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UK Banks, the City and the Elephant in the UK Social Investment Room

by Rod Schwartz

I liked Ed Miliband when he was Minister for the Third Sector – I thought he interacted well with our sector with genuine interest, sincere intent and good humour.   Frankly, I feel similarly about the current Minister, Nick Hurd.   But this piece is not about my personal affinities – it is about UK banking, the trouble it continues to find and a potential escape route from such difficulties.

For banks to turn their considerable talents, resources and financial assets towards social impact investment is in their reputational interest, their financial interest and the broader UK national interest.   Their singular failure to do so must be one of the most puzzling strategic non-actions by UK-based financial institutions since the crisis.

First, let me make one thing very clear: I am opposed to Miliband’s recent proposals to cap the market shares of retail banks.   His claim that a Labour Government would not institute crude caps and leave this to the Competition Commission strains credibility. Furthermore, speaking as an ex-bank analyst, there is something deeply troubling about these caps.   In a sense they say to the banks: “If you are really successful and gain market share, we will force you to sell off branches and disenfranchise customers”.   How does that encourage competition? In fact, it does quite the opposite.

The Coalition Government is already presiding over a dramatic increase in competition among big banks.   TSB was spun out of Lloyds Bank with over 4% of the current account market.   A consortium led by Corsair (and partly backed by the Church of England) will buy some RBS branches and launch them as Williams & Glyn’s Bank (an old name reborn).   Virgin Money was allowed to acquire the failed Northern Rock, and Banco Santander UK – formed by the acquisitions of Bradford & Bingley, Alliance & Leicester and Abbey National – has become one of the UK’s largest banks. We have also had the recent addition of Metro Bank.   If anything, competition has not had the potential to be so robust in many years.

Moreover, there is a curious “convenience of memory” in lambasting the current Government for concentration in banking.   The four mergers that caused the UK to be so top-heavy in banking were: the 2000 purchase by RBS of NatWest; the 2001 merger of Halifax and Bank of Scotland; and the two 2009 deals of Lloyds/HBOS and RBS/ABN Amro.   Labour was in power from 1997 to 2010 and the two large UK banks that had to be rescued were Lloyds/HBOS and RBS.   Enough said about that.

Yet this is by no means a party political piece – I certainly don’t think the Labour Party has a monopoly on terrible ideas in the banking sector.  In a recent piece, we lambasted the Coalition for its attempts to boost indebtedness.

Given that the banks are under fire, you would think that they would grab hold of any branch with which to pull themselves out of the mire.   Getting more actively involved in social impact investment presents precisely such an opportunity.   The UK is a clear global leader in this field, which we can be very proud of – experts come from all over the world to study our path to relative success.   Both Labour and the current Government have been massively supportive with funds, facilitative legislation and tax breaks (with more coming – like SITR).

We benefit from substantial catalytic funders in the Big Lottery Fund and Big Society Capital (BSC), a Social Stock Exchange, a host of ethical banks and other investment intermediaries – as well as panoply of flexible corporate forms that make it easy to achieve the optimal blend of impact and return for each project.

The UK is the epicentre for social finance, and London is its focal point – yet ironically the mainstream UK City financial institutions have been cautious, if not completely absent, as investors.  This is a major obstacle for the sector’s growth, and it is the elephant in the room of social investment.   It is embarrassing, odd and contrary to the interests of financial institutions, their shareholders and the wider UK economy.

In the past six months there have been a flurry of announcements of new funds beings formed in this area.   AXA Investment Managers, the subsidiary of the large Paris-based insurer, set up a EU150m social impact fund of funds from its own financial resources, whilst Goldman Sachs has recently launched a $250m social impact fund investing client money in project such as affordable housing and pre-school education.  Morgan Stanley has also established large sustainable finance funds, while JP Morgan has a longstanding presence in this field.   These firms join UBS, Deutsche Bank and the Dutch financial establishment, which all have embraced the social impact space years ago.

Note the pattern: France, the US, Switzerland, Germany and the Netherlands – where is the City?   In the UK there has been some recent involvement, but it is being driven by the distinctly non-City based local authority pension funds.   Investing for Growth is an initiative of several Northern local authorities, which are investing £250m in “delivering positive economic impact”.  In a recent blog post, we noted that one outer London local authority, Waltham Forest, invested into IVUK (an impact investment fund seeded by BSC and advised by ClearlySo) – British yes, but hardly the City.   It was ironic that, other than Waltham Forest, the main participants in the first close of over £20m were based in Switzerland, Germany and the Netherlands.

Leading UK-based financial institutions are not completely absent, in fairness.   The so-called “Merlin Banks” made £200 million of loans to BSC, although there is some debate as to whether or not this was really voluntary. The other £400 million also can be said to have come via the banks, as it was comprised of unclaimed depositor assets–also hardly voluntary. There are financial firms funding social enterprises and sponsoring sector projects and some private equity firms have dabbled in impact investing, but these engagements have been mostly marginal.

I am tempted to run through some of the specific involvements, but this piece is not about blaming and shaming individual City banks.  The point is that the City’s relative absence from direct involvement in impact investment is irrefutable and lamentable.  It weakens London’s claim to be the global centre for social investment – and this is despite the commendable efforts of the City of London Corporation, Ministers and Big Society Capital.

Frankly, I just do not get it.   For a sector viewed so negatively by the general public, you would think that they would grasp at any opportunity to prove they can make a positive and visible contribution to society.

Let us leave the potential reputational gains aside for the moment.   Given how hard City institutions have worked to bring the offshore renminbi market and the Sharia-compliant Islamic Finance market to London, you would think that they would seek to undertake at least some effort to sustain a market that is already based in London and was actually created here. And this market is expected to grow at 40% per annum – how many financial sub-sectors can make this claim?

I also believe there is strong client interest.   The aforementioned AXA Investment Managers have found that, after launching their self-funded fund-of-funds, substantial client interest presented itself (in the interest of full disclosure, I was on their Board from 2004 to 2010 but, regrettably, cannot claim any credit for this AXA IM move).  Are UK clients, or the global clients of City-based UK financial institutions, so different?

Let me make a direct plea.   I call on the London-based UK financial institutions – the City – to incorporate social impact into what they do and to invest directly into socially impactful funds and investments.   This applies to banks, investment banks, insurers, private equity firms, the venture capital industry, fund managers and anybody else I have missed.   I believe it is in the national interest, the interest of the City of London as a global financial centre, your reputational interest and the financial interests of yourselves and your shareholders – so please get off the side-lines and get into social investing.