Impact investing – an introduction

By: Daniel Madhavan   |   Impact Investing Australia


Risk, Return + Impact

Over recent decades ethical investing has focused attention on avoiding investments that have a negative impact on society or our environment. According to the Responsible Investment Association of Australasia, over $630 billion of assets managed in Australia now employ some type of environmental, social or governance (ESG) screen in the investment process. This is good news for people and the planet.

Impact investing seeks to take this another step further. Beyond screening out the negative, impact investing proactively targets opportunities to achieve measurable positive social, cultural or environmental impacts in addition to a financial return.


Key features of an impact investment

Intentionality

The investment is designed specifically to achieve social or environmental outcomes. This intentionality distinguishes impact investments from other traditional investments that may incidentally deliver positive societal impacts.

Measurability

A key feature of impact investing is the measuring and reporting of social or environmental performance and progress of investments.

Financial Return

Impact investments intend to generate a positive financial return back to the investor, and will include range of return expectations. 

Impact investments provide investors with greater choice and new opportunities to put their investment capital to use in ways that make a financial return and align with their values.  


Philanthropy and impact investing

Much of the pioneering work done around impact investing has been spearheaded by the philanthropic sector and for good reason.  Impact investing provides a unique opportunity for trusts and foundations to deploy more of their capital in support of their mission. In addition to achieving social and environmental impact through the distribution of grant funds, trusts and foundations can also invest some or all of their corpus into impact investments and truly maximize their impact as they maintain or grow their endowment.


How does impact investing work alongside philanthropy?

Impact investing is an investment. Unlike a grant there is an expectation of a positive financial return on the investment.  Importantly, it is not a replacement for philanthropy.  In fact grants and impact investments can complement each other BUT they are different activities.


What do impact investments look like?

impact investing provides opportunities to investors across all asset classes including real assets, private equity, fixed income and emerging hybrids such as social impact bonds.  Much like traditional investments, impact investments can be made directly into an organisation or via a managed impact investment fund. 

From financing social housing and renewable energy to delivering positive outcomes in health and education, impact investing spans different types of organisations, sectors and locations, and delivers a broad range of financial returns and societal outcomes.  What remains consistent is the intention to achieve measurable social impact alongside a financial return.


Financial first or impact first?

The terms ‘impact first’ and ‘financial first’ have been used to describe impact investors with regards to their area of priority, with ‘impact first’ investors optimising the social or environmental impact of their investment with a floor for financial returns, and ‘financial first’ investors prioritising market returns, supported by social or environmental outcomes.  However the line between investors is often blurred with the objectives of investors being more multifaceted and changing depending on the investment, and many impact investment opportunities seeking to optimise both financial and social returns.

Sometimes impact investment may have a ‘layered structure’, combining different types of capital with different risk-return requirements. Often in these cases, government or philanthropic capital may accept higher risk and a lower rate of return in order to attract private investors with different investment criteria, and to make a transaction that delivers notable societal impact possible.


Market size and potential

The impact investing market is still in the early stages of development but with strong potential.  Globally, it is estimated to reach between US$600 billion and US$1 trillion within a decade. In Australia, estimates suggest a $32 billion market by 2022. 

The Impact Investing Australia 2016 Investor Report shows that in Australia, active impact investors aim to triple the size of their impact investment portfolios over the next 5 years and those currently not active in impact investing expect to consider social and environmental impact in investment decision making over the next 5 years.


Types of impact investments

Investing in REAL ASSETS

Not for profits and social enterprises often need to purchase or access real assets to facilitate the delivery of social, cultural or environmental outcomes, for example, aged care facilities, high conservation-value land, artwork, water rights, renewable energy generators and hospitals.

Case studies:

  1. Hepburn Community Wind Park Co-operative Ltd
  2. New York City Acquisition Fund

Financing PROGRAM DELIVERY

Social or environmental interventions that are proven to be effective can be funded through a ‘payment by outcomes’ contract.  One emerging type of ‘payment by outcomes’ funding mechanism is a social impact bond, which engages private capital to pay for the delivery of a service in order to achieve agreed-upon social outcomes.

Case studies:

  1. Newpin Social Impact Bond
  2. Bridges Social Impact Fund

Developing PROFIT WITH PURPOSE BUSINESSES & SOCIAL ENTERPRISES

Whether at the early stage of development or looking to scale up impact, many businesses with a social or environmental mission require and benefit from accessing debt or equity investments.

Case studies:

  1. Social Enterprise Finance Australia
  2. Hire Up

Aug. 23, 2016

Philanthropy Weekly Newsletter

Sign up to our weekly e-newsletter for sector news, expert opinion and resources.

Sign up here