial proportion of revenues from government-backed sources, which have been historically stable throughout economic cycles.
Importantly, this is not about philanthropy – the managers believe impact is a source of value, and that impact and returns should be highly correlated. The trust targets an annual return of Consumer Prices Index (CPI) + 2%4 and a dividend of 1-2% per annum. Growth in its Net Asset Value (NAV) since inception has been encouragingly positive and delivered with low volatility, demonstrating that the trust can play a role in many types of portfolios.
Impact as a source of value
Source: Big Society Capital, June 2023.
A portfolio manager leading the way
The portfolio manager for SBSI, Big Society Capital (BSC) is a true market leader, with unparalleled reach to originate and source impact deals. Established for more than a decade, the company is widely recognised to be the UK’s leading social impact investor. BSC has a solid track record having committed over £800 million to more than 2,000 organisations across the UK.
Supporting positive social impact
As a trust, SBSI engages with investors of all types (retail and institutional) to raise capital. Since inception, £87 million has been raised and fully committed, through funds and co-investments, as follows:
- £35 million in high impact housing
- £41 million in debt and equity for social enterprises
- £8 million in social outcomes contracts
To date, SBSI has supported the growth and resilience of 168 frontline organisations, with an average track record of 30 years, that address critical social challenges and deliver solutions for vulnerable and disadvantaged people across the UK.
The trust is proud to have touched the lives of 276,000 people since its launch, over 94% of whom are disadvantaged, vulnerable or underserved.
Summary: moving into the mainstream
As we all become increasingly aware of the serious challenges facing society, more and more investors want to put their capital to work for dual impact, to benefit both society and their portfolios. The ‘soft benefit’ to investors is undeniable – being part of a force for good, helping to achieve deep, scalable and positive impacts for disadvantaged people. But impact is also a driver of value, and this is a uniquely attractive investment opportunity, with the potential to generate both income and long-term capital growth for investors.
SBSI is one of a range of products once considered niche but now established for consideration by the mainstream investment community, with particular interest from younger and more socially-aware investors. SBSI is clearly demonstrating that it is undeniably possible to ‘do well by doing good’ and in partnership with Schroders, it is keen to inspire others to feel the same, encouraging an ever-increasing allocation of capital to this crucially important section of the economy and democratising this area of investment.
Investing for impact has never been more appealing – or more potentially rewarding.
Read SBSI’s 2023 Impact Report here to find out more >
[1] Source: Green Finance Institute, “Financing energy efficient buildings”
[2] Source: UK Parliament, “Social Care: funding and workforce”
[3] Source: House of Commons Library, “Tackling the under-supply of housing in England”
[4] Net of fees, averaged over three-to-five years
Key risks that are specific to the company
There can be no guarantee that the Company will achieve its investment objective or that investors will get back the amount of their original investment. The Company has limited operating history and investors have a limited basis on which to evaluate the Company’s ability to achieve its investment objective.
The Company has no employees and is reliant on the performance of third-party service providers. Failure by the AIFM, the Portfolio Manager or any other third-party service provider to perform in accordance with the terms of its appointment could have a material detrimental impact on the operation of the Company.
The financial performance of the Company will depend upon the financial performance of the underlying portfolio. The Company’s portfolio will include Social Impact Investments over which the Company and Portfolio Manager have no control. In particular, investments in Impact Funds and certain Co-Investments will be managed by third party managers. The Company’s performance and returns to Shareholders will depend on the performance of those Social Impact Investments and their managers.
The Company’s objective is to deliver measurable positive social impact as well as long term capital growth and income and these dual aims will generally be given equal weighting. Social impact is the improvement of the life outcomes of beneficiaries in a specific target group or groups. There is no universally accepted definition of ‘impact’, an assessment of which requires value judgments to be made. The Company’s impact focus may mean that the financial returns to Shareholders are lower than those which might be achieved by other investment products.
The Company depends on the diligence, skill, judgement and business contacts of the Portfolio Manager’s investment professionals and the information and deal flow they generate, especially given the specialist nature of social impact investing. The departure of some or all of the Portfolio Manager’s investment professionals could prevent the Company from achieving its investment objective.
The Company will make investments where the Company’s commitment is called over time. Due to the nature of such investments, in the normal course of its activities the Company expects to have outstanding commitments in respect of Social Impact Investments that may be substantial relative to the Company’s assets. The Company’s ability to meet these commitments, when called, is dependent upon the Company having sufficient cash or liquid assets at the time, the receipt of cash distributions in respect of Investments (the timing and amount of which can be unpredictable) and the availability of the Company’s borrowing facilities, if any.
The Company’s investments may be illiquid and a sale may require the consent of other interested parties. Such investments may therefore be difficult to realise and to value. Such realisations may involve significant time and cost and/or result in realisations at levels below the value of such investments estimated by the Company.
Any change in the Company’s tax status or in taxation legislation or practice generally could adversely affect the value of the investments held by the Company, or the Company’s ability to provide returns to Shareholders, or alter the post-tax returns to Shareholders.
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