In the not-so-distant past, the world of finance and the world of philanthropy rarely overlapped.
Some people in finance were (and continue to be) very generous philanthropists, so the proceeds of business and entrepreneurship and value creation sometimes ended up being donated to good causes. But it was relatively uncommon for people in finance to invest in those good causes, i.e. to put their money into addressing a societal challenge and expect some kind of financial return.
Today, however, this dichotomy between finance and philanthropy no longer applies, says Michele Giddens. As the co-CEO and co-founder of Bridges Fund Management, a specialist sustainable and impact investor, she has seen a “seismic change” in attitudes over the last two decades.
Spectrum of capital
Michele explains that when Bridges launched in 2002, there was initially some scepticism about the idea of investing to achieve better social or environmental outcomes alongside attractive financial returns.
At the time, the prevailing assumption was that you could either do good via philanthropy or seek to maximise your financial return through investment. Over time, however, the market has come to realise that there is actually a broad range of options between these two extremes, corresponding to different investor motivations. In its report defining this “spectrum of capital”, Bridges argues that by understanding this range, it is possible to design investment strategies to tackle a broad range of societal challenges - from improving gender equality in business to mitigating climate risks.
Michele believes that this has been a real development in the sector. She says there is growing evidence that impact-driven investors no longer need to accept financial trade-offs; in fact, they can now access a number of strategies that allow them to achieve attractive risk-adjusted returns alongside impact.
This evolution of the market has also driven an evolution in Bridges’ investor base. Initially, the firm worked primarily with high-net-worth individuals and corporates, plus a few institutional investors. But the ratio has since reversed: institutional investors now constitute about 80% of Bridges’ investor base.
Michele acknowledges that this is partly because Bridges has built a strong track record. However, it’s also a result of institutional investors starting to see that a focus on social or environmental issues can deliver more robust and sustainable returns.
This changing mindset has transformed the sector in the last three to five years, Michele says, with a number of high-profile asset managers launching new impact funds. But she is not worried about increased competition. Instead, she believes it is to everyone’s benefit if the market continues to grow in size and sophistication. That’s why Bridges is committed to sharing knowledge and best practice that could help other investors incorporate social and environmental impact into their investment decision-making and asset management.
Managing impact
Some of that learning has been incorporated into the Impact Management Project, an industry-wide forum for building consensus on how to measure, compare and report impacts on environmental and social issues. This forum is hosted by Bridges Insights, the firm’s not-for-profit field-building arm, and a Bridges team has coordinated the work since the project was launched.
The underlying premise of IMP is that all investments have an impact on people or the planet. So for an investor, the challenge is to identify which impacts are most material, then minimise the negative and maximise the positive.
A key goal of IMP is to agree on a set of generally-accepted standards for managing impact. Michele argues that this is crucial if we want to unlock more capital to address societal challenges - because it improves transparency and allows investors to make more confident decisions based on meaningful comparisons. “What investors need is global, shared norms and standards - so they have an informed view about which managers or which companies have the most positive impact on society,” she says.
There could be a broader benefit too, Michele adds. When you have an impact vehicle sitting alongside traditional investment vehicles, it naturally raises questions about how the latter compare with the former in terms of their impact on society. It is her hope that when there are more impact vehicles on the market, there will also be more scrutiny of traditional companies and investments, leading to more thoughtful decision-making.
Purpose-driven finance for a better world
Many of Michele’s ideas about how finance can better serve society have been informed by her work in economic development in emerging markets in the 1990s. She began by working on privatisations in Eastern Europe, during the period after the fall of the Berlin Wall when many of these countries were trying to build (or rebuild) market economies. After a period in Poland working for the International Finance Corporation, helping Polish companies create partnerships with large multinationals to expand their capabilities, she later moved into small business lending and microfinance, working in Russia, Bangladesh and Mongolia.
At the turn of the century, she returned to Britain to advise the Social Investment Taskforce. Established by the UK government and chaired by Sir Ronald Cohen - considered by many to be the “father” of British venture capital - the idea of the Taskforce was to examine whether investment and finance could help to boost economic growth and employment in the most deprived areas of the UK, thus helping to reduce the gap between the richest and the poorest in our society.
This led Michele - alongside Sir Ronald and her co-CEO Philip Newborough - to launch Bridges in 2002. Their aim was to bring the best of private equity to these deprived areas, supporting small businesses and entrepreneurial role models who would create jobs and boost local economic dynamism.
Over the next 18 years, Bridges’ focus has expanded in line with the evolution of the market and changing investor demand. Bridges now operate across four investment strategies: in addition to its growth business investments, it has funds dedicated to property and social outcomes contracts, and a long-term capital vehicle to support mission-driven organisations. All of these strategies operate across the same four core themes: Healthier Lives, Future Skills, Sustainable Planet and Stronger Communities.
Michele believes that having this platform is incredibly powerful: it allows the firm to respond to macroeconomic and societal challenges through a range of different interventions, and it allows the different teams to share expertise and look at problems in new ways.
To date, Bridges has raised over £1bn in capital and made more than 160 portfolio investments across these four strategies. It has also achieved some powerful impact: for instance, in its Future Skills theme, its investments have helped over 3,000 young people achieve better educational outcomes.
One recipient of Bridges’ capital is West London Zone, a London-based charity that helps children who are struggling at school to fulfil their potential by connecting them to local services. This is one of about 50 projects Bridges has supported via a social outcomes contract (sometimes called a social impact bond), whereby the Government pays for the achievement of measurable improvements to the lives of vulnerable people. Bridges was an early pioneer in this area, raising the world’s first fund dedicated to supporting these contracts.
Pioneering capital
For Bridges, pioneering new impact-driven investment strategies with the potential for wider adoption is an important part of its mission. As Michele says, “We are always trying to think: what is the new tough thing that we could do? What else can we pioneer in terms of using finance for good?”
Michele’s pioneering work in international development and social finance earned her an OBE in 2018; a colleague of hers at Bridges, Antony Ross, has also received the same honour for his work in social investment. She is quick to downplay the achievement, instead focusing on the people at the ceremony. “It was amazing to meet people from walks of life that you never normally meet, who have done these extraordinary things.”
She hopes that the work of Bridges and others will ensure that the UK continues to be regarded as a world leader in impact investing; but she is also aware that other countries are nipping at our heels. There is increasing interest from around the world, with new markets emerging all the time. It is a reminder that we must continue to innovate and collaborate if the UK is to keep developing at the same pace.
Michele Giddens is the co-founder and co-CEO of Bridges Fund Management.