Maybe SRI funds are to blame for the lack of high social impact investment

Last week I met with a key professional from the Socially Responsible Investment (SRI) fund community. His organisation is one of the leaders in the City, and my colleagues had approached his firm seeking investment for Catalyst Fund 1, the venture capital investment fund which strives for high investment returns as well as significant social impact from investments into private companies. His answer, to paraphrase, was “we would love to try to help you but it is pretty much impossible for us to invest in such vehicles”. SRI funds, you see, are only able to invest in large, liquid exchange-traded shares.

I had a sudden flashback- this was almost exactly what his predecessor said approximately seven years ago.

Back then it sounded a credible problem which needed addressing, this time it sounded either like an excuse or a testament to the industry’s laziness and inertia. It began to dawn on me that perhaps one of the core reasons for the lack of progress on impact investment are these institutions who manage SRI funds and refuse to back smaller, younger social enterprises and businesses.

This behaviour has actually slowed (possibly severely) rather than accelerated the development of the social sector, as these funds have hoovered up the capital of socially minded investors and then backed traditional companies. Thus, rather than lead, the SRI funds have been a hindrance. This is an an appalling indictment for a sector which uses the term ‘social’ or ‘responsible’ in promoting itself.

First a few caveats. I believe my views may be especially applicable in the UK marketand perhaps less valid elsewhere–I welcome comments which set me straight on this. Also, I will not mention the name of the individual I referred to above; he is one of the “good guys” in the sector and is more likely to change this situation than let it persist. I mention this particular anecdote only because it was the ‘straw that broke the camel’s back’. Also, readers may decide that this blog is just a gripe from someone whose fund was turned down. This is possible, but a bit harsh for a few reasons. First, I suspect that in the end this investor will invest in the Fund–getting around internal restrictions in a clever way–they have done this sort of thing before. Secondly, Catalyst Fund 1 is making good progress elsewhere. The sad irony is that UK SRI funds have represented the most resistant audience. Other mainstream investors, who do not describe themselves as “social” or “responsible” are far keener than the SRI funds because of the investment practices of the SRI community which, when it comes to “impact investing” are well behind most of the industry–this is very bizarre. Lastly, I sat on the UKSIF Board for four years, from 2004 to 2008, and had little impact myself in changing this practice. UKSIF is the trade body for the SRI industry–thus a fair criticism could be, “why haven’t you changed this when you could have done so?”. We were not marketing a fund in those days, and the full picture has only become clear to me recently–but these are poor excuses, mea culpa, I should say. Nevertheless, these caveats do not change the facts–the SRI industry in actually holding back high social impact investment in the UK.

This is despite the fact that SRI is booming. A recent report by Booz Allen and Robeco noted that the “responsible investing” (RI) market would reach $26.5 trillion worldwide in 2015, or 15-20% of total global assets under management. The RI market has been growing at 22% annually since 2003, more than double the 10% growth overall, acording to the Booz Allen/Robeco report. Thus its failure to undertake high social impact investment is not due to its troubled past–in fact, my suspicion is that its success has led to a tragic conservatism, with the result that its portfolios continue to match the investment mainstream, whereas the investment mainstream is looking to become more social. The lethargy of the SRI community in this regard is, in part, explained by its success. Rather than upset things and go to the forefront of the space, the community has been satisfied to rest on its laurels, successes and profits and not do anything which may “upset the applecart”. As SRI funds are the vehicle of choice for socially minded investors, by sitting on their hands this way the SRI industry is actually blocking the development of the social business sector, thus making it more difficult for the sorts of businesses that, as they mature, would be exactly the kinds of companies we need to encourage, and they should be investing in.

Such a circumstance will not persist for long. Eventually the extra fees SRI investors pay, especially on the retail side, will be challenged if SRI portfolios remain indistinct from those of the mainstream–and the rapid growth will be arrested. It is outrageous that it has persisted for this long. Thematic investment firms and products, such as those investing in cleantech, microfinance and other niches will pass the SRI movement by–and this will be a just punishment for its conservatism.

I feel particularly bad for the employees of the SRI units. They are often terrific, sincere people who join the SRI community in order to make a difference. They believe that by making investment more social they will be doing their part to change the world. In reality, they are often making fine distinctions between one or another large cap stock which inevitably dominate their portfolios. How deflating!

The SRI has its reasons to feel proud however. It put social issues on the map and has helped make investors and governments more conscious of the importance of responsible investing. Now it needs to show some leadership or fall into the category of those it often criticizes.

Rodney Schwartz