This new White Paper sets out the first usable tools for investors grappling with the challenges of how to invest for impact and donate money to charity, while considering their need for achieving their financial objectives
Many investors are keen to embrace impact investment. But while surveys conducted for this study found that more than half the respondents expressed interest in such investments, fewer than one in ten (9%) had actively engaged. We believe the explanation for this gap is straightforward: people may want to use their investment for social good, but they don’t know how to.
In that context, an increase in the supply of impact investment options – the number of funds available is expected to increase significantly over the next five years – will not meet investors’ needs. The latent demand seen in our surveys will not be unlocked until investors get the help they need to integrate impact investments into broader financial portfolios or philanthropic strategies.
This report provides such help. Based on detailed research, it sets out a design proposal for a new impact investment and philanthropy framework, the first of its kind, and an accompanying social personality profiling tool to help investors understand their own preferences for balancing social and financial objectives.
In this paper, we describe not only the framework, but also the research findings that shaped it, in order to appeal to both investors and those interested in the fields of impact investment and philanthropy. Some of our key findings include:
To unlock latent demand for impact investment, we need to focus on the needs of the investor as much, or more, than on the supply of products.There is considerable interest from investors in deploying their wealth to do social good at the same time as pursuing their financial objectives. However, just focusing on your financial needs is complex enough; adding in social considerations is extremely daunting, so most investors keep things simple by expressing their social preferences only through philanthropy. Our proposal seeks to help investors approach the appealing but daunting set of opportunities of the middle ground of impact investing with comfort and confidence.
Any approach to impact investment should embrace the full continuum of options from traditional investment to philanthropy. The important question for investors is how best to serve their financial and social needs as they deploy their wealth. Any framework that doesn’t consider the full range of options will provide an inadequate response to this question or, worse, promote one approach at the expense of another. This framework helps investors to understand how to approach both impact investing and philanthropy.
To unlock impact investment’s full potential, we must acknowledge that achieving social good at no cost to the investor may be the exception, rather than the rule. The industry needs to be honest that the more mainstream the investment, the more likely that it could raise funds on traditional capital markets anyway. True impact investment therefore often involves some cost – be it lower returns, reduced liquidity, or higher risk – in return for the social and emotional benefits one receives from backing social causes. Accordingly, the framework begins by letting advisers work with clients to determine what kind of social returns they want, what type of vehicle is most appropriate to achieve these, and how much of their overall portfolio is right to devote to this area. The latter is their social budget – an allocation of credits that can be “spent” on either impact investments or philanthropy to achieve social good. September 2015 Greg B Davies Head of Behavioural-Quant Finance, Barclays 6 | The Value of Being Human 2015
Differing attitudes in three key areas help investors consider the appropriate size for their social budget. A series of questions in the framework determine a Social/Financial Balance score, which measures willingness to forego something of financial value in order to achieve a social or environmental impact. This score strongly correlates with interest in impact investing and philanthropy, and the proportion of money devoted to impact investments by those already active in this area, making it the main element in suggesting a social budget of credits with which investors might feel comfortable. Other attributes also include a sense of Personal Satisfaction from giving and a sense of Moral Duty to give back. High scores in either area lead the framework to suggest a bigger social budget.
The framework provides diverse options for turning the social budget into social investments. The social budget provides individuals with a number of credits for individuals to “spend” on seeking social return, up to a maximum of 100. The tool helps individuals make decisions about how they want to distribute their allocation. It is up to investors, armed with a better sense of the trade-offs involved, to distribute their credits in the vehicles most likely to maximise their social utility. As the framework is focused on the investor and not the likely outcomes of specific investments – something still poorly measured – investment choices will vary by personal intuition about what does the most good.
The framework is likely to increase both impact investment and philanthropy. One worry about impact investment is that individuals may simply shift their charitable giving into this type of asset, thereby having little, if any, positive impact. Our research shows, however, that 90% of those looking to engage in impact investment expect to do so using money currently uninvested in cash, or already dedicated to traditional investments. Only 7%, not 8% would reduce charitable giving. Moreover, on average, the framework suggests a social budget for philanthropy slightly higher than current levels of giving.
Impact investment may address an important portfolio weakness.Investors are likely to help themselves financially through impact investment in a hitherto unrecognised way. Many have existing portfolios that are cash heavy, too liquid and too short term. By nature, many of the riskier social investments which attract higher credits in the framework are longer term and less liquid. Putting money into these may not just provide social dividends, but could also encourage them to deploy cash that they have been unable to bring themselves to put to work, resulting in a better portfolio structure in purely financial terms.