Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 123

Impact investing: wealth creation with a social return

Impact investing is a growing field of investment that is helping to finance solutions to many of society’s most pressing challenges.

Impact investments set out to achieve a financial return, as well as positive and measurable social, cultural or environmental impacts.

In Australia, impact investing is in early stages of its development but the momentum both in Australia and globally is building rapidly. There will be many twists and turns on the way, but the opportunity for investors to put their capital to work in ways that contribute to solving issues in line with their values is an exciting one.

There are two ends of the spectrum.

One is the financial return spectrum, where investors will only consider investments that offer a market rate of return and investors at the other end who will accept low or sub-market returns because of the impact on social or environmental returns.

The second is the impact measurement spectrum, where investors are content with anecdotal evidence about the impact of their investment and at the other end, investors expect impact measurement using a global standard independently verified.

Regardless of where an investor sits, the investment opportunities fall into three broad categories.

1. Investing in real assets

Many not-for-profit organisations and social enterprises need an asset to deliver their social or environmental mission, for example, social housing requires houses. Could investors own the properties? Yes. Models are being developed in Australia but overseas examples like UK’s Cheyne Capital, an alternative asset manager that has established a social housing fund, demonstrates the potential.

There are also examples of more exotic real assets such as the Australian Chamber Orchestra’s Instrument Fund, seeded with $1.79 million ($1.00 unit price) in 2011 to purchase a Stradivarius violin. The fund is now valued at $1.40 (2015 unit price).

Clean energy generation assets like solar and wind projects are becoming increasingly popular as direct investment opportunities like the $50 million Coonooer Bridge Wind Farm or via green bonds like NAB’s $300 million bond issued last year that funded 17 clean energy projects utilising the NAB balance sheet to offer investors NAB issued risk.

2. Developing social enterprise

Social enterprises are businesses that trade in goods and services, to generate funding for or directly deliver social or environmental change:

  1. Product or service impact Pollinate Energy aims to provide safe, affordable energy solutions to India’s vulnerable urban slum communities. Impact – 8,963 systems installed, 41,229 people reached.
  2. Operating model impact StrEat, a hospitality operator, employs young homeless people in Melbourne providing training with the aim of supporting them into long term employment in hospitality. Impact – supports 108 young people per annum.
  3. Revenue/profit share impactWho Gives a Crap toilet paper where 50% of the profit goes to WaterAid to build toilets and improve sanitation in the developing world. Impact – 46,500 people given access to toilets, 4,604 trees saved via recycled paper.
  4. Ownership impact – Feast of Merit restaurant in Swan St Richmond owned by YGAP, an organisation that uses profits from the restaurant to fund social entrepreneurs in developing countries. Impact – 149 entrepreneurs supported, 84,142 lives impacted.

Investing in social enterprises is like investing in any other business. It can be debt or equity and whilst many of the current Australian examples are at venture capital stage, they don’t have to be. In 2014 it was announced that Bain Capital had acquired 50% of Toms Shoes in the US. For every pair of shoes Toms sells, a new pair is also provided to an impoverished child (see 3 above). And the financial return was significant; Reuters reported that the transaction valued the company at $625 million.

Three Social Enterprise Development Funds were established and co-funded by the Australian Government in 2012, managed by Social Ventures Australia (SVA), Foresters and SEFA ($40 million) for investing in development of social enterprises. Privately funded vehicles like Impact Investment Group have appeared since, providing investors with opportunities to invest directly in businesses with a social or environmental mission.

3. Financing programme delivery

There has also been a change with government, philanthropic funders and service delivery organisations shifting some of their funding arrangements towards ‘payment by outcomes’ as opposed to ‘payment for delivery’, which can then lead to an instrument like a social impact bond.

Prevention is certainly better than cure. In many cases we often wait for a social issue to occur and then government or a social service provider manages the issue. In most cases, paying for prevention is less financially burdensome.

Let’s use an issue relating to early childhood as an example. We know an investment made in the first three years of a child’s life gives the greatest returns. According to one international study, with every $1 spent on early childhood education, society sees a return of over $7. On the flipside what if we knew the issue of children not being ready for education when they reach school was costing the taxpayer a lot of money?

An impact investment on this issue would:

  1. Analyse the landscape of how much it costs the taxpayer to address social issues connected to children not being properly ready for education when they reach school.
  2. Assess the effectiveness of an intervention to prevent the issue and enable children to be school ready.
  3. Assess the cost saving that can be achieved by focusing on the prevention.
  4. Determine a partner to fund that will enable the delivery of this service and share the cost savings with that organisation that has intervened to stop the future cost occurring.

This is one version of a ‘payment by outcomes’ arrangement. Private investors are offered the opportunity to fund the programme and receive a financial return linked to the outcomes achieved. This is called a social impact (or benefit) bond.

There are two bonds currently in Australia (approximately 50 globally), the Newpin Bond ($7 million) and The Benevolent Society Bond ($10 million), both focussed on prevention of out of home care for children. The NSW Government has committed to two similar transactions a year for the next four years, South Australia is close to a potential bond programmes and Queensland has just announced its plans.

There is interest and momentum growing daily, and Australia is playing a leadership role in the global market development through our participation in the Global Steering Group (previously G8 Social Impact Investment Taskforce). Impact investing is estimated to reach A$32 billion domestically over the next decade.

 

Daniel Madhaven is CEO of Impact Investing Australia. The inaugural Impact Investment Summit Asia Pacific will be held in Sydney from 19-21 October 2015 and will showcase the strategies for finding impact investments and measuring their success.

RELATED ARTICLES

Responsible investing is now retail and mainstream

Impact investing – Australian market in 2014

Not so plastic fantastic: solving the single-use pandemic

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates

Strategy

$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Strategy

Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.