October brought us National Ethical Investment Week, the annual celebration of the varied ways in which meaning and morality can be brought into the otherwise "dismal science" of economics and investment. This is also a year in which the Church of England has begun to engage more visibly with ethical investment issues – both to deflect criticism of apparently “unethical” investments, but also to set out a more positive vision for how the Church might act as a social investor. So it seems a good moment to take stock of how far ethical investment has come, and what still needs to be done.
To date, the emphasis of ethical investment has been on "negative screening" - trying to sift out investments in guns, tobacco, gambling etc. To avoid the worst of the bad. The emphasis is now shifting to ask a deeper question - what do we want our capital to achieve, beyond just replicating itself? We invest every day of our lives, deciding where to put the human capital of our time and energy for the purposes we care about - why are we told that we cannot similarly take control of the outcomes our financial capital creates? Do we always need to leave it to the experts? Is maximisation of financial return the only possible rule for investment? One answer to these questions is to invest capital intentionally for both financial return and to achieve a positive social impact.
"Sounds like Utopia", in the words of a sceptical friend. But it is happening in practice. For one thing, the UK has a thriving community of "social enterprise" - organisations established primarily to achieve social goods but which can also be profitable. These range from business start-ups inspired by the need to address a particular social issue through a new product or service, to community groups forming to create and finance the assets they need to flourish (from affordable local housing to renewable energy), to major national charities accessing investment capital to scale up successful and profitable services which transform lives.
The channels for investment capital to flow into this space are also emerging. Part of this involves innovations which may be challenging to traditional financial institutions - crowd funding and community share issues, for example, can be powerful tools to take financial institutions out of the financing equation when they fail to deliver. These forms of direct financing also bring the individual back into contact with the enterprises and assets being created, so often obscured in our sophisticated investment world by layers of intermediation and complex financial products.
But there is also a place for applying the principles of impact investment in traditional financial institutions. As future pensioners, we want our pension funds to achieve good returns, but do we not also have an interest in the environment and society that their long term investment decisions create? As consumers of investment products - investment funds, pensions, ISAs, savings accounts - we can in time have a massive influence on the decision making of financial institutions. And the products are beginning to emerge to allow us to vote with our pounds in this way.
Inevitably there are questions - particularly whether mixing profit and purpose will lead to compromises. Is social impact investment a niche area for those who are prepared to take higher than normal risks for lower than normal returns? Doesn't bringing financial return into the equation risk corrupting the motivations of philanthropic ventures? Not necessarily. What if sometimes the social enterprise solution to an issue is lower risk than the traditional approach ? What if we involve the social enterprises themselves in setting the goals against which their investors will measure them?
How ethical can investment ever be? Instead of speculating, we have a chance to find out in the coming years which would have been unthinkable a decade ago.
Simon Chisholm is Investment Director of Resonance, an investment company which helps social enterprises raise investment from those who share their passion for positive change, and which creates investment funds designed to achieve targeted social impact (www.resonance.ltd.uk).
Image by Images_of_Money from flickr.com under the Creative Commons Licence
