Innovation & Access to funding in the UK

Lets discuss policy and business ideas about SME funding

[danaelman]

I watch women entrepreneurs pitch all over the world and they tend to gravitate to a magic number of 500K (regardless of currency) when the guys ask for over 1 million. And guess what? It’s just as hard to raise $500K as $1 million so you may as well go for the bigger number, and not have to raise another round 12 months later.

Anne Ravanona, founder of Global Invest Her

[danaelman]

I agree, it is challenging to make time for the strategic goals and look beyond the flow of day-to-day tasks. However, good management requires just that. Our choices on how to prioritise our goals and tasks matter to our productivity. Managers and especially the self-employed who have the intention to grow have to prioritise all the time. Here’s a good post on increasing one’s day to day productivity with valuable advice. https://www.linkedin.com/pulse/5-habits-charge-personal-productivity-sarah-marks-dip-digm/

[danaelman]

Proud to bring the voice of UK SMEs and represent their trade policy agenda at the World Trade Organisation (at Geneva, Switzerland) https://www.instagram.com/p/BodNRJ-h-lc4OzgdJjlj5ZXlPly8cmq4Ci1sbw0/?utm_source=ig_tumblr_share&igshid=l1zghzjwo7ld

[danaelman]

Are you a small business looking for finance in the UK? You’re probably in the right place

The UK is experiencing one of its most turbulent times, with a new minority Government, and inter-societal clashes on how to manage immigration flows. Coupled with the implications of exiting the EU, and a weak pound, there seems to be a growing need to re-focus the UK economy growth engines. Two of them should be to increase awareness to credit availability, and further supply growth capital. 

An innovative thinking approach is required to address the many challenges, and small businesses share this turbulence.

A small business in the UK, according to the UK's Companies Act 2006, is defined as one that does not have a turnover of more than £6.5 million, a balance sheet total of more than £3.26 million and does not have more than 50 employees.

Small businesses accounted for 99.3% of all private sector businesses at the start of 2016 and 99.9% were small or medium-sized (SMEs).Total employment in SMEs was 15.7 million; 60% of all private sector employment in the UK.The combined annual turnover of SMEs was £1.8 trillion, 47% of all private sector turnover in the UK (Federation of Small Businesses, FSB website)

In the second quarter of 2017, the UK Small Business Index, published by the FSB, shows that small businesses’ confidence drops for the first time since wake of EU referendum. UK small businesses suffer more than others the burden of price rises, driven by inflation.  

Economic indicators of the UK small business finance markets from 2012 to 2017 provide a mixed picture: On the one hand, the past nine consecutive quarters show that net bank lending to smaller businesses remains positive, according to the Bank of England. Furthermore, peer-to-peer business lending (for example, equity crowd-funding platforms) went up by 30% in 2016. On the other, from reading through the House of Commons’ First Report on Access to Finance (published in October 2016), and the British Business Bank’s (BBB) Annual report (2016), I find negative trends affecting the UK small business finance markets. For example:

•        BBB reports a declining loan application rate from 11% in 2012, to 6% in 2016.

•        38% of smaller businesses still went directly to their main bank when first identifying a financing need.

•        Only around 1% of SMEs have used equity finance between 2012-2015. VC and PE financing are associated with technological innovations, so not all SMEs are tech-driven.

•        Regional imbalance in scale-up funding: 58% of total equity investment deals concentrated in London and the South-East, and 69% by value respectively.

•        There is a regional imbalance in small business’ confidence in general. The need for equity investments to support growth and productivity across the UK, nationwide, is growing.

When trying to analyse what is the more important policy challenge for improving UK small business finance markets: supply or demand, I argue that one should look at each of the two markets – equity and credit – more closely.

The Private Equity Market

Taking a closer look at the Private Equity market only, one finds that “the UK lags behind many … global competitors, including other EU countries, in the proportion of SMEs using equity funding” (to read the full report of the House of Commons, see here the First Report on Access to Finance, October 2016). Evidence to support this finding shows the following:

•        Almost half (49%) of firms use banks or building societies for external finance, only 10% use equity (according to a poll by British Chamber of Commerce)

•        There is difficulty in meeting demand for UK venture capital of between £10 million and £25 million for firms looking to grow

•        Investors reported a challenge to find good businesses to invest in

•        The need for SMEs to be ‘investment ready’ hinders supply of equity financing

Market failures exist on both the demand and supply sides of the UK small business finance markets, but I identify that the more important policy challenge for improving UK small business equity finance market is twofold: (a) Lack of supply mostly at the scale-up and grow stages, as evidence shows SMEs are unsuccessful in accessing finance of £10 million to £25 million. However, for early stage tech entrepreneurs in the UK, accessing equity opportunities seems better than before. Hence, raising an equity investment is now competitive, when Londoners often compare the UK’s innovative tech scene to the US equivalent in Silicon Valley (however, London’s tech scene has yet to inspire a TV series). The BBB promotes various policy tools to boost the Venture Capital scene in the UK, by developing an Enterprise Capital Fund (ECF). It enables more VCs to raise new funds, and adds to other government and Mayor of London’s initiatives, such as the Technology Strategy Board, Tech City, the R&D tax credit scheme and Entrepreneur Visas.

(b) This is not a demand for equity challenge, because awareness of equity options for finance is growing. However, awareness in areas such as equity has not necessarily led to an increase in uptake of those options (see more on the House of Commons’ report).

 The Credit Market

Observing this market is a bit easier as evidence is clearer. A short analysis of commercial, non-guaranteed loans in the UK in 2016 shows that supply of credit experiences a positive trend.

Reported data from High-Street banks:

Lloyds bank  reports an increased net lending to SME and Mid Markets companies by £1.6 billion, but fell  short of the £2 billion Plan target (2016 Annual  report)

HSBC has set  up a £10 billion SME loan fund  for UK businesses (FT article,  18 April 2016)

RBS provided  SME lending to a  total of £30.1 billion in 2016, with an increase by £100 million from 2015 (RBS lending  data, RBS website)

Barclays provided around  £70 billion of loans to UK businesses, up  6%, and just over £3.6 billion to SMEs (2016 Barclays Annual  report)

With the establishment of the BBB, guaranteed loans have provided further supply of credit. Since inception, the BBB has generated an estimated additional turnover of £8.5 billion in small businesses across the UK, and around £3 billion of additional gross value-added in the economy. In 2015, the BBB supported £2.5 billion of finance to over 40,000 smaller businesses, and it participated in a further £3.6 billion of finance to small mid-cap businesses. Overall, the BBB is welcomed for its contribution to SME finance, with a consensus by House of Commons BEIS Committee, and UK business associations, including FSB, ICAEW, British Chamber of Commerce, Grant Thornton and others.

However, the challenge to fully observe the gap between supply and demand is challenging: “Calculating the gap between demand and supply for SME finance is complicated… and there is a clear need for the BBB to continue to gather intelligence on how the market operates.” (House of Commons report).

As shown above, asymmetric information is on the decline, and risk of SME lending is better understood today among creditors. It seems that UK policies have gradually improved supply of credit. This is not to say that the supply side is to be neglected, so the positive trend in supply of credit finance should be maintained. However, in the SME credit market, the market failure in demand is more critical to address. With growth in awareness of different financial products is slowing, and information barriers and perceptual barriers are growing, the demand for credit should be on the new Government agenda.

To conclude, the new Government should address the following priorities: (1) demand for credit, and (2) supply of equity to scale-up for fast growth SMEs including. With the upcoming exit from the EU market, everyone is eager to know what the future will bring to the UK. 

UK Government is exploring further schemes to promote partnerships across international non-EEA borders. As of today, the UK has increased collaboration with some developed countries such as Israel, and other developing countries as supported by DFID budget. It is the right timing for UK small businesses to consider new partnerships to expand trade, talent and relationships with international partners. The UK economy’s future growth depends on it. I look forward to observing the next steps by Government to advance the UK’s small business growth as part of its new agenda.

[danaelman]

My research is now available in print and online, in the 2017 edition of LSE Public Sphere Journal. It's an evidence-based paper on UK pensions' growing engagement with social impact investing http://publicspherejournal.com/previous-issues/

[danaelman]

What do UK and EU investors say about Trump’s voice on Climate Change?

Trump’s federal pledges- how will he play the environmental change strategy given state policies? And does it really matter? Who else can affect the market?According to a recent Bloomberg New Energy Finance publication, the US has recently pledged $3bn over four years to the Green Climate Fund of the United Nations as part of a commitment under the Paris climate accord. Moreover, the US has only a couple of weeks ago contributed $1bn to the fund to help poor nations develop clean energy and cope with the impact of global warming.

However, BNEF reports that Trump has vowed to cancel future payments to the fund and redirect them toward projects in the US, while hoping to reduce the pressure from the coal industry. So far, barely two weeks in office, it seems he’s acting accordingly.

But the picture is a bit deeper than shown by headlines in the media. Back in November 2016, I recall the morning that that the world discovered Trump was elected, and I attended an event with a small group of UK’s largest asset managers. Our discussion was on the future of their social and environmental investments. These investors manage billions of pounds for their clients, and they were motivated to further grow these types of investments. They showed concern with Trump’s anti-Climate Change stance, but overall presented a positive forecast that their investments in clean energies would grow. The basis for this was the argument that US states have the mandate to set regulation on environmental change and clean energy. So far, several US states have shown positive progress, and there’s no federal mandate to withdraw these pro-Climate Change policies (i.e. acknowledging Climate Change is a real challenge that should be addressed). 

So what does it mean? Well, my first take-away is that we should monitor current states policies, and not rely only on US federal actions. President Trump cannot trump it all. 

More interestingly, earlier this week (30 January), the Financial Times published a piece that pleased me. A Luxembourg pension fund blacklisted Volkswagen on the basis of environmental wrong-doing. This action brings a significant change in the legitimacy of investors (specifically those who have a very deep pocket) to have their say on how businesses consider environmental risks. My second take-away is: the market signaled once again that keeping the environment safe is important to investors. 

Lastly, government is not the only place we should be looking at. Yes, government is a key player in each economy, but there are other key players that may have larger affect. This is an era where institutional investors play a larger role on the environmental front. Making smart decisions requires taking responsibility. When a pension fund excludes Volkswagen for the environmental reason, we should all be carefully optimistic. Positive change is taking place, because more capital is channeled towards responsible investments that do not harm the environment. Quite a difference! I hope to hear about similar long-term investors withdrawing millions of Euros and Dollars and British pounds from businesses that do not care about their environmental implications. 

[danaelman]

FinTech solutions help business to shape our impact on the environment

The Good Money Week is currently taking place in the UK, and I attended an interesting talk in the City on innovating the finance industry. This industry looks after all our cash, savings and investments, and I guess we all agree that it is important monitoring where our investments go to.

Where does your bank invest your savings? It’s often time-consuming and difficult for each of us to monitor the directions of our savings. I find it quite comforting to learn about the growing voice within the industry for responsible investments by banks and financial institutions. As I mentioned in previous posts, this voice calls for using our money to avoid causing more problems to our planet or societies. Check out The Finance Innovation Lab as an interesting advocate.

And the easiest example to avoid causing environment problems is by investing in sustainable projects and companies.

I recently learned about Abundance, a peer-to-peer investment platform that focuses on renewable energy investments. It’s an equity-crowdfunding platform that cuts through the middle-man / Venture Capital so that individuals, like you and me, could engage with value-creating companies. Take for example the company Living Power. Living Power is using recycled cooking oil to quickly generate power for the grid when there is a surge in demand. It raised £2.5 million in total, from 615 investors on the platform, and it offers a fixed 8% return over the 7-year life of the investment. It intends to use the money for refinancing 4 operational bioliquid plants that produce electricity from high quality, low-intensity processed waste cooking oil.

With such a cool platform like Abundance, I am optimistic that technology shall increase access to finance for many value-creating companies. Have you heard about more interesting platforms? If you want to, feel free to PM me on LinkedIn.

[danaelman]

Is the Israeli biennial fiscal budget effective?

Israeli government’s two-year (=“biennial”) policy was first introduced in 2009 and led the fiscal budget covering 2009-2010. Since then, Israel’s Prime Minister Benjamin Netanyahu has been supporting justifications of maintaining the biennial budget despite wide political discord. Regardless to political controversy, I was wondering what is the impact of Israel’s biennial budget on government expenditures. Fortunately, while studying at LSE I had the opportunity to measure its impact.

In my analysis I use a proxy, and Israeli Ministry of Economy’s budget planning helped me to understand the impact of government’s biennial budget. Interestingly I found that after the introduction of Israel’s biennial budget, fiscal planning for the Ministry of Economy was improved. Average actual expenditure (over budgeted expenditure) grew from 77.8% to 78.5%. This is an improvement because the Ministry of Economy’s actual spending has been much lower than its appropriated budget for years. During the period 2004-2013 the Ministry’s appropriated budget was valued to total amount of ILS 57.5 billion (USD 14.9$ billion) but ILS 13.3 billion (USD 3.5$ billion) were not spent during these years despite the ministry's potential spending. Though no causal relationship can be firmly concluded, the Ministry of Economy’s actual expenditures grew in correlation to Israeli government biennial budget reform. 

What is it all about?

Since 2008, when Israel joined the OECD developed-countries club, the Israeli economy grew at a real annual average rate of 3.5 percent (Ben-David, 2014). The biennial budget was introduced by the Israeli Ministry of Finance in 2009, amidst the global financial crisis and in times of national political instability. On July 15, 2009 the Knesset, Israeli Parliament, confirmed for the first time in Israel’s history a biennial budget to the consecutive years 2009-2010. The major reason for the fiscal reform was driven by volatile political circumstances, instability of the governing coalition of the 2009 election and short horizon for the fiscal budget.

The implication of introducing the biennial budget was to allow the new government then (formed on March 29, 2009) to reduce costs and time in planning both the 2009 budget and the following year’s budget for 2010 in a short period of six-week time (Rolf, 2009).

The Minister of Finance at the time, Dr. Yuval Shtaynitz, announced the reform and argued that the goals for transforming the budget from annual basis to biennial were threefold (Katzovitz, 2012).:

(1)   ensuring Israel’s economic growth,

(2)   improving fiscal management for compliance with the deficit goal and

(3)   increasing efficiency of the budget planning and implementation

 The first budget under this approach covered 2009-2010 and the second covered 2011-2012. Due to continuing political instability, the third biennial budget remained, covering 2013-2014 when the previous Minister of Finance Mr. Lapid took office. The total budgeted expenditure for the entire government for 2013 only was ILS 139.8 billion (USD 36.3$ billion) (Ministry of Finance, 2015).

On September 2014, the government has approved the new 2015 budget, and planned for returning back to an annual budget. However, due to the government dissolution immediately after September and no formal Minister of Finance in office until last election (when Mr. Kachlon took office in March 2015), the fiscal budget eventually did not return to an annual basis. De facto, Israeli fiscal budget is still biennial to this day with current government despite public controversy.

Economic Background

Positive economic performance is crucial to Israel for various reasons. Despite its political instability and defense challenges, Israel has succeeded to attract foreign direct investments, mostly for its innovative High-Tech industry which grew through the Chief Scientist policy in the Ministry of Economy (Ben-David, 2014).

Israel's key economic indicators of real GDP and fiscal balance as percent of read GDP have been significantly better than the OECD average from 2005 to 2009, according to these OECD graphs from a 2011 publication.

However, a closer look at Israel's fiscal balance over the years shows it has not been relatively positive. An advanced analysis of the Bank of Israel (BoI) found that deficit targets have been missed and reset on several occasions (further details in Bova et al., 2014). Over the last twenty-two years, targets were revised about fifteen times and were also often missed largely owing to growth shocks, which caused revenue shortfalls.

Political controversy

Aside from one or two exceptional circumstances, no other OECD member-country has ever adopted a biennial budget in central-government budgeting (Rolf, 2009). However, it has some popularity in twenty states in the USA and gains some support with international organisations. Various studies analysed the advantages and caveats of annual and biennial budgets in the United-States but show no significant advantage of one method over the other.

Proponents for the biennial budget argue it has three major advantages (Rolf, 2009). A biennial budget (1) supports long-term government planning, (2) allows a wider time framework for analysing and evaluating programmes and projects by the government and legislators, and (3) reduces costs and time spent on planning and confirmations (both by government and legislator). However, the main limitation for the biennial budget is not being dynamic and relevant in the second year. The planning of the biennial budget is based on forecasts, similarly to the annual budget. However, these forecasts may be inaccurate and require a series of updates to the second year of the biennial fiscal cycle.

There is consensus on the uniqueness of the biennial budget in the fiscal perspective. Consequently, the decision to introduce it, as well as later decisions to keep it during the past years, are still heatedly debated in Israel. But evidence from fiscal policy analysis of the Ministry of Economy Budget During 2004-2013 shows that the biennial budget is correlated with better matching of budgeted expenditures and actual expenditures.

Data Analysis of the Ministry of Economy's Overall Budget

My policy analysis evaluates the Ministry of Economy's main spending trends in light of the biennial budget first introduced in 2009, and seeks empirical evidence to find whether the biennial budget increased the Ministry of Economy’s efficiency of budget planning.Examining trends in the ministry’s budget planning and actual expenditures from before the biennial budget was introduced and after, I argue that the Israeli biennial budget increased the ministry’s efficiency. In other words, I found improved match between budget planning and spending by allowing the ministry to better match its overall budgeted and actual expenditures. Keeping constant all other potential explaining variables (mostly, the recovery from local economic shock of 2003, global economic shock of 2008, defense operations, and increasing fragmentation of political electorate), I evaluated the ministry’s actual expenditure over the budgeted expenditure based on quantitative data analysis from 2004 to 2013. Data of all line-ministries' budget original appropriation and actual spending are published online, annually, by the Ministry of Finance website (Ministry of Finance, 2015).

What is the difference between Total Budgeted Expenditure vs. Actual Expenditure?

The Total Budgeted Expenditure is calculated by the sum of the following two sub-components: 

Budgeted Expenditure includes Expenditure and Revenue-Dependent Expenditure.

Spending Authorization includes the maximum amount on which the government is allowed to commit upon, for a given year. This mechanism enables the government to plan for the following year. 

Actual Expenditure data are also published by the Ministry of Finance.

 Findings

From 2004 to 2013, the Ministry of Economy spent on its core policies a total aggregate amount of ILS 44.2 billion (USD 11.4$ billion as of June 30, 2016).  However, the ministry's budget during this period of time was appropriated with a much larger budget of the total amount of ILS 57.5 billion (USD 14.9$ billion).

This analysis shows that ILS 13.3 billion (USD 3.5$ billion) were not spent during these years despite the ministry's potential spending.

In my data analysis on Israeli Ministry of Finance accounts I find that on average, the ministry spent 77.8% of its budget every year. The following figure shows that the ministry has been missing the budgeted expenditure target every year.

However, when observing for average actual expenditure of the ministry before the biennial budget was introduced and after, I find that the ministry's actual spending reflects a positive trend. After 2009, when the biennial budget was enforced, actual expenditures have increased.

The following figure shows that on average, actual expenditure over budgeted expenditure has increased after 2009. 

From 2004 to 2008, average of actual expenditure over budgeted expenditure was 77.2%, while in the years following the introduction of biennial budget (2009-2013), average of actual expenditure over budgeted expenditure was 78.5%. 

To conclude, despite various potential explaining variables, on aggregate the ministry's actual expenditure was closer to the budgeted expenditure target after the biennial budget reform.

These were my top policy insights:

From 2004 to 2013, the Ministry of Economy actually spent on its core policies a total aggregate amount of ILS 44.2 billion (USD 11.5$ billion).

This actual spending is much lower that the Ministry’s appropriated budget. During this period the Ministry’s appropriated budget was valued to total amount of ILS 57.5 billion (USD 14.9$ billion).

The Ministry’s appropriated budget of ILS 13.3 billion (USD 3.5$ billion) was not spent during these years despite the ministry's potential spending.

On average, the Ministry spent 77.8% of its budget every year. This implies that the ministry has been missing the budgeted expenditure target every year.

After 2009, when the biennial budget was enforced, actual expenditures have increased.

From 2004 to 2008, average of actual expenditure over budgeted expenditure was 77.2%. During 2009-2013 the years following the introduction of biennial budget, average of actual expenditure over budgeted expenditure was 78.5%.

On aggregate the Ministry's actual expenditure was closer to the budgeted expenditure target after the biennial budget reform

Israeli Ministry of Economy better matched its overall budgeted and actual expenditures after the government introduced the biennial budget.

[danaelman]

LSE supports creativity...

Thank you LSE for supporting this new legacy to students like me- interested to experience due diligence on an impact investment deals before graduation http://blogs.lse.ac.uk/ipa/2016/06/17/achieving-my-dream-participating-in-the-miint-competition/    

[danaelman]

Can investors really do good while doing well?

Investors have been recognizing their power to support sustainable economic development while making profits. They do so by factoring social, environmental and governance (ESG) risks in their decision-making process before each investment. Who are these investors? Why is it important to them? And most interestingly, is there enough transparency of financial information for investors to efficiently factor ESG risks?

UK and US institutional investors such as banks, pension funds, or insurance companies make substantial investments in millions and billions of dollars. They have established various collaborative initiatives to promote “responsible and sustainable” investment and finance. The first ones were the US Social Investment Forum (from 1981), the first UK retail ethical fund (1984) and the UK Social Investment Forum (UKSIF) in 1991. The UKSIF’s mission is to “promote responsible investment and other forms of finance that support sustainable economic development, enhance quality of life and safeguard the environment… and to ensure that individual and institutional investors can reflect their values in their investments.”

An important initiative that affected the global and UK financial investment industry is the UN Principles for Responsible Investment (PRI). Signing the PRI initiative’s six principles is to self-voluntary recognize that one’s investment decision process should at least protect value by factoring ESG risks. That is also considered ‘negative screening’ where an investor does not invest in specific industry that is known to be harmful and often includes producers of tobacco and alcohol or weapons. 

Unlike negative screens, which are generally more black and white, positive screens entail an analysis of complex issues. For example, before buying stocks of Royal Dutch Shell plc, the exploration and oil giant which reported 265 billion USD in revenues (2015), an investor who signed the PRI initiative and employs positive screening would employ ESG screening standards to look at Shell through three criteria: Environmental- how Shell performs as a steward of the natural environment in its immense gas project on the Russian island of Sakhalin? How did it manage the heavy allegations of causing devastating damage to the island’s natural forestry and landscape? Social- how does Shell manage its relationships with Russian suppliers, customers and employees in Sakhalin? How does it treat the communities living in the island? Governance- how does Shell’s leadership deal with shareholders’ rights, executive pay and audits and internal controls? This is Shell in only one of its top projects, but you get the picture.

In 2015 the Six PRI principles had more than 1,400 signatories from over 50 countries representing 59 trillion USD of assets that are committed to ESG factors (PRI annual report, 2015). As of May 2016, 220 institutional investors in the UK signed the PRI initiative: 44 asset owners, 143 investment managers and 33 financial service providers. Today, signing the PRI initiative signals a level of sophistication so joining as a signatory is similar to being accepted to a prestigious club.

Sustainable investors

Others institutional investors in the UK have advanced this socially-conscious strategy and gradually transitioned their ESG screening process from “responsible” investments to “sustainable investments”. A sustainable investor is one who actively pursues ESG opportunities with a focus to “adopt progressive ESG practices that may enhance value” (Bridges Ventures’ Spectrum of Capital, 2015).  Alternative forms of energy that produce less pollution, such as solar power and wind power are leading many investors to actively pursue sustainable environmental opportunities.

The next step: Impact Investors?

Too early to say. This is a big step that most investors have yet to do. It is a hot topic in the last few years since the financial crisis, because investors are held to stricter as well as socially positive standards of investments to avoid damaging society (Grabenwarter & Liechtenstein, In search of Gamma – an unconventional perspective on impact investing, 2011). This means that ESG standards of screening (for either negative or positive) investments are not sufficient to some investors, and they intentionally seek to make impact investments. Impact investment are “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return… and target a range of returns from below market to market rate, depending upon the circumstances” (UK National Advisory Board report to G8 Taskforce for Social Impact Investment, 2014). In simpler words, it requires an investor to do a lot of work in the due diligence process because the investments’ environmental or social impact should be planned and measured carefully. This is hard work, and many do not know how to do it yet.

Since 2009, the range of impact investment products has become relatively broad and offers secured and unsecured lending, quasi-equity, equity and Social Impact Bonds (UK NAB report). Last year, in 2015 BlackRock and Goldman Sachs, two of the biggest global investment managers, signaled that their clients find interest in the impact investment market, according to the GIIN 2016 Impact Investor Survey. This entry of distinguished top investment managers is one step further in the transition from responsible investors to sustainable ones, and lastly to impact investors. This means that impact investing would be an investment strategy that is employed alongside other investment strategies. Great news, right?

In my opinion, yes. I find this gradual evolution of investment managers’ decision-making process as a positive signal that the financial services industry commits itself to take higher responsibilities for its impact on environment, society and standards of governance in invested companies. 

However, as impressive as this may seem, we (the public) cannot know if this is genuine, and not just a lip service. But investors who hire investment managers to invest for them know if they indeed screen their investments according to ESG standards, right?

Not entirely.

ShareAction, a UK charity promoting responsible investments, found in its 2015 Asset Manager survey that the quality of self-reporting on ESG practices and disclosures vary considerably between asset managers. In other words, the PRI reporting standard does not ensure quality of transparency on how investment decisions are made. 

Luckily, investors push for better transparency with time. Investors care more about sustainability issues than many executives believe, according to BCG’s seventh sustainability report in collaboration with MIT Sloan Management Review. The consultancy’s 2016 Sustainability & Innovation Global Executive Study surveyed more than 3,000 managers and investors in organizations from over 100 countries. Apparently, managers’ perceptions of investors are out of date because a majority of investors (75%) are paying attention to ESG performance.

Needless to say that not all ESG information is created equally in the eyes of the investor. An investor considers any factor that can have a significant impact on a company’s core business value drivers – specifically growth, profitability, capital efficiency and risk exposure – to be financially material. BCG’s study found that only 60% of managers in publicly traded companies believe that good sustainability performance is materially important to investors’ investment decisions. This gap between investors and business managers shows that ESG screening is not efficient yet, because information about ESG factors of a company is not communicated to a level that satisfies investors. This study provides important and robust evidence that sustainability-related activities are material to the financial success of a company over time. It is time for everyone in the investment realm to acknowledge that.

Obviously it is positive for the economy that most investors often request socially-responsible and better yet, sustainable investment strategies from their proxies – investment managers and businesses. But there is still room for improvement to increase transparency. Better information should be communicated from businesses to investors when reporting on ESG performance and from investment managers to investors (asset owners) when monitoring ESG standards. And again, I conclude with an eye to call policymakers to take action, as those who have the power to make these (small but important) changes happen.

[danaelman]

Dissertation for LSE MPA is done. My findings are relevant not only to the UK Social Impact Investment market but also to policy for efficient and transparent capital markets.

[danaelman]

Where would global pension funds invest (our retirement funds) by 2020? 

 The global consultancy PwC argues that global Assets under Management (AUM) are expected to rise to approximately $102 trillion by 2020, from a 2012 total of $64 trillion. The figure shows PwC’s study “Asset Management 2020: A brave new world” which finds that global AUM growth will be driven by pension funds, insurance companies, High-Net-Worth-Individuals (HNWIs) and sovereign wealth funds.

The global Social Impact Investment market is a strong candidate for pension funds. But as I’ve read through the 2016 Global Impact Investing Network (GIIN) annual survey, I was disappointed to find that only 2%-3% of respondents are pension funds or insurance companies. In 2015 their planned sum to commit was estimated at only $600m. The global impact investing industry channels private capital to deliver social change for undeserved populations and I believe that it deserves more resources and a clear policy so that it can grow.

It’s time that governments carefully plan where they want to see pensions’ investments channeled to. Designing a clear policy today is the tool to address this challenge before 2020.

[danaelman]

Lets discuss Policy & Business Insights for the 21st Century

My interest in the power of policy, business and information networks has always been strong. I began my career as a legal intern at the Ministry of Justice of Israel after I graduated from law school. Since then, I have been pursuing positions in the consulting environment that work in the realm of policy and business. 

As part of my studies at the policy- and  economics- focused Master of Public Administration (MPA) progamme at LSE I chose to analyse topics that I care about, from SME Finance and Social Impact, through policies in Israel, EU, US and UK to Responsible Business and Sustainable Investments. 

As an experienced policy specialist and business consultant, I advised one of the top banks in Israel on market segmentation. Later, I played a vital intermediary role at the Manufactures Association of Israel (MAI) between policymakers and the private sector. There I coordinated with the suppliers of finance (bankers and investors), policymakers (government and Parliament) and SMEs that demand access to finance. Since I moved to London in 2014, I have been engaging with disruptive finance and specifically with the UK Social Impact Investing industry, mostly with its finance and policy practitioners. 

Now, with my LSE education and international experience, I feel it is time to share few insights about policy and business practices that shall hopefully improve the society in which I live in. 

I hope you’ll enjoy reading my Policy & Business blog. I encourage you to share your views and comments so we could learn from each other.

Welcome to my blog.

Dana