In the report
1. Impact on future generations
Impact is a broad spectrum
In the RFP, we asked ISPs to show how their investments would create intentional social and environmental impact for future generations. We also included priority areas identified by the FGP, including: sustainable development and recovery of communities affected by conflict or genocide; affordable housing; racial justice; community ownership; and renewable energy.
We left it broad for two reasons: to leave space for ISPs to innovate; and to maximise buy-in from all participating charities.
As expected, we received a wide range of applications with both targeted impact focuses and more broad impact agnostic or thematic approaches. Of the impact areas listed in the RFP, renewable energy (or climate more broadly) was by far the most common seen in applications (around 50%), followed by affordable housing (around 20%). Other impact areas noted in the RFP were seldom targeted, demonstrating an expectations gap between the FGP and the ISPs.
However, ISPs did put forward other impact themes, including broader environmental themes such as natural capital, circular economy, biodiversity, food security, and blue economy, and social themes such as healthcare, community resilience, and economic inclusion.
Additionally, we saw several applications that focused specifically on emerging markets. We recognise that investing with this geographic scope in small and medium-sized enterprises can deliver high additionality, especially around financial inclusion (i.e. new money that wouldn‘t otherwise have been invested, particularly supporting those usually excluded from financial services). The median average age is also typically younger in emerging markets, making a case that investing in these geographies most supports global future generations. While we received compelling applications focused on emerging markets, none were shortlisted. This was partly because the mandate was global but had a slight UK preference, with the partners seeking a more concentrated amount of ‘home-ground’ impact.
Given the mandate of a portfolio for future generations, we were expecting ISPs to think deeply and innovatively about how their investment approach would deliver on this. Some ISPs demonstrated thoughtful connections between their investment philosophy and impact on future generations – notably Triodos via the child-lens investing framework. Surprisingly, five applicants didn’t mention future generations at all in their 15-page response.
Impact intentionality levels vary significantly across asset classes
Public equity (shares in listed companies)
We saw an array of approaches in the public equity space, with relatively few meeting the level of impact intentionality desired by the mandate.
For many, the main approach was to integrate environmental, social and governance (ESG) factors in the investment approach, and the impact case was made through active engagement with companies. There were a fair number of good examples of engagement and escalation, particularly on climate. But it did not always seem plausible that engagement and escalation was effective with companies like the Magnificent 7. This is partly due to their scale, and in some cases due to dual share-class structures, where founders keep voting control even though other investors own shares, significantly reducing shareholder power.
Others applied a thematic approach – selecting companies based on alignment to the United Nations Sustainable Development Goals (SDGs) or self-identified positive themes. These funds tended to employ some active engagement alongside investing in companies aligned to some chosen positive but broad themes – e.g. climate or social impact. Impact intentionality varied: some considered impact throughout the investment process, had impact-specific teams (or integrated within the investment team), actively engaged, and had strong impact reporting. Others applied a loose classification against the SDGs and did not go much beyond this.
Public debt (bonds)
While there is a reasonable consensus being drawn that public debt is a strong alternative to equity for impact (due to the additionality of new bond raises and the growth of bonds with sustainable outcomes), we saw very few applications in this area. Only three applications were dedicated solely to public debt (none of which were shortlisted), and for multi-asset / fund of fund solutions it was often a minor allocation. Much like equities, mapping to SDGs was common for impact reporting, as well as reporting on the use of proceeds.
Private markets (unlisted companies and investments)
Many argue that private markets offer a far greater contribution to impact than public markets. The main case for this is the additionality offered – new capital goes to small and growing companies, rather than being used to trade shares already in circulation. However, disclosure on sustainability is much less developed in private markets.
We did observe plenty of private markets applications with a more focused and potentially higher level of impact intentionality. The most impactful applications were easier to identify, especially in cases where the focus was narrow: affordable housing (Octopus Capital); natural capital (Foresight Natural Capital); social outcomes contracts and partnerships (Bridges Outcomes Partnerships). These were all UK-focused investments, making them relevant for UK-based investors.
CASE STUDY: Highlighting the trade-offs – Bridges Outcomes Partnerships
Bridges applied with their Better Outcomes Fund V, which invests in c.70 social outcomes contracts and partnerships in the UK (primarily) and other high-income countries. From an impact perspective, it was the highest scoring application, with clear intentional positive impact on children, vulnerable adults, and the planet. However, Bridges wasn’t shortlisted, due to too many trade-offs against other aspects of the RFP. For instance, the fund had a target size of only £100million, while we needed scalability in a winner. Additionally, the investment term was expected at 12 years, raising key liquidity concerns.
This example points to the strengths and realities of the current impact investing market. There are a broad range of exciting impact investing opportunities available to asset owners, depending on their requirements. However, there is no perfect solution and asset owners must recognise the trade-offs and make intentional choices about what matters most.
Weapons and armaments exclusions may still allow conventional weapons
The RFP stated: “…the solution must exclude investments in […] weapons and armaments.”
Most applicants claimed compliance with this exclusion. However, on deeper investigation, almost half of applicants only applied an exclusion of controversial or nuclear weapons but didn’t explicitly exclude investment in conventional weapons. While this doesn’t mean the funds were actively investing in defence companies producing weapons and armaments, it speaks to a live debate about whether defence should remain excluded from ethical funds.
The EIC partners and the FGP strongly believe all weapons and armaments should be excluded from charity investments, not just controversial or nuclear weapons.
Very few investors address conflict, genocide, and breaches of international law
The FGP were clear on the role of war, conflict, and genocide in their lives: “We have grown up with war as a near constant, and we are determined not to support it in the investment choices we make, including those investing in the companies which facilitate the technology for warfare and genocide.”
Importantly, the FGP encouraged both charity investors and ISPs to look beyond weapons and armaments exclusions and do more to specifically address the role of companies in supporting conflict and genocide, making regular reference to Israel-Palestine. This focus was reflected in the RFP:
“We also seek to avoid companies or governments directly perpetrating or closely involved in genocide or breaches of international law as identified by credible international human rights organisations.”
While conflict and genocide are just one aspect of the RFP, the level of responses that acknowledged it was remarkably low. Only seven applications specifically mentioned conflict, genocide, or war, and only one noted an active investment to support economic development linked to an area of conflict. Further, it was a subject that partners found difficult and uncomfortable to navigate, supporting the conclusion that the whole industry doesn’t currently address this issue.
Impact measurement has advanced…but still has a way to go
In recent years, there has been a noticeable increase in the consistency of impact measurement and management, which came through strongly in the applications.
Frameworks like the ABC framework, the five dimensions of impact (What, Who, How much, Contribution, Risk), the Operating Principles for Impact Management (OPIM), and IRIS+ metrics are becoming increasingly used and recognised.
However, many applications still relied on SDG mapping for their impact framework. SDGs were mentioned in 50 out of the 60 applications, showing they are a tool used across the investment spectrum. But SDG mapping is simply a labelling framework – it does not attribute measurable positive impact.
Impact verification also still appears relatively underdeveloped. However, a handful of applicants did have their impact verified by organisations such as The Good Economy and BlueMark.