I recently addressed a conference of chief investment officers on impact investment. I bragged about UK leadership in this field in terms of legal forms, tax credits and subsidies, funds, conferences and other initiatives. Big Society Capital is one of the more notable elements of this process, with £600m at its disposal.
I ran through the impressive list of institutional players that are active, or becoming so, in this field. They included French, German, American, Swiss and even Spanish banks – but not a single large UK institution based in the City. This applies to the large banks but also to the fund managers and insurance companies. Although many have sponsored the odd conference or initiative, no single UK-based firm has engaged in this sector in any meaningful way. It's worth exploring why they say this is.
First, UK banks are unique among western banks in that they do not feel obliged to demonstrate societal benefits. But banks here performed as poorly as many others during the financial crisis and were just as reliant on government assistance: Northern Rock collapsed; RBS and Lloyds Bank required significant capital from taxpayers. The Co-operative Bank, once the largest UK-based ethical bank, became a poster child for misdeeds in the sector, as the Kelly report makes clear. Pretty much every large UK bank might have collapsed but for the governmental bailout, so they are at least as obliged to demonstrate their beneficial social impact as banks anywhere.
Second, UK banks wish to avoid exposure to regulation. A consistent message we hear is that banks are concerned about their legal position when introducing clients to impact investment. Yes, expertise in this area is limited, but there are many established intermediaries that can assist. These banks have been fined billions of pounds for infractions such as money laundering and misselling of payment protection insurance. Their reticence to engage in impact investment for fear of the financial risks it might bring seems bizarre. To our knowledge, no one has ever been sued for their role in ethical financial intermediation.
Third, British banks are too busy contributing to economic growth to be side-tracked. As politicians make clear regularly, 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.
Fourth, clients don't want it. This claim is the hardest to disprove because none has tried. Banks elsewhere are doing it and enjoying success. It is hard to imagine why UK wealth holders would be different. The above-average growth of SRI investments suggests there would be demand.
Banks elsewhere do something about impact investing while UK banks talk about it as they shrink their balance sheets, fight fines and lay off staff.
It is in the interest of banks to engage with the sector and develop scalable propositions in the impact investment space. They are missing a terrific business opportunity and reinforcing the idea that they are not interested in the societal impact of their actions.
Rodney Schwartz is chief executive of ClearlySo, which helps social entrepreneurs raise capital