Money managers need to recognize that an emerging trend of institutional investors keen to allocate to impact investments will require a new skill set, said Sir Ronald Cohen, chairman of the Global Social Impact Investment Steering Group.
Mr. Cohen was speaking at the United Nations-backed Principles for Responsible Investment’s annual PRI in Person conference in London on Wednesday on the topic of the future of impact investing and encouraging asset allocations from institutional investors.
“I think the first step for those institutional managers is for your organizations to recognize — just as you had to when venture capital came along, and then private equity — that a set of skills is going to be required to look at opportunities in this space. And you have to start by making an allocation, and then bringing a dedicated person to look at putting together a portfolio of impact investment opportunities,” Mr. Cohen said.
He said the definition of an impact investment is one that delivers measurable social returns alongside financial returns. “If you adopt that definition, then you begin to understand that, in theory, across all asset classes you will have impact investment opportunities. If you look ahead five to 10 years, I can see that we will have impact public equities, impact fixed income, impact alternative assets, impact venture capital, impact private equity, impact real estate. We will even have impact absolute return, which will be investments in social impact bond funds and development bond funds,” Mr. Cohen added.
He also said to really “break through,” changes need to be made akin to those relating to venture capital. Mr. Cohen cited an amendment to the U.S. Employee Retirement Income Security Act in 1979, which, under the “prudent man” rule, increased permissible allocations to venture capital by pension funds.
He said work is underway to include impact investing under ERISA’s prudent man rule, and in the U.K. there is potential for changes to investment obligations to deliver “an acceptable return, (meaning) a combination of financial and social return. If that empowers trustees of foundations and pension funds to begin to make allocations, then I think we will begin to see flows” to impact investing strategies, Mr. Cohen said.