Our Researcher Daniel Urquijo defines impact investment and its role within society, exploring the potential benefits it can provide to improve the lives of Londoners:
Impact investment is one way to use finance to do good. The premise is that investments can make a positive change in the world while also yielding a financial return. This idea has been around for many years, though the term ‘impact investing’ was only coined in the noughties. Centre for London is now working on a project looking at the impact investment market in London and how it could do more to address the capital’s key challenges.
Impact investing sits somewhere between mainstream finance and philanthropy, ranging from ‘finance-first’ approaches that primarily seek a financial return but try to make a positive impact along the way to ‘impact-first’ approaches that prioritise on-the-ground outcomes over financial return, and accepting sub-market financial returns if needed.
Another way to slice the impact investment world is by the type of outcomes that investors are trying to improve. Investing in renewable energy, recycling, or conserving nature can bring about positive impacts on the environment, while investing in housing, employment, and health can have positive impacts on society. Our research is focused on the latter.
Finally, impact investing can differ in whom it aims to impact. Some impact investments aim to contribute to people in a specific geographical area, while other investments aim instead to have a positive impact on a particular segment of society.
How much impact investment does London get and where does it go?
The best data on levels of impact investing in the UK has been compiled by Big Society Capital and the Impact Investing Institute. While there is reasonably good data on the UK market, it is difficult to estimate the regional distribution of impact investing.
A survey by the Impact Investing Institute estimates that around 27 per cent of all impact investing with a known geographical focus goes to London, while Big Society Capital’s deal level data suggests 42 per cent is going to London instead.
The data suggests that London does not struggle to attract impact investment compared to the rest of the country. This is no surprise; London is where much of the nation’s investment is brokered, and it also is a city that faces many growing challenges, making it a fertile ground for impact investing.
We are looking at what outcomes are being invested in and how they compare to the rest of the country. Big Society Capital’s deal-level data from 2016 to 2020 helps us get a picture of these differences. Because it relies on organisations voluntarily contributing data, it only covers part of the market.
The figure below shows that impact investment in London is more focused on “Housing and local facilities” and “Employment Training and Education” compared to the rest of the UK. On the other hand, more impact investment in the rest of the UK leans towards “Conservation of the natural environment”, “Citizenship and Community”, and “Income and financial inclusion” than in London. These impact investment patterns may be indicative of the relative weight and salience of different issues in different parts of the country.
We have also looked at whom investments are aimed at supporting. The figure below shows how much money was committed to supporting different segments of society. Investment meant to benefit all societal groups is the most common across the sample – this includes diverse investments in things like theatres and community groups. The key difference between London and the rest of the UK is that a greater proportion of investment in London is directed at supporting vulnerable older people.
Impact investment can play a role in addressing some of the capital’s most pressing issues. The data we have analysed give us some information about how impact investment has addressed those challenges to date, and in our research we are using a range of methods to investigate how it could make a bigger difference to Londoners in the future. The research will be published in November – you can learn more about the project here.