Impact investing is a unique and innovative method of both social service provision and investing – involving Government, investors and the not-for-profit sector working together for a dual purpose. The most pressing social and environmental issues cannot be solved by the public sector alone, hence the need for institutional investors to invest capital, while the need for solutions grows. While the current impact investing market in Australia is small, it has great potential to transform into an asset class with attractive rates of return for 'traditional’ or 'mainstream’ investors.
Impact Investing in Australia - what do we need to know?
By FSC Global Markets & Investments Policy Manager, Sara Dix.
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Impact investing is a unique and innovative method of both social service provision and investing – involving Government, investors and the not-for-profit sector working together for a dual purpose.
The most pressing social and environmental issues cannot be solved by the public sector alone, hence the need for institutional investors to invest capital, while the need for solutions grows.
While the current impact investing market in Australia is small, it has great potential to transform into an asset class with attractive rates of return for 'traditional’ or 'mainstream’ investors.
The FSC held a seminar in April, discussing the challenges for investors, public sector and not-for-profits, as well as considering the future of impact investing in Australia.
We learnt about the domestic market and current projects from our speakers and panel including Anna Bowden from the NSW Office of Social Impact Investment, Will Richardson from the Impact Investment Group, Tim Macready from Brightlight Impact Advisory and Giles Gunesekera from the Global Impact Initiative.
NSW Government leading the way
The New South Wales State Government has released an impact investing policy, as well as two social impact bonds. These impact bonds have been extremely successful and the Office is aiming to release two new investments each year.
The State Government’s goal is to stretch tax dollars further through developing more efficient programs with the private and not-for-profit sectors, resulting in innovative solutions.
“We aim to invest now to lower costs later,” said the Director of the NSW Office of Social Impact Investment, Anna Bowden.
The cost savings in the programs are such that the Government can repay principal, provide a return to investors and ensure costs savings to taxpayers.
“The investments are very carefully monitored and evaluated and we repay on results,” Ms Bowden said.
Anna Bowden said some challenges for the Government include the workload involved with releasing two investments per year, scaling up the successful programs and measuring outcomes.
The NSW Government has undertaken several randomised control trials which have shown great results, but are extremely time consuming to undertake. More efficient measurement of results will be required going forward.
Anna Bowden stressed it was imperative for the three sectors to work together to get deals up and running faster, and in larger volumes.
The next steps for the NSW Government include streamlining the investments and building a pipeline for investors.
Can we achieve market rates of return as well?
We also heard from the Chief Investment Officer at Impact Investment Group (IIG), Will Richardson.
IIG undertakes impact investments across unlisted property, renewable energy and venture capital.
“An important theme for us is: you invest for impact and you outperform”, Will said.
The investment returns outlined by all three speakers show this to be true. Outperformance is happening for impact investments in Australia.
Will Richardson also said they don’t trade impact for returns.
“The impact side is just as important as we aim to initiate a shift in capital into impact investments,” he said.
IIG blends risk adjusted financial returns with deep social and environmental impact. Mr Richardson told us that sustainable companies have been shown to outperform their peers by two times.
“Our value aim is to encourage a marked change in consumer preferences. Millennials care about this and there will be a significant wealth transfer to millennials over the next decade”, Will said.
Super funds and fund managers will need to prepare for this and include impact investments in their portfolios.
What are the benefits to institutional investors?
“Including impact investments in your investment mix will result in a highly diversified portfolio,” said Christian Super’s Tim Macready, who is also the Managing Director of Brightlight Impact Advisory.
Brightlight’s portfolio includes a wide global coverage.
“There are billions of consumers in the developing world whose livelihoods are improving and they are demanding access to more services,” Tim Macready said.
“We provide meaningful returns with a measurable environmental and social impact. That is - our investments are making a difference at the same time.”
Increasingly, consumers in Australia are looking for this type of dual-purpose investment and it is imperative the industry is able to capitalise on this shift.
Benefits of diversity
Brightlight’s sector coverage includes microfinance, energy and infrastructure. The highly diversified portfolio means investment returns won’t be affected by downturns in certain regions or sectors.
Other benefits include low volatility, correlation and risk benefits.
The correlation of the impact investments are less than 0.3% with every other investment at Christian Super.
Giles Gunesekera outlined the Global Impact Initiative’s listed investments globally, to show the wide variety in the types of investments covered in the market. This demonstrates the varied range of choices for institutional investors.
Brightlight focusses their investments on the United Nations Sustainable Development Goals.
This helps with measuring impact, provides many metrics to go with each goal and helps us to track success,” Tim Macready said.
“Impact investing is hard to do – you’re taking risks that others aren’t taking,” Tim Macready warned.
“But, the rewards are there for those who take those risks.”
The challenge for the private sector is to reduce costs in order to make the investments more attractive to mainstream investors.
As the pipeline continues to build in Australia and abroad, we can expect the current issue of deals being oversubscribed and closing quickly to balance out significantly.
Federal Government discussion paper
The FSC provided a submission to the Treasury discussion paper on social impact investing. You can find our submission here.
Please contact the FSC’s Sara Dix if you would like more information (02) 9299 3022.