“It stands to reason, doesn’t it ?”
Is investing socially and environmentally the New Rationality ?
Co-chairing a meeting recently with the social housing sector on what we can say to investors about the outcomes we are targeting for tenants, communities, and the environment, one of them stopped me in my tracks. “Of course the problem is,” she said, “social investors are irrational.” She was questioning how the social housing providers, investing in housing stock at least in part for social impact, could possibly engage with economically-driven funders in the public markets.
The reality is that, increasingly, they are engaging, so was she right ?
Reflecting with my co-chair afterwards we concluded that she is not … but that what we are seeing demands a reframing: a new set of parameters in a New Rationality.
Let me explain, taking as prompts three recognised headings from the investment world: business stability, risk and capital value, and investor preference.
The investor, whether a fund or an individual, a housing provider investing in its stock or a social care provider in its services, is investing in a business operation, and seeks business stability. It provides housing or other services and generates income from doing that. But it’s not just a financial transaction. It involves people – in providing the services, and in the markets that receive and pay for them – and draws on environmental resources, having an effect on the environment as it does so. Economic, social and environmental: all are involved in, and affected by, the way the business is run. Increasingly we have become aware of how all three elements bring vulnerability to the business that needs to be addressed and managed , and a balance sought that is right for the prevailing context. If we ignore any one of the three, we could face disaster.
The economic vulnerability was brought into stark reality by the 2008 financial crash, amongst others. Even banking can fail, we learned, and with that comes vulnerability to businesses as costs of capital rise, capital is less available, and spending shifts. Environmental vulnerability has been trumpeted in the media, and by activists as diverse as Sir David Attenborough and Greta Thunberg, WWF and Extinction Rebellion. I am seeing businesses – in both the social and private sectors – considering climate stability (flooding and overheating), sustainable resourcing for supply chains, and adaptability for environmental change. Last but by no means least, the social vulnerability has been in stark evidence over the last nine months how much its vulnerability. We have all experienced the horrors of the COVID pandemic and how the measures brought in to manage its spread have challenged businesses trying to maintain their markets and their supply chains. So, to invest in stable businesses, we must have an eye to social and environmental as well as economic aspects.
If we do, though, there is a gain to be had for the investor in us. Investment markets seek certainty. If we manage risk to investment capital and net earnings, we raise the value of that investment. So, if we manage not just the economic, but also the social and the environmental risks, we may (though not always) enjoy a lower income, but the de-risking will be likely to grow capital values. In practical terms this may be seen in smoother (less lumpy) income, protected supply chains, and renewability of resourcing: all rational drivers of real value.
Finally, what do the investors think ? I am hearing the noise of investors challenging ethical investment to move beyond just not doing harm . I am watching the movement to develop corporate reporting into something more than traditional, selective ESG reports to a new enlightened ESG and beyond into impact. Investment funds are telling me of pushes from institutional investors to focus on particular areas of investment that counter their other risk exposures: local authorities bearing the costs of temporary accommodation for the homeless wanting to invest in social housing funds that provide it, for example. For investment managers used to balancing a number of factors in their portfolios, one other set that gives better risk balance should be welcome and easy to assimilate.
So I say that social (and indeed environmental) investment are utterly rational. The movement that we need to see now is more investment funds following the lead of a number of trailblazers in social housing, to engage with and embrace that New Rationality. If they understand the benefits, if their investors increase their demand for them to do so, and if the advisors and businesses make that possible by building strategy, measuring and reporting the social and environmental as well as the economic, we’ll get there.