Social impact is on the ascendancy

Every financial decision to build or scale critical infrastructure has societal impact. In the US alone, air pollutants from the coal sector can be directly traced to almost half a million deaths recorded since the new millennium, according to Harvard’s TH Chan School of Public Health. More positively, investment from the Inflation Reduction Act is projected to create millions of additional clean energy jobs over the next decade.

Appetite for social impact investment is clearly on the rise. In the UK, social impact investment has increased more than ten-fold in just 13 years from £830 million in 2011 to almost £10 billion ($12.7 billion; €11.7 billion) in 2022, according to research from impact investor Big Society Capital.

The younger generation of investors is also particularly motivated to instil positive change. Social protest movements ranging from Black Lives Matter to opposition against the war in Gaza and the climate crisis all showcase the strength of feeling around global social issues.

A 2023 survey from Deloitte found that less than half of Gen Zs (48 percent) and millennials (44 percent) believe business is having a positive impact on society. Only 30 percent of Gen Zs and 26 percent of millennials said they were very satisfied with their employer’s societal impact.

“There is a growing understanding that ESG, sustainability and impact woven into the ethos and long-term strategy of a company can help attract the best talent,” says Shami Nissan, partner and head of sustainability at global investment firm Actis. “Post-covid, there is also an increasing appreciation of the importance of healthcare and the life sciences.”

Quantifying impact 

In the early days of impact investing, many LPs saw it more as a philanthropic endeavour and doubted whether risk-adjusted market rate returns could be achieved. Today, that perception is gradually starting to change.

“That was a misconception that has taken some time to eat away at,” explains Nissan. “The recent Global Impact Investing Network survey shows around 70 percent of respondents targeting competitive returns, while 88 percent say that they outperformed or were in line with financial expectations. It is absolutely possible to deliver positive impact with competitive returns.”

“It is absolutely possible to deliver positive impact with competitive returns”

Shami Nissan,Actis

Historically, there was also more focus on the environmental side of impact investing, partly because of the real threat of climate change but also because of the complexity of measuring and benchmarking social impact.

“The measuring side is very challenging,” says Adrien-Paul Lambillon, sustainability specialist at Partners Group. “In finance, we like to reduce complexity down to simple metrics, but the social dimension is multifaceted and complex. For example, in one part of the world, a healthcare service might be prohibited on religious grounds whereas in other places it could be seen as a valid impact investment.”

The cultural element makes it particularly difficult to compare and contrast investments, especially when juxtaposed with the much simpler environmental side of impact investing. Infrastructure managers investing in a renewables or energy transition platform can easily highlight positive environmental impact by simply measuring the clean energy generated.

“Measuring social impact is not easy, and frankly, it is still an emerging science,” says Jon Collinge, executive director and head of sustainability at infrastructure manager Morrison. “The first-order social impacts are often relatively easy to measure and benchmark; for example, the number of community services provided or individuals supported. However, in our experience, these measurements don’t always accurately assess the social outcomes that are being targeted.”

Collinge points to the need to ask whether an impact initiative has improved the wellbeing or prosperity of consumers and the wider community, and if so, to what extent? He says best practice suggests that the Social Return on Investment (SROI) should be calculated for every dollar spent on a social impact initiative. This means that managers should measure the actual impact of initiatives on the community in which they have invested.

“The practical approach is somewhere between these two methods, where an SROI assessment is completed for a representative portion of the activities, with the results being used as a proxy for the remainder,” Collinge adds.

Bumps in the road 

The absence of consistent standardisation can also be challenging. “Lack of standardisation is a big problem and definitely holds LPs back,” explains Nissan. “An LP might be approaching five different GPs. How can they make a decision when all five are doing things in different ways? It’s very difficult to compare apples with apples.”

Initiatives like GIIN’s IRIS+ impact performance benchmark and tools from the Principles for Responsible Investment aim to simplify the process and create a degree of standardisation, but the industry is still far from united in its approach.

Regulation has also increased the focus on sustainability and climate goals, but the social dimension has proved much less unified. “If you look at regulatory developments, the EU taxonomy or how SFDR is advancing sustainable elements in the social space, it feels like there is just no consensus yet,” says Lambillon.

Another issue is that the local and cultural components of social impact make it much harder to scale than environmental mandates. “We have seen huge climate transition strategies raised in the market because of the scale of global warming, but you don’t see huge social impact strategies,” adds Lambillon. “Social impact has a more local angle, as there is no one-size-fits-all approach. You cannot raise a multi-billion-dollar fund with social impact from investors around the globe.”

On the right path 

Despite the complexity, there are still plenty of KPIs and metrics that can be accurately tracked and measured. Improving diversity and employment opportunities among communities can be easily calculated before and after investments.

To take just one example, Macquarie recently invested in White Box Enterprises’ Payment by Outcomes trial, which helps find long-term employment for people living with disabilities in Australia. A year into the project, retention rates had reached 86 percent, well above the 62 percent that was initially expected.

“You always have to interpret the data alongside the qualitative narrative,” says Nissan. “Those that have dedicated impact allocations and impact teams get it. Not everything can be summarised with just a numerical figure. You don’t get the full story unless you look at it holistically, in aggregate.”

The ability of environmental impact and energy transition vehicles to raise mega-funds need not necessarily be a negative either. Achieving large social impact strategies might be more difficult because of the local aspect, but that just means more differentiated strategies will be needed to cater to mounting local demand. Ultimately, says Lambillon, the result will be many, smaller differentiated strategies to address different social issues across many different regions.