Schroder BSC Social Impact 18 November 2022

Schroder BSC Social Impact (LON:SBSI) offers a relatively simple way for investors to invest capital to positively impact British society with the prospect of generating investment returns at the same time. SBSI aims for a return of CPI + 2% per annum over a three- to five-year period, and is run by the Big Society Capital team, who invest in a variety of funds, secondary-market transactions and co-investments made through other third-party managers. SBSI targets private, unlisted opportunities and those which focus on addressing entrenched social issues in the UK.

SBSI’s portfolio is allocated across three major asset classes: high-impact housing, debt for social enterprises and social outcome contracts. The team note that these types of investments typically offer a degree of inflation protection as well as unique, uncorrelated sources of returns. Most of SBSI’s investments are resilient, being underpinned by government expenditure and linked to providing solutions to deeply entrenched social issues. This creates a portfolio with strong diversification potential, and SBSI is likely to have an NAV return profile lowly correlated with traditional asset classes, as we describe in the Performance section.

The ESG credentials of SBSI are clear, with the trust elevating itself beyond conventional ESG integration by proactively contributing to the solutions to the ‘S’ in ESG. As we discuss in the ESG section, the board provides detailed reporting on SBSI’s societal and wider ESG outcomes, including a detailed map of which regions have benefitted from the trust’s investments.

Thanks to the trust’s unique investment offering, as well as uncorrelated sources of returns which have remained stable and positive since its inception in December 2020, SBSI has largely traded at a premium since IPO. That said, SBSI has not been insulated from the de-rating the broader sector has experienced in recent weeks, and the shares now trade on an 8.7% discount.

SBSI is, in our view, a truly unique offering, given its clear and dedicated approach to improving society in the UK. At its core, SBSI allows investors to achieve positive social outcomes whilst leaving open the potential for attractive risk-adjusted investment returns. SBSI is the Big Society Capital team’s only publicly available investment vehicle, which further adds to its unique properties.

While the societal benefits of SBSI are laid out plainly in the Portfolio section, we believe that the trust may represent an attractive investment opportunity beyond purely ethical considerations. This is a very unique portfolio with different risks and returns to those of traditional markets, which will likely lead to strong diversification benefits. Many of SBSI’s investments are underpinned by government revenues, and we note that c. 64% of allocated capital is expected to benefit from higher rates of inflation (as at 30/06/2022). This therefore makes SBSI’s returns potentially resilient and uncorrelated, and so perhaps of increasing interest in the current inflationary environment. That said, when compared to inflation-linked fixed income securities, SBSI clearly lacks the linear relationship of conventional inflation-linked bonds. The trust’s 1–2% dividend yield target may be too low for dedicated income investors, but for many investors SBSI’s apparently defensive characteristics may be all the more attractive in what might be a prolonged economic slowdown. The current discount to NAV in our view adds to those attractions.