In October Palatine completed the sixth investment from its Impact fund, which backs profitable businesses that have a clear, positive impact on society or the environment.
There’s been an undeniable growth in ethical or impact-focused investment over recent years. Palatine has placed a focus on ESG (environmental, social, and governance) strategy and evaluation across our buy-out funds for a decade.
Launching a dedicated Impact fund in 2017 was a natural evolution of this, because we saw demand from investors to put money into impact-oriented businesses which wasn’t being satisfied by existing funds.
This demand is being partly driven by attitude and demographic changes. In society at large there’s been a huge shift in awareness and concern about environmental and social challenges. This is changing behaviour – consumers and talent (increasingly want to work for and spend money with brands that demonstrate good ethics and more businesses and funders want to play an active role in being part of the solution.
Institutional investors like pension funds are also under pressure from pension holders to seek out more ethical investments.
This isn’t about philanthropy. There’s a growing recognition that significant value and market-rate returns can be created by impact funds. .
That’s why our Impact fund is based around the philosophy of ‘returns with purpose’.
We see a strong imperative around value creation from operating more sustainably and ethically.
What makes a good impact business for us comes down to investments that will produce returns, while tackling the macro issues society faces – be that reducing waste or addressing challenges like isolation, social mobility and wellbeing.
Being able to measure that impact is key. The businesses we invest in must have a clear evidence trail of making a difference, environmentally or socially. Post-investment we set impact-related KPIs across our portfolio and work constructively with management teams to achieve them, reporting back to investors on a quarterly basis.
These metrics will be specific to the business in question. For example, our portfolio company Trade skills 4U retrains adults to be electricians and so a key measure of impact that we monitor is how many of these learners go on to secure higher paid jobs.
If you went back ten years, some investors had an assumption that if they had a responsible investment policy in place that’s all they needed to do. That attitude may persist in some quarters but to be taken seriously today, you have to demonstrate solid metrics. That will only become more prevalent, and it will not be limited to impact funds.
Increasingly investors want to see that businesses are contributing positively to society and the environment, whether that’s a core part of their purpose or not. Are they limiting waste? What’s their wellbeing policy for staff? Are they looking in detail at their supply chains to make sure ethical practices are in place? These kind of questions are becoming more important in due diligence.
It comes down to risk and reward.
The risk of not focusing on ethical practices goes beyond failing to woo funders. We’ve all seen the negative fallout facing brands who are found to have ethical issues in their supply chains, for example, which can be hugely damaging to their reputations and knock investor confidence.
With a robust strategy, the rewards are enhanced value. Whether that comes through efficiency savings or the ability to attract and retain loyal customers.