Ethical standards make you a better capitalist

"Usually when nobody has done it before and there is a lot of money to be made, it is either a stupid idea or a very good idea," says Oliver Niedermaier, chief executive of Tau Investments, which offers "capitalist solutions to capitalism's failures".

Tau is raising cash for a private equity fund that will intervene in the garment trade's supply chain to improve factory conditions and thereby, in theory at least, deliver significant returns to investors.

It is one of a growing number of investment managers, particularly in the private equity field, that see impact investing as a means to drive returns rather than a risk-management activity.

"We are purely profit driven," says Mr Niedermaier. But his chosen mechanism for turning businesses around is to improve workers' training and conditions, ensure factory buildings comply with safety standards and make the supply chain transparent for large brands reliant on low-cost labour in distant countries. This ticks many boxes on socially responsible investment compliance forms.

Since the Rana Plaza disaster in Dhaka, Bangladesh, when a building collapsed, killing more than 1,000 people and injuring more than 2,000, mostly garment workers, the developed-world clothes retailers that use such suppliers have come under pressure to make sure they are not putting their workers at risk.

Tau was already scouring the industry for investment opportunities. This pressure is just an additional impetus for what it sees as a chance to create strong returns for investors. "We ultimately want to build better businesses and more resilient supply chains," says Mr Niedermaier. "Whether we want to improve things or are just motivated by greedy capitalism and a desire for profit doesn't matter, the outcome is the same."

For Michele Giddens, partner and co-founder at Bridges Ventures, this is "investing with an impact lens". Although the primary purpose of Bridges' private equity and property funds is to deliver returns to its investors, they use the principles of impact investing to seek out investment opportunities.

This means looking for investment themes such as healthcare or leisure that deliver social good, and finding companies in these sectors that deliver high-quality jobs in areas of low employment. The concept has become increasingly popular with institutional investors, which have made up a higher proportion of each round of funding raised.

Bridges Ventures closed its third fund in October 2013 with £125m, well above its target of £100m. About 80 per cent of that came from institutions, compared with a third of the funding for its first fund. The increase comes from new investors as well as larger allocations from existing investors, says Ms Giddens.

While many private equity investors have long been convinced the practice of investment with respect to environmental, social and governance issues can be a powerful risk-mitigation tool, the idea of searching out responsible investments for their business sense is relatively new.

Traditionally it has been assumed there is a trade-off between ethical behaviour and profitable investment but this may no longer hold.

"It is not a trade-off between money and meaning - it is a synergy," said Andrew Kuper, president of Leapfrog Investments, in a recent online interview with McKinsey, the consultancy. "Since the Industrial Revolution, this notion of a trade-off that has been practised has actually been a fetter on humanity." Leapfrog invests in financial services companies serving communities that lack access to formal banking or insurance.

"Profit-with-purpose investing is going to be the next venture capital, the next alternative investing," says Mr Kuper.

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While a cynic might say these investment managers all have an interest in pushing their products, there are other signs that such ideas are becoming mainstream.

Last year, the G8 announced the creation of a Social Impact Investment Taskforce, led by UK social investment pioneer Sir Ronald Cohen, the founder of private equity firm Apax Partners and chairman of Big Society Capital, the investment bank. The task force will facilitate the creation of international standards and raise awareness of impact investing.

These developments may be driven by changes in public opinion at a very fundamental level, according to a report from the World Economic Forum Investors Industries. Research found a generation known as Millennials, those born after 1982, are more likely to see the improvement of society as the primary purpose of business, rather than profit.

If this generation makes spending and investment decisions in line with its declared values, it could make impact investing of the sort Tau, Bridges and Leapfrog are doing conventional.

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