Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 363

Is it time for a social impact credit system?

As the Covid-19 pandemic persists, the universal public health system continues to be stretched and the longevity of the subsequent global economic crisis remains uncertain. The consequential social impact is far reaching, exacerbating problems of poverty, mental health, social dislocation, domestic violence, and potentially crime, and the level of unemployment continues to rise.

The long-term social costs could be disastrous. As the economy continues to deteriorate, what happens to the low socio-economic segment of our community? Will economic resuscitation relegate social benefit programs? And what happens to climate change action? Will it continue to be the victim of political jostling or forgotten altogether?

It seems that all sectors of the economy are distressed. The government is fiscally exhausted, and the household sector is facing various challenges including increasing unemployment and already historically high levels of debt, which now stands around 120% of GDP. Furthermore, the small-to-medium-sized business sector is facing a decline in consumer sentiment, a raft of closures and a spike in potential bankruptcies.

Where do social and environmental causes turn to for support?

Is investment management our white knight?

Two groups still have ammunition to spare: the corporate and institutional investment management sectors. The Australian Bureau of Statistics shows that the institutional investment management industry in Australia has funds under management of almost $4 trillion. According to the Willis Towers Watson Global Pensions Asset Study 2020, the superannuation sector is the largest within the industry and finished 2019 with the world’s fourth-largest superannuation market.

Before the onset of the Covid-19 pandemic, Australia also experienced one of the highest growth rates of superannuation fund assets in the world. Assets rose to 151% of GDP in 2019, representing an increase from 110% a decade ago, and a compound annual growth rate of 9.2% between 2009 and 2019. Fast, long-term growth rates have now created the second-highest superannuation asset to GDP ratio among the world’s 22 major superannuation (pension) markets.

How can our white knights rescue us?

An increase in asset allocation to Social Impact Investing (SII) is a possible solution. SII is defined as the type of investing that generates positive financial and social change. SII is differentiated from traditional investing by its intent and measurement so that both financial and social returns (impact) can be identified. Impact Investing Australia, an independent not for profit organisation, which serves as the operating entity of the Australian Advisory Board on Impact Investing (AAB), suggests that the market in Australia will reach $32 billion by 2022—although acknowledges that precise figures are difficult to determine. Nevertheless, this is dwarfed by the Australian ethical investment market, which has over $630 billion of assets under management.

An obvious application of SII is as a co-investment strategy between government and private sector organisations. Through a variety of agreed social investment activities, government could enhance social welfare outcomes and generate efficiencies. A co-investment strategy is a productive means for government to enhance economic outcomes through the multiplier effect. The alleviation of poverty and potential reduction in unemployment translates into higher consumption, taxation revenue and GDP growth.

Moreover, supplemental social benefits will accrue. One of the challenges in the growth of the SII market is the greater level of uncertainty of returns. So how can we incentivise SII? The answer can be found in the development of a universally accepted and applied social impact credit system.

Social impact credit system

The social impact credit system is one that is designed to attribute value to investments that generate a positive impact to society. It assigns a score for each SII, taking into account the nature and amount of the investment. Scores, otherwise known as credits, can be publicised by the investor thereby promoting their own corporate social responsibility (CSR) and perpetuating a ‘good corporate citizen’ perception.

It is a model that allows comparisons between organisations and incentivises social investing, volunteering and gifting in society. Ultimately, the concept of routinely incorporating CSR considerations into investment decisions could find its way into corporate mission statements, investment mandates and strategy and policy documents. This would engender a way of doing business that considers social as well as financial outcomes in investment decision-making frameworks.

Industry has struggled with the reporting of their social impact, whether through their annual reports or other media due to two major issues.

Firstly, there is the complexity and ambiguity relating to some measurement methodologies, many of which utilise subjective data.

Secondly, there is disagreement as to the preferred model. The absence of a simple universal measurement methodology accepted and used by all corporations, hinders comparisons between entities and discourages its application.

A unique social credit system has recently been established in China that suits its cultural and political system. The difference is that it is targeted at individuals instead of corporations. The Chinese system rewards individuals’ positive moral behaviour with credit points and applies negative points for anti-social behaviour. This system is unique to China and in no way reflects the proposed system for Australia. However, the common theme between the two systems is its intended influence over behaviour.

The measurement problem

Resistance to SII from the corporate sector has largely stemmed from the deficiencies and variability of various impact measurements. Effective impact measurement is essential in the corporate setting, where accountability and efficient allocation of resources is an institutional practice. A sound measurement model not only assists investors but is helpful for investees by aiding them to assess their own performance in meeting targeted social goals and use results to inform engagement in future projects.

According to a UK study in 2011, Gibbon and Dey favour a measure known as social return on investment (SROI) which accommodates key characteristics of simplicity and clarity. The ‘SROI ratio’, simply calculates a quantitative ‘return’ on a notional dollar of investment. The appeal of this measure is its bias towards quantitative factors that are well understood by industry. The model relies less on subjective factors, which use ‘financial proxies’ to quantify ‘soft outcomes’. It would seem logical for any research for a measurement methodology to consider a linkage to social development goals (SDGs) to satisfy the universal call to action to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity by 2030.

A comprehensive study in 2017 by Rawhouser, Cummings, and Newbert in the Journal of Entrepreneurship, Theory and Practice found that standards for measuring an organisation’s social impact are fragmented and underdeveloped. Therefore, they obfuscate a clear understanding of trends and best practices regarding their conceptualisation and measurement. One important observation is the need to devote resources to the collection of new data sources in order for social impact research to progress quickly.

A call to arms

The progress of research in the development of a universal measurement model to advance the acceptance of a social impact credit system should be facilitated by a concerted effort between government, academia and the corporate institutional investment management sectors. An independently controlled administrator is recommended to gather and centralise data, monitor social impact credit measurement, and compile and publish scores.

Only with a consensual approach can a universal measurement model be accepted by the SII community. This is a call to arms for a champion to further this cause.

 

Dr. Paul Mazzola is a lecturer in banking and finance in the Faculty of Business at the University of Wollongong. The author wishes to thank Mr Greg Peel, Mindhive, for his insightful contributions to this article.

 

10 Comments
AlanB
June 30, 2020

Isn't this just a form of ethical investing, which is already available? You can't manipulate our choices to implement your own agenda.

Paul
July 20, 2020

Alan, please read the article carefully. It is not about manipulating choices. It is a call for the development of universally accepted measurement model which can facilitate social impact investing. There are many asset allocation choices in the market. No one is trying to force your hand.

matthew smith
June 28, 2020

Dr Mazzola, this is too sloganistic.

Chris
June 26, 2020


I have a PhD in a hard science area and so, academic writing is nothing new to me, but using buzzwords and phrases like "social investment activities", "social welfare outcomes" "generate efficiencies", "social impact research" and "co-investment strategy" without explaining what they are or giving examples thereof only loses the reader and confuses them. 

If, as the literature states, social impact research is being measured and interpreted so badly, then why does the author say we should "devote resources to the collection of new data sources" ?

In short, my understanding is that they want our super funds to use our dollars to champion social and environmental causes, it would seem.

No thanks. I am apolitical and I invest my money to make more money - it's my money, not someone else's to waste without my say so, to "save the trees" or champion some misguided agenda that is the flavour of the month, least of all to give money to support any particular group, be they unions, an activist group, a religious group, a political party, business lobby or otherwise. If I want to do this, I'll donate to those causes myself or tick the 'socially responsible' option on my super fund and feel warm inside whilst I go for a poorer performing option.

And in any case, as soon as I hear words like "social" and "credit", wrapped up in feel good phrases like "end poverty" and "climate change" it reminds me too much of a communist society. Again, no thanks, I'm already getting enough of this right now with "social" distancing and "socially responsible" companies.

John
June 28, 2020

100% agree with Chris' comments ( that he posted on 26 June 2020)

Warren Graham
June 30, 2020

100% Agree with Chris

George Hamor
June 25, 2020

Really? From someone lecturing in a Department of Business? Cogitating about the “universal call to action to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity by 2030”?
Utopia and Nirvana rolled into one!

Paul
July 13, 2020

Thanks for your comment George. Whatever we can do to help social and environmental causes is definitely worthwhile. If the investment community or even a Finance academic can expand the debate relating to the development of a universally accepted model which could incentivise SII, then it is adding value. Utopia would be when SII becomes mainstream whilst generating consistently acceptable returns. There are fund managers already doing this. We just need more.

Judy Henderson
June 25, 2020

Are you aware of the Global Reporting Initiative, setting global standards for non0financial reporting?

Paul
July 13, 2020

Hi Judy, thanks for your comment. In fact I am inspired by the GRI. However I’m attempting to promote a discussion around the benefits of a social impact credit model which is more concerned with scoring investments as to their impact. A measure can then be used to rank investments and organisations as to their impact. The GRI is doing great work around disclosure which is different from a scoring model. Although some models exist, there is no dominant or universally applied one as yet. Lots of work is still needed.

 

Leave a Comment:

     

RELATED ARTICLES

Sustainable investing focuses on the future

Investors expect ESG issues to drive returns

The rise of socially responsible investing

banner

Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How to manage the run down in your income in retirement

The first of five articles on modern retirement income products that aim for an increasing pension that lasts for life and on average should not decline in real terms. They are not silver bullets but worth a look.

Latest Updates

Superannuation

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require trustees - even SMSFs - to offer a retirement income product to protect longevity risk.

Superannuation

How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.

Retirement

Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.

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.