When Westpac launched its A$100 million Bicentennial Foundation in April, the Prime Minister rightly described it as a "remarkable day in the history of corporate philanthropy in our country". The amount pledged by Westpac makes most other companies’ charitable giving look tokenistic. But could Westpac get more social bang from its banking bucks?
Innovations in social finance mean that banks and corporates can now put their money to work in a way that not only benefits shareholders but also delivers meaningful outcomes to communities.
Social finance and its close relation, impact investment, moves corporate philanthropy from an expense in a cash flow statement to an asset on a balance sheet. While it requires a mind shift, the fact that JP Morgan, Goldman Sachs, Citi and Credit Suisse are already participating in this market is a call to arms for Australian financial institutions.
WHAT IS SOCIAL FINANCE AND IMPACT INVESTMENT?
For the corporate sector, ‘giving back’ has traditionally meant donating to charities, sponsoring not-for-profit organisations and the like. The paradigm has been, the more you give; the less you have.
Social finance offers a new model where old-style ‘corporate gifting’ is transformed into sound investments that return both a financial and social benefit. In this paradigm, the more you give; the more you get.
This is so much more than simply “negative screening” or discouraging involvement with a wicked practice or industry. Using the Westpac Bicentennial Foundation as an example, the corpus of the foundation could be invested in social impact businesses or funds that generate the income necessary to fund Westpac’s charitable giving and also deliver real and practical solutions to significant social and environmental issues.
A broad range of social finance products have already been developed, from social benefit bonds to environmental upgrade agreements. Equally, impact investments have taken many forms - debt, equity, working capital lines of credit, guarantees, microfinance, etc. They 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.
A common theme is that the investments aim to deliver goods and services to low-income and excluded communities. They complement the work traditionally done exclusively by government agencies and community organisations.
While social finance necessitates an extra level of analysis on the social and environmental impact of the loan, in many ways it is a logical extension to the “reputational committees” already used by Australian banks to decide whether the bank sees any reputational risk of extending their financial services to a particular borrower or industry.
Although in its infancy in Australia, social finance and impact investments are gathering momentum in the UK, US and Canada. Ageing populations and budget pressures are driving governments of developed nations to look for new ways to deliver social services. It has been predicted that the global impact investment market will grow to between US$1 trillion and US$3 trillion within the next 20 years.
In the US, the New York City Acquisition Fund is a syndicate of 12 banks led by JPMorgan Chase (with a contribution of US$160 million) as senior lenders, with the City of New York (US$8 million) and a group of nine foundations (US$32 million) providing a principal guarantee pool.
The Fund extends loans made by participating banks to enable affordable housing developers to acquire land and buildings. Loan rates float at the Prime rate, currently with a floor of 4.0%, plus a margin of approximately 110 basis points, for an all-in rate of 5.1%. The Fund’s goal is to create as many as 30,000 units of affordable housing over a 10-year period. A return is generated for investors through the repayment of the bank loans by developers.
GROWING SOCIAL FINANCE IN AUSTRALIA
To date, impact investment in Australia has been quite ad hoc. Investors, fund managers or intermediaries find causes or opportunities that resonate with them, their clients and/or their communities and then attempt to navigate the variety of legal and regulatory obstacles that apply. The bespoke nature of such investments mean they are often more costly and time-consuming in terms of due diligence and negotiation of contracts. However, as set out below, these costs can be mitigated through more efficient intermediation, standardised metrics and streamlined documentation.
Impact investment, and social finance more generally, is a genuine model for governments, communities and business to partner for social and financial benefit. But a number of challenges must be overcome for social finance to become a functioning market in Australia. These 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 or NFPs), 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);
- developing enabling infrastructure, such as policies and regulations that can make investing simpler and more efficient;
- 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;
- funding champions in the upper echelons of Federal and State parliaments, in order to change the way in which government tackles endemic social problems, encourages cross-departmental coordination, and breaks the cycle of budget cuts for preventative services;
- encouraging multilateral cooperation, such as the G8 Social Impact Investment Taskforce, so that Australia can learn from other countries;
- broadening the investor universe to include foundations, private ancillary funds, self-managed superannuation funds, industry superannuation funds, high net worth individuals and banks;
- fine-tune 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.
THE FINANCIAL SYSTEM INQUIRY AS AN ENABLER
The task of the current Financial System Inquiry, chaired by David Murray, is to examine “how Australia’s financial system could be positioned to best meet Australia’s evolving needs and support Australia’s growth.” Surely there is room in this ambit to consider how a social finance market can promote sustainable growth as well as positive outcomes for our society and environment.
Our view is that, in many respects, existing legal structures and financial systems are already able to support the development of a social finance and impact investment market. Driving social finance and impact investment from a political and multilateral perspective is harder, but the key theme underpinning the Federal Budget and Commission of Audit report is that the age of universal social services provided by government is over.
Australian communities must reassess how they can continue providing basic social services to those who need it, and what opportunities there are for private enterprise to fill the void. And the next generation of bankers, investors, fund managers and business owners will embrace this new market if they are given the platform to deliver it.