What is social impact investing?

Social impact investment describes the targeting of capital towards business models and assets that are seeking to contribute to solutions to the world’s societal challenges, helping to build stronger communities and improve lives. It can be defined by an intention to create measurable social benefit, alongside a financial return.

The terms social impact investment and social investment are often used interchangeably. Both terms refer to investment into organisations tackling social issues, generating positive social impact alongside financial returns. The risk-return profile for these investments can vary, but the commonality is the underlying intention to create impact. Some in the market use social investment to describe investment into community-based organisations such as social enterprises and charities while using social impact investment to describe a wider sphere which includes investments such as venture capital in high impact startups or property investments providing affordable housing.

Social impact investors target a diverse range of positive social outcomes that will often be determined by their mission and investment strategy, seeking the greatest opportunity set in target geographies or stakeholder groups that align with that mission and strategy.

Social impact investing frameworks

There is no universal standard for assessing social impact investment, however the Sustainable Development Goals (SDGs) are often used, both by investors and product providers. Sustainable Development Goals (SDGs) – produced by the United Nations in 2015, sets out a framework to address global challenges such as poverty and other deprivations in a way that recognises the interdependence of social and environmental challenges. This resulted in 17 Sustainable Development Goals (SDGs) underpinned by 169 targets.

Social impact investing strategies

Investors aiming to build impact into their investment portfolio often develop a strategy that considers the nature and size of their capital, goals, and motivations, as well as incorporating factors such as internal resource and expertise, and access to investible opportunities.

Three commonly adopted strategies include:

• Carve out: Creating an impact investment ‘carve’ out, often with its own financial return objectives that differs to the main portfolio objectives.
• Integrated impact strategies: Integrating impact investments as a portion of investments within an existing asset allocation where these investments contribute to the portfolio’s objectives.
• 100% impact focus: Applying an impact lens to 100% of an investment portfolio.

All three of these strategies may be adopted at different points in time as an investor’s strategy evolves. For example, many investors seeking to allocate 100% of their portfolio to impact in the long-term may begin by creating a carve out or integrating impact investments within one or more asset classes first.

There are benefits and limitations to each of the three and these will influence which strategy an investor believes is most appropriate for them. For example, whilst a carve out can help investors to begin and experiment with different investments in a controlled portion of their portfolio, they may be having a net negative impact across the rest of the non-impact portfolio. In addition, though a 100% impact approach allows an investor to fully align investments with its values, for institutional investors who may have a mandate to invest for market rate risk-adjusted returns, there may be an insufficient volume of suitable impact investment opportunities.

Approaches to channelling impact investment capital to help tackle social issues can depend on the asset classes investors invest in and their investment strategies. Certain products and asset classes are more common and see the greatest flow of capital towards social impact. Investors can access impact investments directly or indirectly via funds and pooled investment vehicles. Examples include:

• Debt: Ranging from loans to small community impact enterprises through to publicly traded bonds for established enterprises which can have a range of impact characteristics.
• Equity: Ranging from early-stage venture capital into start-up impact enterprises to public equity in established enterprises which can have a range of impact characteristics.
• Hybrid models: Several hybrid models have emerged that bring together characteristics of equity and debt to bridge the needs of impact enterprises and impact investors. The prominent structures include:
  • Quasi-equity: Typically structured as a debt investment with equity characteristics, for example the impact investor may have certain control or governance rights to influence the delivery of impact and, if applicable receive a share of profits if the impact enterprise is successful. This type of investment can be used where an impact enterprise is structured as a charity which cannot take on equity but requires equity-like capital to scale and take on debt financing.
  • Revenue share: Typically structured as a debt investment with repayment in part or wholly tied to the generation of revenues by the impact enterprise. This may be suitable where there is uncertainty on future revenues, and investors want to offer flexible terms to share the risk with the impact enterprise to achieve positive impact outcomes.
  • Variable payment obligations: Variable payment obligations are tied to the delivery of positive impact outcomes, for example an interest rate may be set with a premium if outcomes are not achieved or a discount if they are achieved. This aims to provide a financial incentive to the enterprise to deliver the positive impact outcomes.
• Impact funds and pooled investment vehicles: Impact funds can be made up of a single or multiple asset class and offer investors a pool of diversified impact investments delivered by a specialist asset manager. Some funds may not have yet made any investments and the focus is on impact intent and the manager’s track record to test alignment with the proposed investment strategy. In other cases, such as existing public market funds, the make-up of the existing portfolio can be reviewed to understand the extent there is alignment with impact intent.
• Specialist impact investment products: Two prominent specialist impact investment products include:
  • Blended finance: In blended finance structures, public or philanthropic concessionary capital is used to increase private investment to achieve greater positive impact outcomes. Concessionary capital includes guarantees and/ or taking a junior, first-loss position in a structured product. Blended finance is most often used in impact investment where the risk of the investment is unknown or unproven and would otherwise fall outside the risk appetite of the private investor.
  • Outcomes contracts: An outcomes partnership, sometimes known as an impact bond, is where a public or philanthropic commissioner makes payments wholly or in part based on social and/or environmental outcomes achieved. An impact investor will provide the flexible working capital to delivery organisations and only be repaid if outcomes are achieved.

Health and wellbeing investments

Healthcare delivery is an increasingly challenging issue in the UK. The twin pressures of an ageing population and the rapidly growing number of people with multiple complex medical conditions has resulted in an ever-increasing demand on the National Health Service (NHS.)

There are various ways in which social impact investment can be used to tackle some of these issues, the first one being social outcomes contracts where local government commissions a network of local service providers to meet the needs of the community. These networks are initially funded by private investment on the basis that Government will make repayments based on a set criterion of outcomes, e.g. reduction in visits to a GP. Because services are delivered by an expert network of delivery partners with demonstrated experience of meeting individual community member’s needs, the chance of outcomes being delivered is higher than other less tailored approaches. You can read more on health outcomes investments here.

Another example of health and wellbeing investments could be investment in a technology start-up which is providing a healthcare service. Innovative technology solutions can help tackle issues surrounding healthcare and deliver products and services that meet people’s needs better. There are various funds which are making investments into these business models, you can find out more about them here.

Financial inclusion investments

Several technology start-ups are working on improving financial inclusion and wellbeing for users at scale. One example is Wagestream, a financial wellbeing app that helps workers avoid debt by making some of the wages they’ve already earned available when they need it most, such as when unexpected bills and expenses land. You can learn more in this video here.

Community resilience investments

Social enterprises, charities and small businesses play an important role in their communities. They support vulnerable people, create jobs and contribute to the local economy. Many viable and sustainable enterprises struggle to access affordable finance from mainstream finance providers. This is because they may be unable to offer a ‘security’ to back the debt, they may lack a track record, and traditional lenders perceive them to be high risk.

Providing manageable and appropriate finance can enable organisations to achieve much needed impact within their own communities. Examples of organisations which have taken social investment to help improve service delivery within their communities are Food Works, a social enterprise tackling food waste in Sheffield, and New Leaf CIC in Birmingham, a community interest company which helps people facing complex barriers to employment find work.

An example of a community resilience investment is investment into Community Development Finance Institutions, which onward lend money to small businesses who drive the local economy and create jobs in underserved areas. Read more about this kind of investment here.

Social and affordable property investments

There is a chronic shortage of housing in the UK, affecting thousands of people in different ways. There are rising levels of homelessness, quality affordable housing is in short supply, and vulnerable people, such as rough sleepers, people fleeing domestic abuse, and people with a disability, face a lack of suitable housing and the support they need.

Social impact investment can increase the supply of quality social and affordable homes in the private rented sector, enabling long-term life improvements for vulnerable or disadvantaged people. You can read more about this kind of investment here.

There are many benefits to investing for social impact, ranging from long-term positive outcomes for people and planet, to increasing value for stakeholders [1]:

1. More capital driving positive impacts and public benefit outcomes. 

Social impact investment can increase the amount of assets contributing to social issues and inequalities, that grant-making alone cannot solve. The returns can be redirected to social purpose, increasing the impact that capital will have over time.

2. Increasing value for shareholders and stakeholders

Social impact investment can provide financial returns as well as social and environmental returns that align with an organisation, shareholder and stakeholder values.

3. Catalysing capital from other investors and change in market behaviour more broadly

Social impact investment can enable investors to role model positive impact, seed new markets, and deliver on commercial goals, inspiring others to adopt similar strategies.

4. Improve the long-term effectiveness and accountability of capital 

Social inequalities and underserved communities are entrenched issues that are not going away quickly and cannot be solved easily. Social impact investment allows investors to get on the front-foot and spot negative social issues before they arise, as well as play a vital role in regulatory development.

The development of the impact investment market in terms of growth and sophistication of approaches has helped overcome many early challenges investors faced. However, existing challenges include:

1. Understanding the risk-return-impact dynamic in practice: It can be complex to understand how individual investments compare across risk-return-impact and therefore build a portfolio of impact investments managing these factors. A perception exists that there is an inherent ‘trade off’ of financial returns for positive outcomes or that they are ‘riskier’ than comparable traditional investments. Market maturity and increased data availability are helping to overcome this challenge, but the perception can still act as barrier to entry for some and application of impact in practice.
2. A demand-supply dynamic that influences pipeline: While there is an increase in the demand and supply of impact capital, there is not always alignment between the needs of impact organisations and requirements of investors. For example, a recent report on UK catalytic capital has argued that there is an insufficient supply of patient, risk-tolerant, concessionary, and flexible capital (or some combination thereof) to support social purpose organisations and social impact investment fund managers that are not otherwise be able to access investment.
3. Impact expertise at the investor level: Impact management and social impact investing in practice requires specialist skills and experience for effective delivery. Most investors starting to make impact investments will need to either develop or buy in these skills. The number of professionals and advisory services has grown; however, in emerging or new markets, availability of impact expertise may still be a challenge. The cost of accessing impact expertise may be disproportionately expensive for the amount of capital being directed to impact, particularly at the start of an investors journey.
4. Sophistication of enterprise-level impact practice: An investor may identify an enterprise with strong potential positive impact, but depending on the enterprise’s stage, it can be challenging to effectively measure and manage the impact. This could be due to limited capacity, capability and/or willingness. It also needs to be proportionate to an enterprise’s stage. An investor can overcome this challenge by working directly with the organisation to put in place impact management practices; however, they may find this challenging if they do not have the appropriate expertise itself.
5. Availability of benchmark and performance data: There are limited benchmarks and performance data on social impact investments which can make it challenging to compare financial performance and positive impact outcomes. Benchmark impact data can also be challenging given the high degree of contextualisation of impact outcomes. Initiatives such as IRIS+ are seeking to build a database of impact outcomes to help investors to apply impact to their investments in practice but this continues to be an emerging field.
6. Impact integrity: Given the degree of subjectivity in integrating impact in practice, and the lack of a market standard setter, there is a challenge in maintaining impact integrity across impact investments. This may lead to ‘impact washing’ or ‘greenwashing’, where an investor or organisation makes misleading claims about its social and/or environmental practices and performance. The 2020 GIIN Investor Survey found that 66 percent of respondents noted that impact washing was one of the greatest challenges facing the industry in the next five years. This is not unique to impact investment, and regulation is aiming to address impact and greenwashing in ESG and sustainable investing, the most prominent being the emerging FCA Sustainable Disclosure Regime and European Sustainable Finance Disclosure Regulation.

There is not a prescriptive route into social impact investment, however there are certain considerations and steps that investors have cited as being essential to getting started on the journey (Investing With Impact in The Endowment: Why Do It And How To Get Started): [2]

• Learn about social issues that can be tackled through investment.
• Educate key stakeholders within your organisation about the opportunity.
• Obtain an internal mandate for impact investing.
• Establish financial and impact requirements for capital.
• Update your Investment Policy Statement.
• Integrate impact and investment at board and staff level to deliver the strategy.
• Work with investment advisors, investment managers and asset managers with skills and experience in impact.

Starting social impact investing therefore requires a process of consulting with and educating all stakeholders. It is essential to embed support into all levels of the organisation and to draw on specialist expertise where possible to ensure the social impact investment approach is delivered in a sustained and effective way.

There are a growing number of social impact investors – these currently include institutional investors like pension funds and large university endowments, charitable trusts and foundations, wealthy individuals and families and government. Each have different experiences of participating in the social impact investment market, with differing motivations and requirements. This includes factors such as mission focus, financial return expectations, liquidity needs, and impact measurement and management expectations. It’s therefore important for providers of impact investment opportunities, whether that is impact fund managers or organisations raising capital directly from investors, to understand and adapt to the investor universe.

Investors can also be at different stages of their social impact investment journey, from those that are starting out to those actively investing and advocating for social impact investing opportunities. As mentioned, investors will likely adopt a social impact investing strategy that is appropriate to the stage of their impact journey.

What is the history of social impact investment?

Whilst social impact investment is a relatively new movement in the UK, different forms of ethical investing can be traced back throughout history and can help provide context to the evolution of social impact investment. The concept of socially responsible investing originated in the USA, during the 18th century, when the Methodist movement, a denomination of Protestant Christianity which stood against the slave trade, smuggling and conspicuous consumption, resisted investments in companies manufacturing liquor or tobacco products or promoting gambling. However, the earliest example of a social investment in the UK can be traced back to the mid-16th century when the Sir Thomas White Loan Charity in Leicester, which still operates today, made loans to local businesses.

Socially responsible investing gained traction in the 1960s, when Vietnam War protestors demanded that university endowment funds stopped their investment in defence contractors. In the 1980s, students at Columbia university in New York organised a sit-in, which along with protests harmful investments, successfully redirected hundreds of billions of dollars from South Africa by 1993 (during Apartheid).

By the end of the twentieth century, ethical lenders such as Unity Trust Bank and Triodos Bank, were operating in the UK. Then the dawn of the new millennium saw several initiatives instigated by Government (under the then Chancellor, Gordon Brown), as well as the social and business sectors, that sought to understand how investment can be used to intentionally tackle the pressing social issues of the day. The Coalition Government which came to power in 2010 continued to support the idea of social impact investment to simulate a fairer UK economy, driving positive returns for all stakeholders, including people from underrepresented communities. In 2012 the first social impact investment bank was launched under the name ‘Big Society Capital’ (changed to Better Society Capital in 2024) using money from dormant bank accounts in the UK.

Is social impact investing profitable?

There are a range of financial risk-return expectations in social impact investment where there is neither a linear or inverse relationship between financial returns and positive impact outcomes. For many impact business models, the evidence base of the risk-return-impact dynamic continues to be built. [3]

How big is the social impact investing market?

Better Society Capital has estimated the total value of the social impact investment market to be £7.9bn as of the end of 2021, a 20% increase since 31 December 2020. We calculate this figure as the outstanding value of social impact investment (ie balance sheet amount). It is the value of the capital out (drawn down), less capital back (in repaid) plus/ minus valuation adjustments (e.g. Property Value write-ups/ Loan write offs).

The role of Better Society Capital

Better Society Capital’s mission is to grow the amount of money invested in tackling social issues and inequalities in the UK. We do this by investing ourselves and enabling others to invest for impact too. Since 2012, we have helped the social impact investment market grow tenfold to nearly £8bn. This capital has financed social purpose organisations tackling everything from homelessness to mental health and fuel poverty. We have created a model for how social impact investing can thrive and shown that making society better can go hand-in-hand with financial returns.