1. Impact investment and ethical investing are not the sameThere is a difference between impact investing and traditional ethical or socially responsible investing, where investments are made according to a firm’s environmental, social and governance (ESG) criteria. ESG investments filter out the companies that don’t meet certain criteria, and impact investing looks at companies that have a specific goal of improving society through their actions. 

Global International Financial Reporting Standards Leader and UK Head of Accounting and Corporate Reporting at Deloitte, Veronica Poole, says the two should not be confused. “Traditional ESG investing is focused on screening out the negative. For example, a fund manager might look at a company’s energy use, waste or pollution and decide not to invest if the company is having a negative impact on the community or environment around it.”

By contrast, impact investing analyses the ESG factors of a company, but also looks at how that company can generate a positive impact and a profit. “Impact investing looks for both the beneficial social or environmental effect that a company can have alongside a positive financial return,” adds Veronica. 
2. There are multiple funding methodsImpact investments can take a variety of forms, from loans and guarantees to private equity funds, with the type used depending on the needs and structure of the beneficiary. One of the most prominent forms of investment is social impact bonds (SIBs), which is an area where the UK industry has led the way. 

SIBs are contracts with the public sector in which a commitment is made to pay for improved social outcomes that result in public sector savings. According to the UK Government, investors pay for the project at the outset, and then receive payments based on the results achieved by the project. The bonds are designed to attract private investors to fund early and preventative action for complex and expensive social problems.
3. They sometimes have unique risks The first SIB, launched in 2010, was designed to reduce reoffending among short-term male prisoners in Peterborough prison. Seventeen foundations committed £5m to fund rehabilitative interventions for male offenders sentenced to less than 12 months in prison. The Ministry of Justice, supported by the Big Lottery Fund, agreed to pay a return to investors if targets for reducing reconvictions were achieved. 
“Impact investing looks for both the beneficial social or environmental effect that a company can have alongside a positive financial return” More than 60 SIBs have now been established, with 31 active programmes in the UK, and the first are beginning to mature. The first group of prisoners included in the Peterborough SIB needed to achieve a 10% reduction in reoffending compared with a national control group to trigger an early payout to investors, but missed this target by 1.6 percentage points. The second round of results is likely to be released early in 2017.
4. However, others have proven successfulA SIB set up in 2012 by the Department for Work and Pensions (DWP), supported by Impetus-PEF and Big Society Capital, to provide funding for a project run by London-based charity ThinkForward, was completed successfully in October 2015.
The project, which received funding of £900,000 by the SIB, paid for ‘progression coaches’ to be placed in 14 schools in Tower Hamlets, Islington and Hackney. It provided five years of one-on-one intensive support to more than 1,000 disengaged young people from the age of 13.

To trigger payout to the investors, the project had to meet a series of outcomes, including improved attendance and behaviour at school, level 1, 2 and 3 qualifications, entry to university and employment and sustained employment. 

Programme Development Manager for ThinkForward, Luke McCarthy, says: “We were lucky that our investors were genuinely committed to the social outcomes. This meant that we were able to stick to our core mission of supporting young people furthest from employment, who understandably needed more intensive support, and also not simply ‘park’ young people in a job which was not right for them in the long term, but which generated an outcome payment for the SIB.” 
5. The sector has plans to growUntil now attention has been focused on high-net-worth, corporate and institutional investors, but now the sector is beginning to consider expanding to retail investors. 

In France, a ‘Solidarity Investment Fund’ has more than one million investors and assets of more than €4.6bn: 10% of the fund is invested in social organisations dealing with issues such as housing, employment and the environment. In the UK, the innovation charity Nesta has called for the launch of an ISA specialising in impact investing, while the Social Market Foundation and Big Society Capital – the funding ‘wholesaler’ underpinning this sector – have called for the Government to encourage savers to invest in a new type of social pension fund. 
6. Improved liquidity is providing a secondary marketLack of liquidity may also be a concern for some investors who are interested in the impact investment sector. The Social Stock Exchange (SSX) solves this problem in two ways. First, all SSX members are screened by an admissions panel to ensure they have a pro-social or pro-environmental mission at their core, and must submit an impact report on an annual basis. About half the members are listed on exchanges such as the London Stock Exchange and Euronext, which means investors can use their membership of the SSX to validate a company’s impact ‘credentials’ before using their regular retail stockbroker to buy their shares. Second, the SSX offers its members the option to list equity on the SSX segment of the ICAP Securities and Derivatives Exchange. The SSX helped businesses raise more than £400m in 2015 alone.

Chief Executive of the SSX, Tomás Carruthers, says: “Historically, impact investments have been the preserve of high-net-worth investors, private equity and family offices, as there is typically no secondary market for the investments. The SSX can provide this secondary market, so a retail investor can get involved, confident that if they need access to the capital, this can be achieved.” 

This article was originally published in the January print edition of The Review. The print edition is available to all members who opt in to receive it, except student members. All eligible members who would like to receive future editions in the post should log in to MyCISI, click on My Account/Communications and set their preference to 'Yes'.