Hot Topics: Impact Investing - Where is Australia heading?
Impact Investing is a growing sector that is gaining interest and funding from both retail and institutional investors. The ideal outcome for investors is to achieve a positive social, cultural or environmental benefit with some measure of financial return. But as the sector grows, how will the social impact of these investments be measured? And can Australia catch up or even become a world leader in making a real impact? Industry Moves asked the opinions of two experts based at opposite sides of the world.
Ben Thornley, a former investment journalist in Australia is now Managing Partner at Tideline, a US consulting firm that provides tailored advice to clients developing impact investment strategies, products and solutions. Ben is also co-author of The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism.
Ian Learmonth is Executive Director, Impact Investing at Social Ventures Australia, the Australian not-for-profit organisation that was established in 2002 by The Benevolent Society, The Smith Family, WorkVentures and AP Foundation. SVA offers funding, investment and advice to support partners across sectors to increase their social impact.
Is it really possible to achieve authentic "impact" as the market grows to include larger, mainstream investment products?
Ben: Yes. There has been a robust debate within impact investing about what investments ought to be "in" and "out". If social enterprises providing childcare, vaccines, clean energy solutions, good jobs etc. are in, what's out? Maybe green bonds? How about infrastructure investments? The answer is neither. The conversation has shifted instead to the question of how to actively and intentionally manage all investments to be more authentically impactful, certainly through the type of business models/social enterprises described above, but also business operations and corporate citizenship. This idea is at the crux of impact investing at scale, when the requisite size of deals precludes backing the start-ups and enterprising NGOs we know and love.
Ian: The question of whether you are achieving a demonstrable social impact with your capital is independent of the size of the investment or its form. Whether it is debt or equity or whether it is made directly or via a managed fund will not usually be the crucial factor in generating the impact. At SVA we have been investing in issues such as long term unemployment, affordable housing and disability related enterprises and we are always at pains to track the positive impact that our capital is achieving despite the size of an investment. The greatest challenge with impact investing is being able to actually measure the impact that you are having and ensuring that the positive outcome is happening because of you and not some external factor. The measurement of social impact is getting more sophisticated and more reliable as data collection improves but there is still a way to go.
Is the Australian market ready for an influx of institutional capital (as opposed to the more "flexible" money being provided by high net worth individuals, governments, and philanthropy)?
Ben: Yes and no. There are a growing number of "institutional-quality" products and intermediaries; but let's face it. Track records do and should matter. Visibility into the underlying risks of a market does and should matter (and many impact investing markets are relatively new and idiosyncratic, for now). Where it gets interesting is when flexible dollars are used as guarantees or first-loss capital within structured funds, precisely for the reason of attracting institutional capital. There has been a ton of activity in product development, across sectors, for many years. Deutsche Bank's Global Commercial Microfinance Consortium, created in 2005, is illustrative of the approach. There are no shortcuts here. The field needs to keep plugging away at developing new investable opportunities.
Ian: Impact investing really started with high net worth individuals and more philanthropic centred capital as the risks historically weren't well understood (eg. gambling on improved incarceration rates) and they were probably not accurately priced. Institutional capital was therefore cautious of such investments. The other challenge with impact investing has been the size of transactions and often the lack of liquidity, both features that have kept bigger pools of professional money away. Now with the advent of larger scale social, disability and affordable housing opportunities, institutional capital is slowly being attracted into this space.
What are the most promising opportunities for impact investing in Australia?
Ben: I'm not as familiar as I once was with the local market, although the largest impact investing sub-sectors internationally have also been the focus of efforts to build products and pipelines in Australia as far as I can tell: health, education, housing, community/economic development (i.e. investment in deprived places), financial services, and the energy/environment. Australia has been a pioneer in financing social services through pay for success models and has a real opportunity to continue playing a leading role there also.
Ian: There is a broad range of investment opportunities emerging in Australia in this sector from start-up enterprises to mid-sized industrial investments and to larger scale (and lower risk) housing transactions. Social enterprises are businesses that also have a social mission, for example they may seek to address social issues such as indigenous unemployment or develop new technologies that assist disadvantaged people such as people with disabilities. There is also increasingly the opportunity to invest capital into social impact bonds (sometimes referred to as social benefit bonds) that are now being rolled out by the State governments as they seek to address difficult social issues such as repeat offending, homelessness and chronic illness. The bonds use private capital to fund preventative programs that (if successful) save the Government money, which is in turn shared with investors.
How could Australia be a leader in impact investing (on the face of it, the market appears to significantly lag the US and Europe in both depth and breadth)?
Ben: Favourable government policies have been essential internationally. So too has the engagement of high net worth individuals and philanthropic foundations. Individuals have created the demand needed to draw in big name service providers, like Goldman Sachs, Bank of America Merrill Lynch, Morgan Stanley, and BlackRock. Philanthropy has provided "catalytic capital", in the form of grants and investments provided on concessionary terms. If Australia doubles down on each of these key ingredients, it could surge into a leadership position globally. What's needed is a government utterly committed to the power of impact investing; investors to drive demand (likely super funds in the Australian context); and a more active group of catalytic capital providers (akin to the role NAB has been playing). The catalytic capital piece is the most difficult to put in place, and will require an all-out effort to win the hearts and minds of individual investors, governments, corporations, philanthropic foundations, and anchor institutions like hospitals and universities.
Ian: The leader in this area is arguably the UK given the number of social impact bonds that have been launched there as well as the UK government's support for contracting with social enterprises. The US has also been very active but often approaches it from a more commercial angle, investing in 'for profit' companies that deliver some broad social benefit eg. agricultural, health, clean energy or water. Australia is keeping up with an increasing number of impact funds coming on line and in some ways it is technically quite advanced. Australia was in fact the first country to attract super funds into social impact bonds.
