Impact Investing Could Improve Budgets and Lives
23 Jan 2017
It’s confronting to consider that in a prosperous nation like Australia, nearly three million people, including 730,000 children, live below the poverty line.
Or that in a country which prides itself on its sporting prowess and outdoor lifestyle, about 11.2 million Australian adults – 64 per cent – are overweight or obese.
There are plenty of big social and economic challenges – like homelessness, inequality and indigenous disadvantage – that challenge our way of life and our quality of life.
And while budgets are getting tighter, these problems aren’t going anywhere.
That’s why it’s more important than ever to think laterally and find ways to fund solutions to these urgent challenges. Because while governments can’t always solve these problems alone, they can make it easier for others to pitch in.
One approach gaining attention and support among businesses and NGOs is impact investing. It’s a way for businesses to do well and do good at the same time, with investments which generate not only a financial return, but a positive, measurable social or environmental impact as well. A relatively new concept in Australia, impact investing has been embraced overseas, particularly in the UK and US.
One celebrated US initiative is the California FreshWorks Fund – a public-private financing program that invests in grocery stores in mainly low-income communities where access to fresh food is limited and chronic diseases like obesity, diabetes and heart disease are rife. The $270 million-plus fund has so far financed 78 food projects, invested $70 million, provided healthier food to 800,000 Californians and created 1,284 new jobs.
Across the Atlantic, the UK’s Cabinet Office launched the world’s first social investment bank, Big Society Capital, in 2012. The institution, set up to develop the UK’s social investment market, is expected to accrue about £600 million over five years from dormant English bank accounts and funding from the country’s biggest banks.
The first social impact bond (SIBs) was also launched in the UK in 2010, aimed at reducing reoffending rates among inmates released from Peterborough Prison. SIBs, also referred to as social benefit bonds, are a popular “pay-for-success” model, where governments commission social service providers to address a particular social issue.
Private investors, who fund these providers, are then repaid over time if pre-determined and measurable social outcomes have been achieved. This allows others, usually in the not-for-profit sector, to address targeted social problems more efficiently and cheaper than governments may be able to.
There are now 32 SIBs in the UK and the model has been adopted in 15 countries, including Australia, where some state governments have taken tentative steps.
But we need to look beyond social impact bonds if we’re serious about harnessing the potential of impact investing. Broader options like payment-by-results contracts, outcomes-focused grants and incentive payments for service providers and not-for-profits should all be on the radar.
Then there are location-based public private partnerships, like the California FreshWorks Fund, and layered investments, where governments take on a greater risk for lower return to get other investors on board.
Whatever specific models are adopted, the time has come to actively build and encourage this sector.
A departmental report released by the former Labor Government in 2013 estimated the market in Australia would reach $32 billion in a decade. But that level of investment is likely still a long way off for a couple of reasons.
Firstly, there’s a misconception that impact investing generates below-market returns, because sometimes lower financial returns are accepted in exchange for social outcomes. There’s also reluctance from superannuation funds and major investors to get involved given projects are generally targeted and small-scale.
Yet there is still an appetite among some businesses wanting to counter increasing scrutiny of their investments, develop their social licence, or to manage financial risks that arise from social or environmental problems. Some major corporations have turned to green bonds, to help finance renewable energy projects, as a way to complement investments in coal.
The Government can take advantage of this growing enthusiasm, and counter lingering concerns, by championing the sector; facilitating investments and critically analysing data. It can even lead the way on how best to measure social outcomes – a key component of impact investing models – given it often holds the data needed and is best placed to do so.
This isn’t about replacing Government investment. It’s about supplementing it.
Our approach should be about finding the most cost-effective new ways to tackle the range of social and economic challenges we face as a nation.
If we get this right and make the most of this emerging opportunity, we’ll improve budgets. But we’ll also do something far more important – we’ll improve lives.
This opinion piece was first published by Huffington Post Australia on Monday, 23 January 2016.