3D Investing: The shape of things to come in institutional investment

Recently, we at ClearlySo had the privilege to conduct and publish research on behalf of The City of London Corporation, City Bridge Trust and the Big Lottery Fund on “Investor Perspectives on Social Enterprise Financing”.   (The link to the full report is accessible from our homepage).  Written by Katie Hill, this 178 page report provides a comprehensive insight into City thinking on social enterprise investment.  Katie interviewed about 60 professionals as part of the work and concluded:

  • There is no silver bullet, but a number of small developments, when taken together, will improve the level of social investment.
  • There is no “City” as such; the term describes a broad array of financial institutions, pension fund managers, private equity investors, etc. Each have different needs, objectives and approaches and need to be separately understood rather than amalgamated.
  • The opportunity provided by the Big Society Bank (BSB) and the restructuring of the state is a “once-in-a-lifetime” chance to accelerate social investment and must be seized.

The launch took place in a beautiful venue, The Livery Hall, which added further gravitas to the proceedings which were headlined by the Lord Mayor.  Perhaps, when presented with such awe-inspiring surroundings, one can become prone to grand statements, but I felt as if the meeting could herald the start of a new era of institutional investing and was sufficiently moved to call it the start of “3D Investing”.  In my presentation (available here) I noted that, whereas investing had been a two dimensional exercise since approximately 1980, as investors sought to maximise risk adjusted rates of return, we are now entering a world in which a third dimension has entered the calculation: that of social impact.

Before discarding this notion as fanciful and accusing me of being carried away by the moment, I should point out that there are many examples of such trade-offs being undertaken.  How else could the Ethical Property Company, a firm which makes it very plain it will never try to maximise financial return, have been able to raise roughly £20 million over the last decade?  Although most of its investors were individuals, some were from the City and were present in the Livery Hall at the launch.

This is also not the first time a new dimension has been added to the investment equation.  When I entered the financial world in 1980, as an analyst with PaineWebber, investing was one dimensional.  Portfolio managers spoke of “average total return” over the life of an asset or portfolio.  The tumultuous 1970s meant that investors became more aware of their preferences for lower volatility.  Hence the birth of beta and “2D Investing”.

In response to the socially tumultuous period we are now in, is it so surprising that investors are becoming increasingly aware of their preference for positive social impact (as well as their aversion to negative impacts)?  Thus dawns the era of 3D Investing—anyone have a suitable Greek (or other) letter?

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