Vanessa Morphet tells PMP about how the Church’s social impact fund is building up its allocations across social housing and climate change adaptation and resilience
The Church of England Social Impact Investment Programme was established in 2020. It targets specific areas of deep social need using repayable finance and seeks to catalyse institutional capital in innovative approaches. Vanessa Morphet, head of social impact investment, joined the Church to set up the programme.
The Church Commissioners manages a £11 billion endowment, which it invests to generate a return that supports the business of the Church in perpetuity. From this, the Church Commissioners granted £25 million to the Archbishop’s Council, a delivery charity of the Church of England, to finance the programme.
The fund is in its pilot phase. It has committed just over half of its capital, and just over half of these commitments have been deployed. It is in the process of investing the balance and monitoring the impacts of its investments.
Morphet previously led on social impact investing policy at the Government Inclusive Economy Unit and has a worked at Goldman Sachs, Arma Partners and Wellington Management, and in venture philanthropy, where she was an investment director at Impetus.
Please tell me about the programme’s objectives and strategy.
We have very clear impact and financial goals. As we sit outside the Church Commissioners, and its fiduciary responsibility, we can take a different view of financial returns and target specific social impacts.
We focus on capital preservation, in line with long-term inflation expectations. Our capital is onward-invested rather than onward-granted, enabling the programme to be self-sustaining. We are also a patient investor, as this approach is needed to tackle deep social and environmental challenges. We typically invest for 10-year terms.
How does the programme create social impacts?
Morphet: Our core aim is to address key social challenges in the UK in a way that reflects the mission of the Church. We do this across three key themes. Firstly, housing for the vulnerable. Secondly, supporting communities to thrive, which is focused on particularly vulnerable communities. Thirdly, a just energy transition, focusing on specific benefits to local communities across mitigation, adaptation and resilience.
How do you identify vulnerable communities?
Morphet: We select fund managers that have core expertise in housing, charities and social enterprises, or work with particularly vulnerable communities. These managers utilise impact frameworks with concrete metrics. For example, the proportion investment that goes to the 40% most deprived areas in the index of multiple deprivation.
Are such fund managers able to produce commercially competitive returns?
Morphet: Institutional investors predominantly invest in social and affordable housing funds that have reached the scale that makes it feasible to invest efficiently.
We tend to invest alongside other investors, some of which are large. For example, Man Group Community Housing Fund III is a larger fund that attracts institutional capital at a significant scale. We’ve also made investments in two transitional supported housing funds that are building in scale.
Social and affordable housing has an established a track record of returns that are commensurate with investors’ fiduciary responsibilities. The challenge is around the period of time individual funds can be effectively evaluated. There can be higher perceived risk when the investment approach is new or the fund manager is still building its track record.
We focus on investments that deliver clear and demonstrable social or environmental impacts in a cost-effective way.
Vanessa Morphet, Church of England’s Social Impact Investment Programme
Part of our role is to catalyse seed and scale capital for new approaches. We do this by helping managers to establish track records for their funds over longer periods. For example, we’re an investor in the Social and Sustainable Capital Social and Sustainable Housing Fund II, which has an innovative approach to financing charities and social enterprises that allows them to own housing assets.
The government is responsible for social housing. Why is social investment also needed?
Morphet: All major social challenges – such as housing shortages and climate adaptation and resilience – need a combination of private and government finance. For example Homes England grants play a critical role in driving housing affordability. We look for managers who can access relevant government grants and subsidy..
Are commercial institutional investors also making social investments?
Morphet: There are many examples among large institutional investors. For example we invested alongside London CIV in the Man Group fund. Some of our peers are focusing on the emerging place-based investment theme, which we are starting to see among LGPS and other institutional investors seeking specific social impacts.
Should pension schemes factor quality of life issues into their fiduciary duty?
Morphet: Social challenges will require both private and public investment. There are many opportunities to make investments that address social challenges while meet fiduciary responsibilities. Funds that alleviate challenges like the housing shortage create wider economic benefits, which in turn should support the whole portfolio.
How do you measure impacts?
Morphet: It is important for sector-specific impact frameworks to be developed. Better Society Capital, alongside The Good Economy, has created an approach to measure impact in social and affordable housing, which provides a very useful way to compare providers.
One of the challenges is that impacts often happen over the long term. We start with an output, such as a house, and then an outcome, such as a tenant in that house. Further down the track, the impact is the improvement in the tenant’s wellbeing and productivity, which takes time to play through. We look for managers that measure impacts over the long term, not only short-term outputs and outcomes.
Is there any political risk involved?
Morphet: Policy change is a risk for any investment. For example In housing, there is policy risk on the revenue side, in housing benefit, and support side, in Homes England grants.
We focus on investments that deliver clear and demonstrable social or environmental impacts in a cost-effective way. In areas of real need, there is probably a bigger chance of policy being stable.
Are there any other non-financial risks that investors need to consider?
Morphet: Impact risk is the key thing to think about, which depends on organisations on the ground. Housing associations, charities and social enterprises deliver the housing that creates the impact. It’s important to work with managers who understand the challenges in their operating environment and organisations that are best equipped to implement. The sector operates on tight margins and economic changes impact them just as much as anybody else.
What other areas are suitable for social investments?
Morphet: Another area where we have invested in is finance for charities and social enterprises. We invested in a fund that provides unsecured loan finance to charities and social enterprises, using a British Business Bank guarantee to reduce credit risk.
We also invested in a fund with Big Issue Invest that provides loan finance to charities and social enterprises that address social infrastructure including housing, health care and other social infrastructure. And we made an equity investment in Charity Bank, which provides loan finance to charities and social enterprises.
The LGPS pools or other large pension funds might need to operate at a larger scale. The challenge for funds is to get to the scale where an investor can put down a £20 million ticket and not become 90% of the fund. Part of the role we’re trying to play is getting funds to scale.
Do you see any new opportunities coming from government initiatives?
Morphet: We are interested in social outcome contracts, or social impact bonds, which effectively create an underlying need for investment. For example, the government recently announced the £500 million Better Futures Fund, which provides outcome payments to organisations that support better futures for children, young people and families. This fund is looking for match funding.
Social outcome funds have established a track record in relatively small pilot funds, but this government initiative creates the opportunity to increase scale and attract institutional capital. The track record of outcome contracts funds establishes their returns are not correlated to markets – so they can be an attractive diversifier.