This resource provides an introduction to social impact investing. It’s useful for those looking to understand its application in Australia by public, private and not-for-profit organisations.
What is social impact investing?
Social impact investments (SII) are investments made into organisations, projects or funds with the aim of generating financial returns, as well as measurable social and environmental benefits.
SII can be made directly to an organisation, or via a managed fund. In return, investors usually receive a private stake in the organisation or fund, via debt or equity. The NSW Government has defined four features of SII:
- they must work towards outcomes that are measurable and quantifiable
- they must set incentives and investors must relinquish direct control over the services being provided
- they must involve partnerships to share risks and benefits across sectors
- they must invest in long-term preventative solutions, not short-term services.
The Commonwealth Government has a more exhaustive list of guiding principles for SII. Investments can be made to an organisation in the public, private or not-for-profit sector. SII usually take one of three forms: social impact bonds; social enterprises; and SII funds.
What is the purpose of social impact investing?
According to Impact Investing Australia, SII are designed to:
- scale a business, social enterprise or government program
- access real assets (property or infrastructure)
- finance program delivery.
Global awareness of SII was initially sparked by a pair of reports released by the Rockerfeller Foundation (2011) and the World Economic Forum (2013) following the GFC. The reports noted that the extent of social and environmental problems facing the world are greater than the capacity of any government or charity.
As such, the authors concluded that more capital needs to be directed to these issues. At the time, new business models were beginning to demonstrate the possibility of pursing financial, social and environmental returns. SII were considered the best model to achieve all three objectives.
How social impact investing works
Liebman[1] provides a good introduction to SII design, by showing how public and private money comes together to achieve social outcomes, and where performance-based payments come into effect.
A case study: Newpin Social Benefit Bond
Newpin is a social services program that provides emotional and practical support to families with at least one child under the age of six. It helps families break the cycle of child neglect and returns children in out-of-home care to their families, or prevents them from entering care in the first place.
The Newpin Social Benefit Bond (SBB) was Australia’s first social benefit bond, created in 2013 via a partnership between the NSW Government, Uniting Care and Social Australia. It was designed to deliver both savings to Government and returns to investors.
The SBB used $7m of capital from investors and is due to mature in September 2020. It aims to fund 6 new Newpin centres (a total of 10), support more than 700 families, return 400 children to their parents and save $95 million in Government spending.
Investors receive a return based on Newpin’s success, measured by the restoration rate—the proportion of children attending a Newpin Mothers Centre who are successfully returned to the care of their family. The higher the restoration rate, the more interest that investors receive, with a maximum payable interest rate of 15%.
As of 2018, the SBB has helped Newpin increase the number of children returned to their families to 272 (63.3%). The program has also prevented an additional 12 families from entering their children into care. Overall, the SBB has now delivered a 13.5% p.a. financial return to investors.
As we can see, this project roughly follows the process for impact as laid out in Liebman’s1 diagram. The only difference is that this SBB received funding from both public and private entities. After funding for Newpin was secured, performance-based payments were agreed on by all parties in the form of a restoration rate.
SBBs are one of the less common types of SII, likely due to the complexity of directly linking financial returns and social outcomes. Most SII feature a pre-determined financial return, or no return at all until the project is up and running. Other case studies are available on the Impact Investing Australia website.
The social impact investing market in Australia
The SII market last year reached $6bn in value, a four-fold increase in under three years. The Australian Government supported SII in the last two budgets ($30.4m in 2017/18 and $8.3m in 2018/19), by funding homelessness programs and building capacity in the sector.
The NSW Government has its own Office Of Social Impacting Investment, with several ongoing initiatives. These range from justice and family services, to youth unemployment and palliative care. Other SII projects in Australia include:
- $4m worth of loans and debt guarantees for community-owned wind farms in regional Victoria
- Tender Funerals: a social enterprise which offers affordable and personalised funeral services, funded via crowdfunding, philanthropy and private loans
- Australia’s first dementia retirement village, which received $19m from the HESTA Social Impact Investment Trust
- the construction of a light-rail network using an SII funded by the QLD Government.
Strengths and weaknesses of the funding model
There are a number of strengths and weaknesses of SII. In terms of potential benefits, SII can:
- stimulate innovation to deliver better outcomes and value for money in the delivery of social and environmental outcomes
- share financial risk with investors where the government pays for success
- provide increased transparency, accountability and performance
- allow service providers to scale up services with private sector funding
- offer greater flexibility in achieving objectives, potentially reducing red tape.
There are also a number of potential challenges:
- deals can have high transaction and due diligence costs, due to the specialist lawyers, financial professionals and intermediaries required to establish the projects
- data-gaps pervasive in the government and not-for-profit sectors make it hard to the determine the level of success (and therefore payments) for projects
- the timeframes involved in achieving and measuring outcomes may not satisfy investors
- the range of problems that allow for the application of SII is small, implying that it will be hard for this market to develop depth.
The Australian Housing and Urban Research Institute published a report last year about its concerns in using SII to improve housing and homelessness outcomes. These concerns include:
- the rate of implementation within Australia, given how little evidence there is of its success in addressing Australian issues
- high transaction costs and the potential for poor design and implementation, which diverts capital away from other effective solutions
- moral hazards in how to effectively link social and financial outcomes
- impact on vulnerable beneficiaries if the SII market fails
- the potential for SII to be interpreted as a panacea.
The Responsible Investment Association Australasia, in conjunction with the Centre for Social Impact, published a report last year about the emerging SII market. Their key findings were that environmental Investments (96%) far outweigh social investments (4%). This is possibly due to a relative caution of implementation or a lack of relative return on social investments.
[1] Liebman, J (2011). Social Impact Bonds: A promising new financing model to accelerate social innovation and improve government performance. Center for American Progress.
