The government should increase its participation in co-investment models and perhaps even take a first loss position to encourage capital into social impact investments, said a report into impact investing it commissioned.
The Growing a Culture of Social Impact Investing in the UK report also said the government should work with the financial services industry to identify investment approaches that can be used to deploy capital to "tackle entrenched social and economic problems".
It also called on companies to increase their focus on creating a demonstrable positive social impact alongside financial returns after it found some advisers were unclear on how to incorporate impact investing into portfolios and what the consequences may be if the investments fail to deliver expected social returns.
The government-commissioned report further explained more could be done by professional bodies and regulators to help strengthen competence and confidence in impact investing in the financial services industry.
It called on the Chartered Insurance Institute and Chartered Institute of Securities & Investments to accelerate professional development around impact investing through CPD and professional qualifications.
Economic secretary to the Treasury Stephen Barclay said: "Social impact investing has the power to make a positive change in society, while also bringing positive financial returns. It's a win-win, which is why demand is growing.
"The market has enormous potential, but we need to make it easier for people to make a social impact investment. Today's recommendations will help make this possible."
The current landscape
Worthstone, a social impact investment specialist that works with advisers, contributed to the findings through its own investment mapping report and a survey of advisers.
It found there to be 194 funds that fit on the impact spectrum that met its criteria, which included: Having some form of sustainable/ethical mandate within the fund; being registered for the sale in UK, and; being available to retail investors.
Although the retail impact investment sector has around £87bn assets under management, Worthstone found the majority of these funds that sit in the UK equity sector had exposure to banks and other financial companies that had "no meaningful restrictions" on lending.
This means, with only a few exceptions, the funds allow investment in healthcare companies that test products on animals, Worthstone said, while many hold "potentially controversial stocks" that include mining, oil and gas.
Worthstone also carried out research with intermediary firms for the report, asking questions of 335 intermediaries, including client-facing advisers and those from intermediary firms that carry out investment decisions.
It found that half (47%) of respondents' clients were either moderately or very interested in impact investing.
While one-third (31%) of advisers who do discuss impact investing with clients said it was always part of their conversations, four-in-ten (43%) said they will ask clients if there is an indicator to do so and the remaining quarter (26%) said they only talk about the investments if the clients raise the issue.
More than half (53%) of the 335 surveyed expect client demand for impact investing to increase over the next 12 to 18 months.
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