Tom Hall of UBS argues that if the likes of Bill Gates and Mark Zuckerberg were to put their money into impact investment instead of grants they could make a real contribution to the Sustainable Development Goals
For the past three years I have had the privilege to work at UBS, the largest global wealth manager, where we have provided philanthropy and impact investing services to clients for the last 18 years. Over that time we have seen social impact become an increasingly important topic to our client base, right across the globe.
Over 90% of our clients are active philanthropically and in a recent survey of our top 270 family office clients, 30% are already actively engaged in impact investing, with a further 30% identifying impact investing as something they are likely to become active in within the next two years.
As a business we feel that one of the biggest social contributions we can make to the world in general, and the furthering of the Sustainable Development Goals in particular, is to help our clients give and invest for social impact more easily, efficiently and effectively.
If, for example, we can help our clients to invest just 5% of the $2trn we manage into impact investing structures then it could bring around $100bn of new investment into this sector, a figure we believe could deliver real social change and eclipse the total current market size for impact investing of $77bn.
However there have been considerable barriers to moving the dial on this, and whilst 2016 was a significant year for us, with the launch of a number of impact investing initiatives – from the first SITR fund in the UK market, to our Oncology impact fund, which raised just under $500m from clients globally - there is still a significant way to go before we arrive at the goal of a mature, liquid market that allows investors of all types to select investment opportunities based on a robust data set showing the risk, return and impact of each opportunity and allowing them to dial up or down all three elements independently to align with their investment or impact goals.
It has always seemed counter-intuitive to me to see wealthy individuals making 5%-20% returns on their investment capital, only to get minus 100% returns of their grant making, and I have spent my career looking to build the impact investment market from this perspective. If a philanthropist can get more or the same level of impact from a loan or investment as they can from a grant, then why wouldn't they? Followed by an assumption that if they see that impact investing is a secure investment they will deploy more capital in this space and we can grow the market.
Some argue that there is no point focusing on the philanthropy or impact end of the motivation continuum as the proportion of total invested capital is too small. But I think this ignores a significant trend of our times. More billionaires have been created in the past 20 years than ever before in history, and increasingly this group are looking to philanthropy as the main destination for their wealth. Led by hero philanthropists such as Bill Gates and Mark Zuckerberg, over 140 billionaires have now pledged around $750bn to be given in their lifetimes and on death; a trend that I have seen mirrored right down the wealth curve.
Much of this capital may end up adding to the just under $1trn estimated to already be in foundation vehicles and donor-advised funds globally. The focus of this new breed of philanthropists is to solve the social and environmental problems they are passionate about, and they are willing to take big risks, including no financial return, in pursuit of those goals.
But with the exception of a few pioneers like Omidyar, and Bill Gates to an extent, this group don't seem to be actively engaging in impact investing. Of the £55bn donated in 2013, 98% was deployed as grants. And I have met many sophisticated philanthropists – hedge fund managers, financiers – who have never considered an impact investment because they don't believe they are as impactful as their grant-making.
Indeed grant-making at its very best can have huge 'invest in Facebook' type social returns. Take, for example, the philanthropists who invested in the RCT [randomised control trials] that identified de-worming tablets as the intervention that would improve educational outcomes almost 10 times as much and at a tenth of the cost of other more traditional educational interventions. That has leveraged hundreds of millions of dollars into de-worming programmes funded sustainably by big pharma on an annual basis through free drug distribution.
This market level impact is what strategic philanthropy is all about – but philanthropists also have to be aware of the limitations of this approach when using grants. Even Mark Zuckerberg's $49bn is only 6% of what, for example, the UK government re-distributes every year on health, education, infrastructure and defence.
Therefore strategic philanthropy has to try and find ways to inculcate sustainability or scale into the things it invests in – with scale coming in two key ways: private sector scaling or public sector commissioning, increasingly through outcomes-based purchasing.
This increased focus on exit and scale has led many philanthropists to begin to look at a wider range of financial instruments – such as PRIs, debt, quasi equity – often undiversified, and with a higher risk profile than mainstream investors would ever tolerate.
It is in this context that we have been particularly excited by the results of the world first development impact bond (DIB) in education, which we pioneered with our clients in India, and which was designed to demonstrate that instead of funding schools directly, governments and development agencies can drive better results by only paying for outcomes once they are delivered, such as increasing the number of girls who attend school, and a sustained improvement in their test grades. (See #BeBoldForChange: How impact investors are educating girls in India.)
High impact investing
After 18 months, this first bond is on track to hit all its targets and triggered repayment of part of the invested capital. It has also helped the NGO be more data-driven and results-focused. We are already working on the next-gen of DIBs, in partnership with major development organisations and foundations, using the lesson we learned from the first DIB, and will announce more details later this year.
Whilst globally the social impact bond (SIB) market is only around $180m, we still believe that longer term payment by results is a key opportunity for high impact investing. The political and economic expedience of only paying for results if and when they have occurred is highly compelling, and the recent announcement by the Modi government in India to commit over £1.5bn to buy outcomes in WASH delivery in India is an example of the scale that could be achieved in this space.
DIBs and SIBs not only have a direct correlation between the highest standard of outcomes that philanthropists are looking to gain at a programmatic level; they can also generate significant market-level returns by building out the market in the same way strategic grants do.
Indeed, in the case of DIBs some foundations are acting as outcome payers and making grants through this mechanism because they believe it will demonstrate to governments a better way to procure social or environmental outcomes, and help social sector organisations operate more effectively than they would with a grant.
Beginning of the journey
So we have all made progress but there is still a way to go. The risk profile of these investments means they are only open to private client opportunities that still require individual investment decisions client by client, which is very time consuming even if ticket sizes are large.
Liquidity is still a major issue and probably the main barrier preventing us from being able to include impact investments like these in discretionary portfolios. Which is why the concept of the Social Stock Exchange – an idea that was ahead of its time – is incredibly important and also deserves support as an investment that has market level impact.
I for one am convinced that engagement from all ends of the impact investment continuum can genuinely release the investment that is needed not only to help meet the SDGs by 2030, but also to help solve the myriad pressing social and environmental problems of our time.
Tom Hall is executive director, head of philanthropy services, at UBS.