The Financial Services Inquiry panel has thrown its support behind the fledgling impact investment industry in Australia. In its interim report, the panel has identified impact investment as being key to helping governments across the country better deal with social or environmental problems.
Impact investments are a type of social finance that aim to derive a financial yield in exchange for delivering social services to low-income and excluded communities. They complement the work traditionally done exclusively by government agencies and community organisations and can range from establishing a fund that invests in social impact businesses, to direct investment in community renewable energy projects, to clubs of investors buying and retrofitting commercial or industrial properties so that they meet environmental standards.
The attraction of the impact investment model is that governments, communities and business can partner to achieve both social benefits and financial returns. As the FSI panel notes in its interim report, impact investments potentially deliver better community outcomes as entrepreneurs develop new solutions to endemic social and environment problems, and governments shift their approach from paying for service delivery to paying for outcomes at the most competitive price.
Despite the potential value of impact investment, there are several barriers impeding the sector’s growth in Australia and the Panel draws attention to the following issues in its report:
- superannuation trustees may believe their fiduciary duties do not permit impact investment, as their overriding consideration must be financial returns to members;
- private ancillary funds don’t meet sophisticated or professional investor tests under the exemptions from the prospectus regime, despite high net worth individuals or organisations having established them; and
- social impact bonds are subject to disclosure requirements that are too onerous.
This list is far from exhaustive. Other challenges that must be overcome for impact investments to become a functioning market include:
- “upskilling” intermediaries that can link funds with appropriate opportunities, and reduce the cost and complexity of investing;
- for those delivering social outcomes (such as not-for-profits), developing revenue-based business models which reward effective social intervention and wean the NFPs off grants and donations;
- improving metrics so investors can validate their non-financial objectives (i.e. outcomes adjusted for what would have happened anyway);
- building a pipeline of high-quality investment opportunities (with track records), so that there is liquidity in the market and an ability to exit investments; and
- fine-tuning tax and trust laws, to provide (even modest) incentives to social impact investments, and to ensure trustees are able to take into account the social and environmental impact of investments when assessing the deployment of capital.
Encouragingly, the FSI panel has called for views on the following policy options and alternatives in relation to impact investments:
Guidance to superannuation and philanthropic trustees on impact investment...
... including how trustees can satisfy their legal and statutory duties when making impact investments.
Private ancillary funds (PAFs) being classified as a sophisticated or professional investor for the purposes of the exemptions from the prospectus regime...
... particularly in circumstances where high net worth individuals or family offices stand behind the PAFs.
Simplify and streamline disclosure and documentation requirements associated with social impact bonds...
... as consistent and readily replicable documentation is key to commoditising financial products.
Undertake a more active role in expanding impact investment, such as providing risk capital and establishing a social investment bank...
... no doubt looking at Big Society Capital in the UK as a case study.
Impact investment is a tiny part of the wider investigation into Australia’s financial services industry, comprising only a few pages out of a 460-page interim report. However, the Panel has recognised its potential. And while significant proportions of the interim report look at minimising the negative aspects of a mature financial market (prudential oversight of banks, conflicted remuneration of financial advisers, etc), impact investment looks at maximising the positive aspects.