Insights from our expert roundtable on how to boost the difference that London’s impact investing sector can make in the city.
Public services are under strain right now. Can private finance with a social impact help fill the gap?
We’ve been researching the role that ‘impact investing’ – investments designed to make a difference, as well as a financial return – can make in improving London.
We brought together a group of leading industry experts, including investors and policymakers, to discuss how to increase the impact of impact investing.
They identified 4 key ways to help more Londoners: increasing inclusion, listening to communities, filling funding gaps, and making all information clear to applicants.
Make access to capital more inclusive
Who receives impact investment? It could be charities, social enterprises, or ‘profit for purpose’ businesses.
But our research found that small businesses (SMEs – small and medium size enterprises) are struggling to access impact investment. And in many cases the reason wasn’t the project they were trying to fund – it was discrimination and structural inequality.
Making impact investing more inclusive is vital. At our expert roundtable, we heard about one way to do this – creating funds that specifically invest in minority-led projects or organisations. One example is the Pathway Fund, which focuses on addressing the barriers businesses led by people from Black and minoritised communities face in accessing investment.
Funding organisations that can act as intermediaries between investors and people seeking investment is vital. It helps to widen the pool of people who hear about and apply for funds.
However, as one of our experts said, the impact investing sectors often “refused to teach to fish” – in other words, didn’t build capacity. Professionals from underrepresented groups are often invited to speak about diversity and inclusion, but still fail to secure sustainable investment in their organisations.
Listen to Londoners to reflect real needs
When people make an impact investment in London, they are seeking to improve outcomes for Londoners alongside a financial return. But what are Londoners’ real needs? It’s difficult to say. Any number of organisations from campaign groups to councils can make their case, but none of them can paint the full picture of London’s nine million inhabitants.
One way to find out is to ask Londoners directly. In our discussions with people in the sector, we heard that such engagement is too often lacking, and that standards for how to do it well are yet to be established.
Impact investing should move towards more frequent and meaningful engagement with communities. This means making sure that engagement is part of every project where it makes sense. It also means consulting people on multiple occasions and granting them more of a say in the finished product.
Fill gaps in the market
Projects which are smaller or with less of a track record can pose a greater risk to investors.
We heard that there’s a gap in the availability of capital, with not enough money being directed towards projects in these ‘early’ and ‘growth’ stages.
Our experts discussed ways to fill these gaps in the market.
One way is to provide grant funding alongside an investment to be repaid, often called ‘blended finance’. This can make the terms of the repayable finance more affordable to the project.
Blended finance is a central part of making impact investing work. But how can the grant portion of blended finance be funded?
Dormant assets –the money in bank accounts that haven’t been used for many years – have been made available by the government to fund blended finance. The government is expecting to make a decision on the future uses of dormant assets in early 2023.
Outside of blended finance, we heard about the potential role of community development finance institutions (CDFIs). These provide finance to individuals and organisations with the goal of community development. In 2021, 94 per cent of CDFI borrowers in the UK had been declined by another lender.
However, there isn’t yet a London-focused CDFI – a potential gap in the market.
Communicate clearly to applicants
For an organisation or project to access impact investment, they typically apply to a provider of it.
We heard from some of the people who have applied for impact investment that many providers of finance don’t share key information publicly that would be useful to applicants.
For example, clarity about the rate of expected return could help organisations understand what they’re expected to deliver.
It’s important that work is done to make sure that the people who are seeking finance for their work can all access and understand this information.
Of course, as our experts pointed out, this is linked to efforts to make impact investing more inclusive discussed above: using clear language, investing in intermediaries to understand the needs of different groups, and building more connections across sectors are all important.
The need for impact investing to fund projects and people that make a difference is increasing as government budgets tighten. Bringing together experts, we found a lot of optimism that the sector can do more. We hope we’ve also found a roadmap to move forward.
Findings from our research, alongside our full list of recommendations, can be found in our report In London and for London: Impact investing for the capital.