The Elephant in the Room

Recently I had the pleasure of addressing a conference of Chief Investment officers and was asked to introduce the concept of impact investment.  I spent a considerable portion of my allotted time bragging about UK leadership in this field and the numerous initiatives which have been undertaken. Britain is a leader in experimenting in this field through legal forms, tax credits and subsidies, funds which have been established to facilitate the growth of the sector, conferences and a host of other initiatives. Big Society Capital is one of the more notable and sizeable elements of this process as it should have at the £600 million at its disposal to facilitate a social investment market in the UK.

I then ran through the impressive list of institutional players who are active or becoming active in this field. They included French banks, German banks, American banks, Swiss banks and even Spanish banks. But on the list was not a single large UK institution based in the City. This would apply to the large banks but also to the fund managers and insurance companies. Although many have dabbled and sponsored the odd conference or tiny initiative as part of their CSR budget, no single UK based firm has engaged in this sector in any meaningful way.

I have ranted in the past about the subject but felt it was worthwhile exploring why it was that these UK have thus far remained on the side-lines.  I can come up with four possible reasons for them to have done so and I list each and then addressed them one after the other below:

  1. UK banks are unique among banks and the Western world in that they needn’t feel obliged to demonstrate societal benefits. This could not be farther from the truth.  UK banks performed as poorly as many others during the financial crisis and were as reliant on government assistance as those in most countries. Northern Rock collapsed and RBS and Lloyds Bank required very significant capital from taxpayers. The Co-op bank, which had once been the largest UK-based ethical bank depressingly became a poster child for misdeeds in the sector, as the “Kelly report” makes abundantly clear. We can tend that pretty much every large UK bank would have collapsed but for the governmental bailout and therefore they are at least as obligated to demonstrate their beneficial social impact as banks anywhere.
  2. UK banks wish to avoid areas which would leave them exposed from a regulatory standpoint. A consistent message we hear from banks is that they are concerned about their legal position should have a introduce clients to impact investment. It is true that there expertise in this area is limited, but there are many establish intermediaries which could assist them. These banks have been fined billions of pounds for such varied infractions as foreign exchange will appear relation, money laundering, reading the gold fixing, payment protection insurance and manipulating Libor.  Their reticence to engage in impact investment for fear of the financial risks it might cause seems slightly bizarre. To our knowledge no one has ever been sued for their role in ethical financial intermediation.
  3. British banks are too busy contributing to economic growth to be side-tracked by involvement in impact investment. As politicians make clear on a regular basis UK bank balance sheets have been contracting and missing their loan growth targets. The emergence of many challenger banks proves such business can be done profitably or at least external investors think so.
  4. Client simply don’t want it. This claim is the hardest to disprove categorically because none has tried. Other banks elsewhere in the world appear to be doing it and they are meeting with significant interest and enjoying success. It is hard to imagine why UK wealth holders would be significantly different and not wish to have exposure to high impact investments.  The above-average growth of SRI investments suggests there would be demand from UK investors. Tax credits make this even more attractive.

So instead of making a serious commitment to impact investing UK banks merely talk about it while banks elsewhere do something about it. In the meantime UK banks are shrinking their balance sheets, fighting fines and laying off staff— this is hardly a way to win the hearts of mines of customers or governments and regulators who answer to them.

We can tend that is very much in the interest of banks in the UK to engage with the sector and develop scalable propositions in the impact investment space to meet the needs of their varied clients. By continuing to fail to do so UK banks are missing a terrific business opportunity, reinforcing the idea that they are not interested in the societal impact of their actions and seriously undermining the city of London’s strong position as a leader in impact investment and finance.

First published in Third Sector in October 2014.

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