“A better way to invest”: Big Society Capital’s Sir Harvey McGrath says structural change is coming to the asset management industry

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At a time when governments around the world are burning through billions attempting to rescue citizens from the financial pain of coronavirus, which has created severe crises in healthcare and employment, Big Society Capital says there is a crucial opportunity to use private money to fund social causes. 

Big Society Capital was one of the first institutions to champion impact investing in the UK. It was established in April 2012 as a private company with the purpose of building the social impact investment market, under a pledge made by former Prime Minister David Cameron.

“There's no doubt that the Covid crisis has really reinforced the momentum that was already there,” says its chairman, Sir Harvey McGrath, adding that there has been a “fairly strong flow” of recent inbound inquiries from investors.

Some of this interest is “directly a function of the crisis”, but McGrath also considers this to be part of a broader paradigm shift taking place in the finance industry at large, as generational change boosts demand for value-aligned money management.

Impact investing has come to the fore in recent years, as investors look for ways to make a positive difference in the world, alongside a financial return.

In the UK, social impact investing has grown six-fold over the past eight years, increasing from GBP830 million in 2011 to over GBP5.1 billion in 2019, according to Big Society Capital’s latest estimate of market size.

Globally, the broader ESG investing market is now worth an estimated USD30 trillion and accounts for around one-third of all professionally managed assets.

“The numbers are really evidence of the fact that impact isn't just a ‘nice to do’, because it feels morally right, but that there's something much, much deeper happening. It's structural, and therefore will influence the way in which markets develop over the next decade,” says McGrath.

McGrath is a veteran of the finance industry, having been CEO and then chairman of the investment manager Man Group, before taking the chair of the insurance group Prudential. 

While he says the idea of ‘impact investing’ is “as old as the hills”, the past 20 years have seen it go from being a barely-recognised outlier to one of the fastest growing areas in investment management. 

McGrath says that managers now need to start recognising impact investing not as a separate asset class, but rather see impact as a “third dimension alongside risk and return”. 

“Risk, return and impact. That paradigm and that way of thinking about how you manage money will become the dominant one,” he predicts.  

“I think what will happen now is that we won't talk about ‘impact investing’, it will simply be a better way to invest, because the businesses that are addressing real social and environmental need are in many ways better businesses than those that don't.”

Since its establishment, Big Society Capital has invested GBP625 million of its own capital in social impact causes. Most of this capital came from the GBP425 million of dormant deposits in UK bank accounts that have been pooled together in the Reclaim Fund. The rest was invested by its four major shareholders: Barclays, HSBC, Lloyds Banking Group and NatWest Group.

Housing is one of the key issues that Big Society Capital focuses on. McGrath says the firm is at the beginning stages of bringing a new fund to the market to help address homelessness, as government support schemes wind down. 

The UK government launched a scheme during lockdown in March called ‘Everyone In’, which took 15,000 homeless people off the streets and temporarily placed them in hotels. The new fund is focused on the problem of housing these people after they come out of the hotels. 

McGrath explains: “We are working specifically on a project with government and with other investors to invest in social property funds, which provide local authorities and charities with access to suitable properties. This means there is a wrap-around support structure that not only provides accommodation but works with the individual to find out what the problem is, and triage the issues that ended up with them being on the street.”

Big Society Capital does not make direct investments, but rather works with external fund managers to design solutions to broad social problems. Its other projects in the pipeline include funding housing for women experiencing homelessness and survivors of domestic abuse.

“We tend to start with the social issue that is the problem that we're trying to help address, and we'll look at the ways in which effective interventions can be made. Then we seek to work with partners, often fund managers, to develop a fund product that can finance those interventions,” says McGrath.

Any investment Big Society Capital makes with its own capital, it seeks to match at least one-to-one with funding from external organisations, in order to “further magnify the impact that we can have”.

This has resulted in an additional GBP1.4 billion of funding from external organisations such as pension funds, endowments, and high net worth family offices.

Pension funds form a growing part of Big Society Capital’s investor base. “In the pension fund world, local authority pension funds are natural investors in some of these housing projects, for example,” says McGrath. 
Appetite for sustainable investing has been growing at pension funds. A recent study from Mercer found that the overwhelming majority of pension schemes, 89 per cent, now consider wider ESG risks as part of their investment decisions. 

McGrath says it makes sense that pensions are looking to make their portfolios more sustainable, since the rise of sustainability has been led by the changing preferences of asset owners. “It's your money, it's my money,” says McGrath.

Obstacles still remain, as some pension trustees interpret their fiduciary duties narrowly to mean that they can only invest for the highest return, not with any other considerations in mind. 

“In fact, in many jurisdictions, including the UK, fiduciary responsibility requires investors to consider long-term value drivers in the investment process, so there are no impediments to trustees taking account of social or environmental factors’’, McGrath explains. 

The fiduciary duty debate came into focus again this week as Australia’s superannuation funds were told by the country’s assistant superannuation minister, Jane Hume, that their purpose is “not to change the earth's temperature” but to “build savings for retirement or to create an income for retirement”.

But change needs to happen, says McGrath, considering the funding that will be needed for countries to meet targets like net zero for greenhouse gas emissions by 2050, and, on a shorter timeline, the United Nations’ Sustainable Development Goals by 2030.

“It’s beyond the reach narrowly of governments, certainly beyond the reach of philanthropy, and so unlocking these very significant private capital flows is not just an opportunity – because I think it is an opportunity for investors – it's a necessity,” concludes McGrath.

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