What is Social Investing?
More and more individuals are looking to invest in a manner that is consistent with specific principles and values. It is not uncommon for individual investors to express concern about how their investment decisions affect the world they are creating for future generations. There are an increasing number of emerging investments designed to put money to work in social purpose businesses to create sustainable social change, as well as the potential for a financial return. Changes both from within the charity sector and from donors have pushed philanthropic organisations to be more commercial in their approach. At the same time, business models are developing that align business strategy to remedy environmental and social challenges.
It may be possible for investors to magnify impact by creating access to investment products designed to blend the desire for impact with financial return. However it is important to evaluate social impact investments as carefully as any other investment opportunity and aim to achieve impact alongside asset allocation, diversification, fiduciary duty and a clear investing charging structure.
A social impact investment enables an investor to use their available capital to achieve defined social outcomes whilst aiming to preserve capital and potentially produce a return. In contrast to a donation, a social impact investment aims to create a return on the investment to the investor usually at a given point in time.
Social impact investments harness the power of capitalism to develop accountability and business approach for organisations that would have traditionally delivered charitable services. Capitalism is an efficient way to allocate resources and wealth. Sustainable capitalism is investing for blended value and can be used as a framework that looks to maximise total value creation potential and performance of organisations whether non-profit, for-profit or hybrid. It applies to the entire investment value chain from entrepreneurial ventures to social activists and policy makers.
It is investing in private companies that can have a positive social impact. Social impact investing provides the opportunity to support community economic development, revitalisation, growth, and sustainability. Typical investment areas include:
• Microfinance or financial inclusion
• Social housing
• Job creation and retention
• International development projects
• Environmental energy or waste reduction projects
• Sustainable agriculture
There are several ways to invest. There are private equity and debt fund of funds available in both the US and the UK. Additionally, in the UK there are tax-efficient Enterprise Investment Schemes (EIS) and Venture Capital Trust (VCT) structures available to suitable investors. For US investors it is important to ensure that the investments are made through direct investment and avoid being caught under the PFIC rules. Specific tax advice should be sought.
Returns vary from investment to investment and past performance is no guide to future returns. All social impact investments are not created equal and should match the investment policy statement mandate and objectives. Typically the investment returns vary widely and may tie up invested capital for an extended period of time.
Risk Warnings and Important Information
A social impact investment is an investment like any other and careful attention needs to be paid to the risks. Additionally, there are sometimes private equity and deal structure risks to take into account. Potential investors are advised to seek relevant legal, financial and tax advice before making any decision to invest. It is important to remember that the value of shares can go down as well as up and you may not get back the full amount invested. The level of returns are subject to commercial risk.
Rates of tax, tax benefits and allowances may change from time to time and are not guaranteed.
» Tax treatment is dependent on individual circumstances and may be subject to change in the future.
» Past performance is not a guide to future performance and may not be repeated.
» The value of shares can go down as well as up and you may not get back the full amount invested.
» You should consider an investment in either a VCT or EIS as a long-term investment.
» Investment in unquoted companies involves a higher degree of risk than investment in a quoted portfolio.
The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.
MASECO LLP trading as MASECO Private Wealth is authorised and regulated by the Financial Conduct Authority, the Financial Conduct Authority does not regulate tax advice. MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice prior to acting on any of the strategies described in this document.