Social investment is not an asset class, and should not be one

It would lack coverage, says Rodney Schwartz of ClearlySo

The question of whether or not social investment will become an asset class has come up at several meetings I have attended recently.

Many of us are endeavouring to accelerate the development of the sector, and we are all considering how to tinker with old models, find new mechanisms and use various combinations of advocacy and cajolery to make something happen.

Understandably, several of my colleagues believe that if we create SI as a separate asset class, its growth will increase. This thinking seems flawed to me - I do not believe that SI will be a separate asset class, nor do I believe we should desire it to be.

I see social investment as comprising all investments that are made for reasons beyond their risk-adjusted rate of financial return, and where these extra-financial reasons have a social, ethical or environmental component. This includes microfinance investments, venture capital investments in clean energy, socially responsible investment funds and a variety of thematic funds - such as those in water-related businesses.

A study by asset management firm Robeco and consultancy Booz Allen found that socially responsible investment will account for 15 to 20 per cent of worldwide equity assets -reaching an enormous figure of $27 trillion (£16.3 trillion) by 2015.

Four different types of SI - three different asset classes. What would happen if all these were to be combined into a single asset class? I suspect that drawing these investment areas away from the mainstream would harm their growth.

The hypothetical asset class of SI would require many different disciplines and expertises. This would hardly be optimal. Also, any new asset class would start small, certainly below 5 per cent of any portfolio, until it had proved itself. This would be well below the sorts of figures expected in the Robeco/Booz Allen study.

SI's growth in fixed income, apart from microfinance, has been more recent, but it would also be limited if it were spun out into its own category. We need to avoid being shunted off into a backwater.

SI is instead becoming a key feature of the investment mainstream, in the same way as risk in the 1970s and 1980s, when investors' understanding grew to a point where all portfolios took it into account. Social returns are now being increasingly understood by market participants and, in particular, their end-investors (pensioners or mutual fund shareholders). Thus, they are being considered as part of a growing number of all investment decisions.

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