Making money in pursuit of social good – Financial Times

Written by Patrick Fisher October 10, 2011 0 comment

By Michele Giddens

“Investors as a whole will find it hard to maintain healthy financial returns if faced with accelerating climate change and ecosystem collapse,” according to the recent report Sustainable Economy in 2040, published by Forum for the Future, a non-profit organisation working for a sustainable future. The study comes at the end of a decade in which increasing numbers of investors are recognising that in order to maintain their position as wealth creators and to generate financial returns over the long term, they must play a role in building a sustainable economy.

This emerging trend turns on its head the traditional interpretation of fiduciary duty that the investment manager’s singular responsibility is to look after the financial interests of the beneficiary. A sole focus on financial returns often overlooks social and environmental considerations entirely, in the belief that they might adversely affect financial returns.

This does not have to be the case. Financial returns and social or environmental impact do not have to be mutually exclusive concepts. Indeed, investing in businesses with a positive social or environmental impact can produce superior financial returns and actually help to fulfil the fiduciary’s primary duty.

In the current environment of low to negative growth and budgetary challenges, there is an opportunity for fiduciary managers to take a new approach and seek growth and value creation rather than just risk reduction. Capital directed towards areas where there are strong and pressing social or environmental needs that must be met, such as health and wellbeing, education, and the environment, can offer growth opportunities which are otherwise hard to find in the current economic climate. Furthermore, they are underwritten by long-term trends and so may be less correlated to the economic cycle.

Take health and wellbeing for example, where trends include increased costs of healthcare, growing unemployment, an ageing population and rising levels of obesity. These drivers create an opportunity for investors to make a positive change as well as a profit. One example is The Gym, a low-cost gym operator that aims to bring affordable gyms to more consumers across the UK. It began operations in 2008 with one site. With backing and support from Bridges Ventures since inception, it has now grown to a chain with more than 80,000 members – up to 40 per cent of whom have never been to a gym before – and is opening new sites every few months. The business addresses an important social need among traditionally excluded groups and strong potential returns are being built for the investors in Bridges Ventures’ Funds which include pension funds and private investors.

Other examples are emerging worldwide across different asset classes. The International Finance Fund for Immunisation used tiered finance to raise $3bn in AAA-rated bond offerings. It is estimated this money has prevented 3.4m premature deaths, through raising vaccine coverage in 70 of the world’s poorest countries. At the same time, it has provided investors with improved returns over sovereign bonds.

In Africa, frontier markets investor TLG Capital invested in sub-Saharan Africa’s first WHO good manufacturing practices certified pharmaceutical plant outside of South Africa, manufacturing generic anti-retroviral and anti-malarial drugs in partnership with local Ugandan entrepreneurs and Cipla, the Indian pharmaceuticals giant. The company has shown consistent growth and is on course to increase its capacity threefold – providing both affordable treatment for millions of Africans and strong returns for its investors. At present, the plant can produce 6m tablets a day.

Looking through the lens of social and/or environmental sustainability allows investors to spot pockets of growth in an otherwise flat economy and thus generate financial returns that can attract all types of investor, including pension funds and others with fiduciary responsibility.

Although the past decade has seen a significant rise in institutional investment in funds with a dual purpose of financial and social or environmental impact, fiduciary managers remain sceptical of investing money into projects with a dual objective. A change of mindset is required.

Michele Giddens, executive director, Bridges Ventures