Globally there is a growing demand for social impact funds and an increasing trend towards sustainability, and Environmental, Social and Governance (ESG) investing. Simon Page, Global Head of Funds at Hawksford looks at this increasing trend.
Jersey has positioned itself with the Charities legislation in 2014, the recent appointment of a Charity Commissioner, and the introduction of the charities register, to secure the growth and governance of the charities sector. Locally, the treatment of charitable structures is now more aligned to that of the UK, whilst the compliance element is far less cumbersome, allowing vehicles to be established quickly and cost effectively. This will enable the finance industry to benefit significantly, in terms of attracting impact investment capital, from its experience in administration of structures set up for philanthropic or charitable purposes.
Mission driven investing has long been the preserve of the ultra high net worth individual or institutional investor wishing to achieve their philanthropic goals, structuring their donations through a foundation or endowment. Indeed, this kind of global philanthropy is on the rise, with individuals, families and businesses around the world increasingly wanting to make a difference to society at large. The Coutts 2016 Million Dollar Donors Report illustrates that in 2015 there were 2,197 donations worth $56bn across the UK, USA and the GCC countries compared to the $17bn donated in the same regions in 2014, with the number of donations increasing by 57% over the same period.
This philanthropic focus is no longer limited to those ultra high net worth individuals or institutional investors. Structured giving is becoming increasingly important for potential investors who seek to make investments with the intention of generating a positive environmental and social impact along with financial return.
The growing impact investing market offers such opportunities to investors, providing capital through investments made into companies and funds which are structured in a way to address the world’s most pressing challenges, in sectors such as renewable or sustainable energy, conservation, sustainable agriculture, medicine and healthcare, education and so on.
Of primary importance to these investors is a clear and transparent impact measurement and management strategy – the aim being to ensure that structures set up can ensure a lasting legacy from the performance and impact of the underlying investments, whilst being able to measure and report on the social and environmental performance of those investments. For example, many impact funds will produce an annual social impact report, with social considerations being an integral part of the investment policy. Indeed, many funds are choosing to measure the social impact of the fund’s investments using independent monitoring and measuring assessment tools.
It is worth noting the distinction between impact investment and socially responsible investment. Impact investing refers to the pursuit of investments that aim to generate a positive social and/or environmental impact. Whereas, socially responsible investing considers an investor’s strategy as being one in which they intentionally avoid investing where the investment is counter to their non-financial values.
Many impact investors also choose to invest through funds whose social, environmental and financial goals match their own. It is worthwhile noting that financial goals are not always the investor’s primary success criteria and below market rate seeking capital plays just as an important role in the wider market. Directing capital to strategies that do not lend themselves to market rate returns acts as a bridge between philanthropy and market rate capital. Investment strategies such as real estate development, now consider sustainability as one of the core investment criteria and performance metrics throughout the asset development and fund life cycle. Overall, the sector has grown rapidly with at least $114bn worth of impact investing assets under management according to the Global Impact Investing Network (GIIN) - $114bn is the ‘floor’ of the market size and based simply on the respondents to the 2017 Annual Impact Investor Survey.
Foundations such as Kellogg’s MDI and global financial institutions such as Goldman Sachs, UBS and JP Morgan have created funds to funnel a portion of their portfolios into impact investments. These funds allow sophisticated individuals and institutions to benefit from consistent financial returns that are commensurate with associated risks, whilst promoting responsible investing. Additionally, and particularly since the launch of the UN Sustainable Development Goals, there has been significant interest from most investor types (foundations, family offices, banks, sovereign wealth funds, pensions funds and other institutional investor types) and the entry of large scale firms into impact investing, should professionalise the market further and bring in additional capital, although there are considerations of mission drift or impact dilution to consider with this trend.
The key to all impact strategies is to ensure that the largest amount of capital possible goes to the socially and environmentally conscious investments. This means establishing the most effective structure, something that Jersey has considerable expertise in.
Jersey’s strong funds and philanthropy pedigree have seen the island develop into a hub for this developing market, with a number of private philanthropic and impact funds being established in recent years.
GIIN found that 75% of investors did so via intermediaries (such as trust companies), and further analysis by Cambridge Associates found that nearly 70% of social impact funds were private equity or venture capital vehicles.
Jersey’s pedigree for funds and alternatives in particular, is second to none, positioning itself well to support the growth in impact fund establishment. Jersey Trust Law allows for both charitable and non-charitable purpose trusts and for trusts that can be set up for purposes that are partly personal and partly philanthropic. Whilst Jersey Foundations are an extremely flexible method of structured giving, offering a balance of transparency and confidentiality with amendments made easily, allowing for evolution through time.
Jersey is therefore well positioned to assist investment decision makers as well as investors, to develop structures that support socially and environmentally conscious investment strategies.
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