Investors deploy their capital in order to achieve the maximum rate of return, given the level of risk they’re willing to accept. Investments are evaluated to determine which should be selected, based typically on risk, return, future expectation and financial metrics. The term ‘impact investing’ was coined in 2008, and refers to investing for a positive social and environmental impact, combined with a measured financial return. It seeks to distribute capital to projects which will have a direct impact on society and are typically in the areas of renewable energy, housing, employment, health and aged care.
Even though this is an emerging field, the market is expected to reach $32 billion in Australia, and US$500 billion-$1 trillion globally over the next decade (Impact Investing Australia, 2015). As awareness grows of global issues such as sustainable development, the ageing population and rising need for health services, so too does the issue of funding. This cannot be solely provided by government and philanthropy alone, hence the need for impact investing.
Even as an emerging form of investing in Australia, there are many examples which illustrate the operation of impact investing. A prime example is GoodStart Early Learning which emerged from the ABC Learning collapse, and now offers 650+ child care centres for 73,000 children. The reported impact is employment for over 15,000 staff and access for disadvantaged families and communities. The centres have been purchased by National Australia Bank, Australian Government, Private Investors and the GoodStart Syndicate.
Financially, in 2011-12 a surplus of $3.8 million was achieved, debt was reduced by $18 million and all financial liabilities to lenders were met (Impacting Investing Australia, Case Studies 2015). Other investments around Australia seek to address clean energy, affordable housing, community infrastructure and employment.
The Australian government has been supportive of the efforts to date, and committed further funding in order to assist. New South Wales has trialed social impact bonds, to finance the delivery of improved social outcomes. Launched In 2014, the government backed bonds of $7 million aimed to return a yield of 7.50% to investors, based on reducing the costs of foster care. The aim was for an innovative way to deliver services and to also support the community. The Financial System Inquiry was released in December 2014 and contained specific recommendations regarding impacting investing. It encouraged the development of the market as a way of funding social services in order to benefit both taxpayers and government.
The examples above highlight two specific investments, and there have been others globally which have for example raised funding for vaccines to save lives in Rural India. In 2012, Barefoot Power raised $5.8 million from investors, and provided solar powered light to children in Uganda. The aim was to achieve a commercial financial return and provide low cost and quality lighting/power to 2 million people.
While projects are present and emerging across Australia, they have typically been accessible to high net worth individuals or institutions. Even for individuals who have access, a key consideration is the liquidity of the underlying project. The access to funds is unlike shares which can generally be redeemed immediately, or even a property which can be listed for sale. In order to sell, an investment needs to be sold or exited, therefore tying up capital for a period of time. Therefore many impact investing projects are long term investments with limited options to exit. Access for individuals and liquidity may change in the coming years, with the advent of further innovation and funds flowing into this sector.
There are clearly many benefits to impact investment, and various ways it can take shape in terms of financing and the type of project. Awareness for these projects is increasing over time, and the sector was been supported by individuals, institutions and government. These groups are taking responsibility for creating a positive impact on society through financial means and innovation. It is clear that impact investing has a large role to play within the financial sector and community as a whole.
Author: Jeremy Chiel