One of the (few) positive side effects of crises is that they drive spectacular examples of innovation. The atomic bomb during the second world war is the most notorious example. The approval of a Covid-19 vaccine in record-breaking time this year is a more recent one, and one that will save rather than destroy lives.
Financial innovations driven by the pandemic
The pandemic has driven some pretty spectacular examples of financial innovation in 2020. Not only have record amounts of money flowed into sustainable investment funds, but the industry has responded with creativity and imagination, launching new vehicles and strategies to respond both to the demand from investors and to the pressing need across the globe from businesses, charities and individuals for emergency funds. They offer new opportunities for retail, as well as institutional investors.
The largest innovation was the move by four of the world’s largest philanthropic foundations to tap the bond markets for the first time. The huge Ford and MacArthur Foundations, among others, have borrowed billions in the US corporate bond market against their endowments, releasing more grant capital that is needed urgently by struggling communities and charities.
The decision to borrow, highly unusual for not-for-profit organisations, and never before attempted at this scale, was not without its critics, wedded to a more traditional stewardship approach to philanthropic pots of money. But its advocates argue that it is an example of what is needed in “Philanthropy 2.0” – using the markets to exploit and leverage grant or concessionary capital for urgent requirements. The foundations’ innovation is bold and large, but it is far from the only one.
Focus on enterprises delivering social and environmental impact
At the beginning of the pandemic, Barclays launched its Impact Agora, an online marketplace (hence the name) where enterprises delivering social and environmental impact can display their wares, enabling deal sharing between accelerators, fund managers, investor networks and wealth managers.
Blue Orchard, the boutique fund manager, has designed an innovative fund combining public and private capital in a blended finance structure. It will use money from development finance institutions from the US, Japan and the UK, as well as investment from KfW, Germany’s state development bank, to provide loans to banks and lending institutions in the developing world to support local micro, small and medium-sized companies. It expects to help 20 institutions and support more than 200m jobs once it reaches its target size of $350m.
Increasing private investment flows to emerging markets
Meanwhile, a new programme by what was the Department for International Development – now absorbed into the Foreign, Commonwealth and Development Office – seeks to target listed markets to deliver large-scale private investment flows to the emerging markets. The aims of Mobilist are, perhaps, grandiose for what it hopes to deliver. These are to “effect systemic change in the role that institutional capital plays in bridging the Sustainable Development Goals financing gap, responding to climate change, and consolidating London and the UK’s role as the development finance hub for the world”.
However, its more prosaic practical aims – to invest up to £90m in seed capital into five listed products – look eminently achievable. It is about to launch a competitive request for proposals from fund managers for the first of these, a listed infrastructure vehicle to deliver new financing for the SDGs. The competition aims to identify listed product structures, which may subsequently get a capital injection from Mobilist to bring them to IPO.
Market-competitive financial return
What is most innovative about these plans is that they target financial vehicles which will not be concessionary, but which aim to deliver a market-competitive financial return. They will look and feel like mainstream investment products.
Mobilist will not fill the yawning hole opened up by the government’s cuts to the UK’s aid programme announced by the Chancellor in his spending review, but it is one example of the new structures and tools being developed to mobilise more private sector capital to deliver on public policy priorities. With government purses across the globe more than empty, never have these tools been more needed.
Opportunities for retail investors to invest with impact
There are other new opportunities for retail and institutional investors to direct capital at social challenges which have been worsened by the pandemic. The Home real estate investment trust raised £240m in October to acquire and create a portfolio of homeless accommodation across the UK. The REIT trades on the LSE’s main market, and has already purchased 141 properties to house 800 vulnerable, homeless people. Shares are up 8 per cent since launch.
Perhaps the most innovative new vehicle for retail investors is a new UK investment trust which will allow private investors access to private market social impact investments for the first time, with the added benefits of daily pricing and liquidity.
The Schroder BSC Social Impact Trust
The Schroder BSC Social Impact Trust was listed on the London stock exchange on 22 December 2020, and is seeking to raise £100m. It is the first of its kind to offer investors access to a range of private market impact investments helping people in the UK with issues ranging from dementia and learning difficulties to homelessness and domestic abuse.
Until now these types of investment have only been accessible to large institutional investors or contained in dedicated housing trusts. The new trust portfolio’s underlying assets will be diversified across sectors including housing, debt for social enterprises and social outcomes contracts.
These innovations provide new ways for both retail and institutional investors to access market-return products that deliver positive social impact. Some of them might have happened without the crisis. All, however, have undoubtedly come to market with added impetus and focus as a result of the pandemic.