Asset manager Schroders has launched a first-of-its-kind strategy, aiming to deliver a measurable, positive social impact in the UK alongside long-term growth and income for investors.
The Schroder BSC Social Impact Trust has assigned independent social investment institution Big Society Capital to be a delegated portfolio manager on the trust.
The trust, which seeks to raise £100m, will invest in companies which tackle social issues such as homelessness, youth unemployment or local social care and will be aligned to the UN’s Sustainable Development Goals.
As such, it will invest across a range of asset classes but it will primarily focus on three areas.
The first, high impact housing which will include property funds which either acquire or develop high-quality, affordable, or specialist housing for vulnerable groups.
Second, is debt for social enterprises. This includes charity bonds and co-investments in portfolios secured loans for example.
The final area is social outcome contracts. These are contracts between the public sector or a government body where the investment is used for preventative intervention. Here the investor returns will be based upon whether those social outcomes are achieved.
Due to the illiquid nature of the underlying investments this process Jeremy Rogers, chief investment officer at Big Society Capital, said it was more suited to a closed-end structure than as an open-ended fund.
He said: “The open-ended structure would be quite a challenge for that, the closed-ended structure allows you to make these investments while also giving investors access to liquidity from the listing. So, it’s a very appropriate structure for connecting investors with these types of investments.”
On the type of investors he anticipates backing the trust, Rogers said he expects a “real mix”, of retail and institutional investors.
Discussing why this strategy would appeal to investors Rogers said that giving them the ability to have a positive impact locally as well as being a diversifying option would be a big draw.
He said: “The bit that’s really landing with investors is this combination of local impact interestingly, because it’s very difficult for people with their investments to deliver impact in their local area.
“But also the fact that these investments have historically low correlation to traditional markets so they have potential a place in the portfolio that is a bit different as well as the impact and returns they could generate.”
He added that, by investing through the private markets it’s easier to see the tactile impact the investment is having versus large companies on big public markets.
“We hope that’s a real differentiator in this in terms of the visibility through to that impact,” Rogers said.
The returns element is essentially split into two categories: the financial returns and the amount of positive social impact.
On financial returns, Rogers explained that it would be more of an absolute return goal rather than being benchmarked against any specific area.
It aims to provide consumer prices index (CPI) plus 2 per cent per annuum over a rolling three-to-five year period once the trust has been fully established.
Some of these financial returns will be directly linked to whether the positive social impact has been achieved, such as with the social outcome contracts. And in those circumstances, the returns will be based on whether the impact you are achieving would have happened without the investment.
“So, it’s quite unusual in that in terms of impact investments that you have that sort of link between the financial success of the investment and the impact delivering in different ways,” Rogers said.
Two examples of the trust’s holdings are two charities, West London Zone and Hull Women’s Network.
The first, West London Zone, works with children in west London who are at risk of not being educated, or gaining employment and training and helping them access those assets.
Measuring the investment impact in this case, Rogers explained that you have to form a ‘baseline’ of what would normally happen to these disadvantaged children if they didn’t received help.
“Then with the interventions that take place how have you achieved more than that in terms of educational and employment outcomes, and also actually health and wellbeing outcomes in different ways,” Rogers said.
The second example, Hull Women’s Network, helps women and children who have suffered domestic abuse find safe housing.
“When you look across those two examples, they sort of summarise what this portfolio is doing.” He said. “It tends to be doing a combination of prevention, that when do you intervene in people’s lives that can make a real difference, or social infrastructure of different ways like the abuse example.
“There’s a lot of stuff around social care, that is, the government has historically underinvested in some of those areas, and so the possibility to invest and make significant impact is there.”
While this trust is a first-of-its-kind vehicle, Big Society Capital and Schroders don’t expect it to be the only one forever, as significant investment opportunities and investor interest grow, Rogers said.
Andy Howard, global head of sustainability at Schroders added that when this combination happens an initially individual and different investment option soon has some contemporaries.
“I’ve seen [it] in many other sub-sectors of asset classes. You take something like student accommodation Reits – first there’s one then there’s another two,” Howard said.
“And I think people realise that there’s a demand for an asset class like this. And, you know, it is investor-led. And, as Jeremy said, my gut feeling from experience is there will definitely be more.”
Indeed, there has been growing support for impact investment strategies recently, especially during the past year.
Falling under the sustainable investment umbrella this area of the market has gained momentum during the Covid-19 pandemic, which has raised awareness of many social and environmental issues which can be supported via investment.
While there have been more investment options targeting environmental issues, Rogers said it’s not the case that the social side has been overlooked, rather investors have failed to realise how interlinked the two areas are.
Rogers said the difference with the social side is that these investments have been harder for people to access. But he added, he thinks this will change over time and the market will see more social impact options come through.
Issues such as climate change for example are intrinsically linked to better social outcomes, Rogers said, since the transition to better environmental practices need to be inclusive to the day-to-day person.
“I think how people should think of this fund is [that] it’s focused on more vulnerable and disadvantaged groups across the UK,” he concluded.
“The bar, if you like, is focused on those more in need, and looking at where can investment have a transformational impact for people.”