Profile: Sarah Gordon on moving impact beyond ESG

On the day the UK’s Impact Investing Institute publishes a major new report on the size and shape of the sector, we meet with CEO Sarah Gordon to discuss her views on taking impact investment to the next level

The UK’s Impact Investing Institute was launched in 2019 with the aim to “mobilise private sector capital for good.” The Institute has a broad range of funders – the UK government, the City of London Corporation, and ten founding financial institutions.

CEO Sarah Gordon tells Impact Investor: “I’ve always been fascinated by the interaction between business and philanthropy”. Her Master’s thesis examined NGOs. “I’m excited to be at the cutting edge of that dynamic now – attempting to increase private capital in the impact space.”

“Overwhelmingly, we seek to grow the impact market and to make sure that it is more effective and accountable.” Gordon says she does this “by raising awareness, providing tools and research, and supporting policy and regulation [that] moves mainstream finance towards embracing impact investing”.

To this end, the Institute today released a major report on the impact investment sector in the UK, titled ‘Estimating and describing the UK impact investing market’.

Gordon comments: “I have been in this job now three years and I have to say it has been a period of real revolution in the impact investing industry.” She adds it feels like “100 years ago [when] it came to be realised that investment was not just about return but also about considering the risk related to that return. I think now we’re moving into a climate where investment will be about return, risk, and impact.”

Policy work

The lead up to this report has been intensive policy work. The Institute co-led the international Impact Taskforce set up around COP26 as part of the UK’s presidency of the G7. This focused on how to finance a Just Transition and achieve the Sustainable Development Goals.

“We presented our findings to the G7 foreign and development ministers in December and have made a set of recommendations.” Many of these are amplified in this report. Gordon highlights three.

“Firstly, that we want actors to act now. Too many institutional investors seem to be waiting for government action.”

“Secondly, we need buy-in from all institutional investors for the creation of marketable sustainable products.”

“Thirdly, we do need action from governments when it comes to MDBs [Multilateral development banks] and DFIs [Development Finance Institutions] mobilising private sector capital. This needs to be imbedded in their mandates and in their incentive structures. I believe this is critical for addressing climate change.”

“Overall shifting capital is our main focus. We need to get private capital actually mobilised. There is ‘pledge fatigue’ post COP26. What people want to see is actual capital mobilised and we want to make sure the shift happens.”

A €70bn sector

According to Gordon, one of the most important aspects to come out of the report is the estimates about the size of the market, something that hadn’t been done before in the UK.

The report makes a “conservative” estimate that there are £58bn (€69.4bn) of impact investments in the UK, with a further £53bn which are “impact aligned.” It suggests that this figure reflects the UK’s leading position in impact investing, representing as much as 8% of the total global impact investing market.

“We need to move impact beyond ESG. I believe impact investment is a very effective way of avoiding the greenwashing that is affecting the ESG market.”

Sarah Gordon, Impact Investment Institute

Also interesting is that respondents overwhelmingly expect the fast-pace of growth in the sector to continue. 90% of respondents indicated that they plan to increase their asset allocation to impact investments within the next five years, with the report predicting that UK direct impact funds will reach £100bn over the same period.

“The UK impact market will grow very rapidly but our report raised warning flags around definitions and transparency. These are challenges for the industry. Investors need to be able to hold impact managers to account. The market is growing so fast at the moment it is rather like the Wild West and dynamism in the market is such that it is ahead of government and regulators,” Gordon warns.

“We need to move impact beyond ESG. I believe impact investment is a very effective way of avoiding the greenwashing that is affecting the ESG market.”

A surprising finding of the report, she explains, was that 60% of respondents said that they were measuring their own impact, rather than using external independent systems. “We believe it is very important for investors to move towards independent verification and support the efforts of the ISSB in this regard,” she adds

The report gives details on the split by institution and the asset categories used.

Growth paths

Gordon believes growth could be even faster. The perception of “fiduciary duty is a big ‘blocker’ for many pension trustees at the moment. We are seeking to combat this mentality with a two-pronged approach”.

“Firstly, to show that there is in fact no real legal block to impact investment provided it is investment which is generating a return. Secondly, we are engaging with government. I do believe new guidance or perhaps I should say ‘clarification’ for trustees from the Department of Work and Pensions, and from The Pension Regulator, would be very helpful.”

Gordon also believes there could be a further push into impact investing by endowments, helped by a redrafting of their Investment Policy Statements. “We aim to provide support and guidance especially by giving endowments examples of how other foundations have done this”.

Going forwards, Gordon also expects to see a lot of new “thematic lens impact investment funds, focusing on gender and race. In the UK this will be galvanised by what happens with the next round of dormant assets”.

Last week the UK government announced a public consultation on an additional £880m freed up from dormant assets, or unclaimed financial assets. Gordon cited the recent Adebowale Commission on social investment, which proposes a new £50m “Black-led” social investment fund.

For Gordon, initiatives like this perhaps show “the UK can also offer examples of innovation to our friends on the continent.” It has a “dynamic impact investing climate” benefiting from “its deep capital pools, it’s very global approach, and the very existence of the City of London itself.”

“Despite the challenges of Brexit, there are some examples of nimbleness in the UK now. One area where I see this is the marrying of social and environmental priorities. I believe the UK has been very innovative in its work on making sure there is a just net zero transition, and that we pay attention to the social implications of net zero targeting.”

“We do get involved in discussions on the impact investing space with European policymakers and MEPs. Most recently we’ve been working together on the ‘green plus social agenda’ working to integrate social considerations into environmental initiatives like the Green Bond Standard.”

“Working with other industry bodies and other actors in our space – that is how we’re going to get change to happen.”