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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:

  • 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.
  • 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.
  • 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.
  • 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:

  • 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.
  • Assess the effectiveness of an intervention to prevent the issue and enable children to be school ready.
  • Assess the cost saving that can be achieved by focusing on the prevention.
  • 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 Madhavan 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.

 

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