Playing to our strengths: social and impact investing

This blog was originally published in Charity Finance's March magazine for its impact investing special.

In a Test series between South Africa and Australia on 24 March 2018, the cricket world was thrown into disarray. Dubbed ‘sandpaper gate’, a few members of the Australian cricket team were involved in rubbing one side of the ball with a piece of sandpaper to create more swing to give their bowlers an edge (quite literally). Sports stars that millions looked up to, caught on live TV audaciously, blatantly cheating. The players in question were given lengthy bans and the coach stepped down. In stepped Justin Langer. A coach who immediately set about coalescing the whole organisation around its values and a mission. He wanted the team to live and breathe honesty, trust and high performance, with a mission to restore respect to Australian cricket and ultimately win cricket matches playing the Australian way: hard but fair. Whilst not a perfect tenure by any means, he took the team from scandal to glory, retaining the Ashes (arguably the most famous series in cricket, contested by England and Australia) in the following year.

Now I suspect there aren’t too many similarities between Australian cricket and Esmée Fairbairn Foundation. But I share this story for one reason; because it’s a profound example (of which there are many in sport), where aligning everything an organisation does to its values and mission leads to better results. And that alignment is why we invest with impact.

At Esmée, income from our £1.3bn investment portfolio is used every year to make roughly £50m of grants. We do this across three strategic aims: A Fairer Future, Our Natural World, and Creative, Confident Communities. Our roles as grantmaker and investor are not mutually exclusive. Aligning our investments with our mission plays into our expertise and our values, with everything pulling in the same direction. Investing in line with our mission means we are consistent, we’re investing in what we know and what we’re known for. It strengthens an investment case when done right, maintains conviction over the long-term, and it maximises our total impact by including our investment portfolio.

This alignment is a work-in-progress for us. Using the Spectrum of Capital to articulate our different investment approaches, we can see how all of our capital has a role to play, with different mandates across financial and impact return. This gives us clarity on what we are aiming to achieve with every part of our capital. From prioritising the impact (social investment) to investing into the intersection of strong, risk-adjusted financial return and impact (impact investment and enhanced sustainability) and embedding our impact strategy in our Investment Policy Statement (sustainable investment).

Prioritising impact through social investment

Social investment is our £60m impact-first portfolio, prioritising social and environmental impact, whilst recycling financial returns for further impact. Last year, we increased this allocation from £45m, as we refined its strategy and ramped up investment activity. Launched in 2008, it now has over 15 years of track record with 215 investments made. Given we recycle capital, for every £1 our trustees in 2008 and 2024 allocated to social investment, £1.45 has been committed to-date to an impactful organisation (£1.92 before the 2024 increase).

Two years ago, we developed investment strategies to align to our foundation’s three aims: Investing in A Fairer Future, Investing in Our Natural World, and Partner in Place. From here, as a team, we’ve been able to explore so many areas to deliver our impact goals.

Investing in A Fairer Future

For Investing in A Fairer Future, we have been investing into social enterprise models that are transforming children’s residential care, in Lighthouse Pedagogy Trust and We are Juno. As a sector, children’s residential care in the UK needs this transformation. A singular focus on profit is displacing children from their communities, and their family and friends, in pursuit of improved yields, and they are charging councils huge amounts for the privilege. Yet, despite the exorbitant charges, our system is rife with examples of poor practice. Both Lighthouse and We are Juno have set up in cities (London and Liverpool respectively) to keep children close to home, and put children’s relationships and outcomes at the centre of all they do, from how the homes are fitted out, to staff training and each policy and process. As investors, we have an important role in supporting these social enterprises to change the system in the UK in a meaningful way. As part of a group of active investors in this space, we've been engaging with commissioners of children's services, social enterprises, charities and Government to explore options to invest at scale in these organisations’ inception and growth (blended finance) and provide the right homes in the right places (real estate).

Lighthouse Pedagogy Trust's Founder and Director Emmanuel Akpan-Inwang on the Radical Reformers podcast talking about reinventing children's care homes.

Investing in Our Natural World

For Investing in Our Natural World, we are looking at an expanded, collaborative Land Purchase Facility, which was developed to purchase land on behalf of conservation organisations, giving them a fundraising window to later buy that land back off us, with the intention of restoring land to nature in perpetuity. We work closely on this with the Royal Society of Wildlife Trusts, RSPB and the Woodland Trust. This is a model that has worked really well with 44 investments made to-date for 2,800 hectares of land, and the conservation organisations collectively accessing £29m. 37 of the 44 investments have been fully repaid, with seven live investments. To address the scale of the climate and nature crises and to deliver the UK’s commitment to protect 30% land and sea for nature by 2030, we need to scale up the resources available for mission-aligned organisations to purchase land for nature’s recovery.  So, this year, we are exploring how we might collaborate with others on the Land Purchase Facility to grow this.

Partner in Place

For Partner in Place we are investing into community ownership models, from housing to high streets to renewable energy. We believe local economies work better when local people have a stronger stake in how they operate. We have invested both indirectly through funds and directly into organisations, such as the UK-wide fund manager Resonance and Grimsby’s East Marsh Community, all united by their respective pioneering community-led asset-based models.

These are just a few examples. Unshackled from conventional financial objectives, and with a clear, mission-aligned investment strategy, the breadth and depth of what investment can achieve is really incredible. Borrowing the comparison from Align Impact, this could be the R&D function informing how we all invest in the future. And we’re keen to do this with others. Collaboration is very important to us, so please do reach out if any of these areas chimes with your work, or simply piques interest.

Thematic impact investing

Financial returns generated from the rest of our investment portfolio enable our grant-making. However, we believe that how we invest can also create impact. With a fast-developing market and fund managers raising more capital against a strong track record, we’ve started to think about strategy-aligned investing for our main investment portfolio.

Our impact investing allocation, a £10m experiment to explore how we might generate compelling risk-adjusted returns and impact through funds, has a strategy to test exactly this. Our starting point has been to develop a thematic-led investment strategy.

We have core themes that transpose directly from our three aims, and expanded themes that are supportive of our aims, but aren’t explicitly part of our grant-making. This enables us to assess risk, return and impact (a simplification of a ten metric scorecard we use) through a matrix of asset class allocation and theme allocation. We can assess how all of our investments are, or are not, contributing to our mission, from our sustainable investment portfolio to our impact investment, and how we might ‘contribute’ more. This doesn’t mean that every investment we make is a specialist investment into that theme. It means that we understand how our entire portfolio intersects with that theme (strengthening ties between mission and portfolio) and informs our decisions on allocating to that theme moving forwards by understanding the investment case.

Practically speaking, we have a two-fold approach to implementing our thematic strategy: deep dives of the market and exploring or developing new investment vehicles that may not exist yet.

We commission deep dives to explore the market as it is, to find the intersection of compelling investment opportunity and impact. Not every aspect of our strategy will be an opportunity for strong return, and rightly so, but through the lens of supportive, expanded themes, there are many intersections. Published at the end of 2024, our first deep dive focuses on how to invest to transition the food system. Highlighting the macro drivers for the investment and impact opportunity, it explores three themes, the impact risks, and analyses the fund landscape by asset class.

It has also helped us to move our thematic approach from theory to practice. We’ve been able to dig into what it means to invest in strong returning funds that are also progressing us to a nature-friendly food system, rather than incrementally improve the status quo. For example, assessing venture funds that have a clear theory of change to support technologies that produce food at the same time as restoring nature and allowing soils to recover, with relevant expertise and track record to back it up.

Taking this a step further, we can build conviction in the strategies and underlying companies that we believe will benefit from strong, near-term tailwinds. The food system’s hidden costs (e.g. the economic burden of poor health) are estimated to be larger than the entire food system’s market value. Given this system has an estimated value of $10-14 trillion (16-20% of global GDP for context), this is astonishing.  With the system responsible for 26% of our global anthropogenic greenhouse gas emissions, 70% of global freshwater use, and 78% of global ocean and freshwater pollution, the climate and nature case for transition is clear. The energy transition has seen significant capital flows in recent years. Perhaps the food transition will follow closely behind? Add in global population growth, land scarcity and food security, and we’re starting to see where innovation and investment might thrive.

We also wanted the deep dive to bring the impact – organisations entirely focused on changing the system for the better – into the room with the investment sector. Whilst not an easy exercise, we hope that aligning every aspect of Esmée to our values and mission, from the next Investment Committee decision on a private equity position to the next grant decision we make, will lead to greater impact. We’re planning our next deep dive on how to invest to scale community-led social and affordable housing in the UK.

Using our impact expertise to develop new investment opportunities

We are also interested in exploring and collaborating with others who share our goals to co-design investment vehicles that can enable impact. This takes more time and thought, but we’re keen to use our grant-making and social investing expertise, and many years of deep institutional and individual experience to bring rigour and opportunity to investing our capital.

Justin Langer was values-led, and turned Australian cricket around by bringing the organisation back to what it does best. As we bring our expertise, values and mission to our investing approach, I believe it will contribute to a high performing portfolio and just as importantly, contribute to our impact goals. It’s not done overnight, it’s a pragmatic, evidence-based, collaborative process, but that’s the journey we’re on.

Let us know what you think

If you'd like to share your thoughts on our work in this area or have a question, send us an email to: communications@esmeefairbairn.org.uk.