Many investors are no longer interested solely in maximising returns. They want a return with meaning, where they can have a positive, measurable impact that promotes social or environmental change. This is known as “impact investing” and there’s a growing investor appetite for it
This new investment approach fits well with an environment where there is not enough funding from government or pure philanthropy to support many worthwhile causes. A more holistic approach, combining business, community and government can be undertaken more quickly, use less government funds upfront and ultimately save taxpayer dollars while improving social or environmental projects.
Global projects supported by impact investing include: lifting the participation rates of girls in secondary schooling in sub-Saharan Africa, increasing the number of people at the base of the social pyramid who can gain access to electricity or clean water, and reducing homelessness in major US cities.
Source: World Economic Forum "From the margins to the mainstream" Sept 2013
In Australia, there are a number of home grown impact investing projects including:
- Hepburn Community Wind, which used funding to develop, own and operate Australia’s first co-operatively owned wind farm.
- The Australian Chamber Orchestra Instrument Fund which purchases world class instruments for investment and for the orchestra to play for the public’s enjoyment and to attract world class musicians.
- NSW Social Benefit Bonds, another term for social impact bonds, which I’ll explain in more detail.
NSW Social Benefit Bonds
NSW was the first state to launch social benefit bonds. Its first bond, the Newpin bond – a collaboration between the NSW government, the Uniting Church and Social Ventures Australia - aimed to return children in out-of-home care to their families. Success would improve family relationships and enable children previously at risk of harm being returned to the care of their families. The bond aimed to raise $7 million and had a seven year term to maturity.
Minimum investment was $50,000, which is low given the very small overall value of the bond. It had quite harsh terms for investors with capital write-down clauses with a maximum write down in the first four years of 25 per cent and then 50 per cent for the final three years until maturity.
The NSW Court must approve return of the children to their families which is how success is measured.
Two years into the bond, the June 2015 report revealed that 66 children have been returned to their families and the bond had delivered an 8.9 per cent per annum return based on the cumulative restoration rate for the first two years of 61.6 per cent – well above the 55 per cent level where losses are incurred. The program further supported an extra 35 at-risk families in preventing their children being taken into care.
Encouraging results, but circumstances with families can change quickly and investors can still lose money. My sense is that investors in these bonds don’t mind too much about losing money, they’re trying to give a hand up instead of a hand out.
Source: Social Ventures Australia
Another social benefit bond issued later the same year in a partnership between the NSW Government, The Benevolent Society, Westpac and the Commonwealth Bank was to promote resilient families. The $10 million raised was used to fund an intensive program to keep children with their families in a safe environment and to avoid entry into out-of-home care.
This bond had a vastly different funding structure. Two classes of bonds were issued: Class P, worth $7.5 million where capital was protected and returns were lower, the other Class E of $2.5 million where capital could be lost entirely but returns on offer are much higher.
Source: The Benevolent Society
The success of the bond is measured against agreed government targets and compared to a control group of similar families. The most recent evaluation report of the service runs to over 70 pages and suggests it is too early to assess the outcomes.
If you wish to consider investing in impact bonds, some issues you may wish to ponder include:
- The size of the transactions is typically small, ranging from just a few hundred thousand dollars. This makes the projects more difficult for institutional investors who typically like to invest larger amounts.
- Delays in the start of projects given the range of stakeholders.
- Resourcing issues, particularly if government departments are involved.
- A change in regulation or government policy can bring a program to a halt.
- It’s very difficult for investors to assess the risk and some investments allow for loss of capital.
- Very small issues would be highly illiquid.
The current market is very small and negotiated privately. If you are keen to invest in these types of investments let your broker/ bank/ superannuation provider know that you would like to use some of your wealth to create positive change.