Will social investment become an asset class

This question, as to whether or not Social Investment (SI) will become an asset class, has come up at several recent meetings I attended.  Many of us in the sector are endeavouring to accelerate the development of the sector and each of us individually are considering how to tinker with old models, found new mechanisms and use various combinations of advocacy and cajolery to make something happen.  There has been some progress and the sector is growing, but far slower than we might otherwise desire.

Understandably several of my colleagues believe that if we create SI as a separate asset class it growth will increase.  This thinking seems flawed to me—I do not believe that SI will be a separate asset class, nor do I believe we should desire it to be.  This view stems from a view regarding what SI actually is, and what it is not.

I see SI as being comprised of all investments which are made for reasons beyond their risk-adjusted rate of financial return; where these extra-financial returns have a social, ethical or environmental component (let’s call them all “social” for the purpose of this article).  Presently this includes microfinance investments, Cleantech VC investments, Socially Responsible Investment (SRI) funds and a variety of thematic funds—such as those into water-related businesses.  At present which asset classes do these sit in?  Microfinance is now a growing part of the fixed income area, Cleantech VC would be part of the VC allocation in the alternative investment asset class, while the last two would be part of the very large equity asset class.  In fact, Robeco and Booz Allen believe that such Responsible or Social investments will account for 15-20% of the worldwide equity assets—reaching an enormous figure of $27 trillion in 2015.

Four different types of SI—three different asset classes.  What would happen if all these were to be combined into a single SI asset class?  I suspect that drawing these investment areas away from the mainstream would be to the detriment of their growth.  Within asset managers the “asset class” of SI would require many different disciplines and expertises to be duplicated within one asset class—this would hardly be optimal.  Also, any new asset class would start small, certainly below 5%, as do most new asset classes within investment organisations—until it had proven itself.  This would be well below the sorts of figures expected in the Robeco/Booz study.  SI’s growth in fixed income, apart from microfinance, has been more recent, but it would also be limited if it were spun out into its own category.  As a general rule we need to avoid being shunted off into a backwater.

Social Investment is instead becoming a key feature of the investment mainstream.  As with risk in the 1970s and 1980s, investor’s understanding of risk, and appreciation of its consequences, grew to the point where all portfolios took it into account.  Social returns are now being increasingly understood by market participants and, in particular, their end-investors (pensioners or mutual fund shareholders).  Thus they are being considered as part of a growing number of all investment decisions.

SI is not an asset class.  Let’s not make it into one and instead make SI part of a growing percentage of a very large total investment “pie”.

First Published in Third Sector in October 2009.

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