Financial Services Inquiry Targets Impact Investment

Reducing regulatory burdens and providing greater guidance are among the recommendations for the improvement of the impact investing market made by the Federal Government’s Financial Services Inquiry.   

Recommendations in the interim report centred on the addressing of existing barriers to impact investment, despite submissions proposing more active Government involvement – including the provision of risk capital to attract initial investments, developing a dedicated social investment bank and introducing tax concessions.

The inquiry acknowledged that mobilising the impact investment market might require government support, including removing barriers such as:

• Some superannuation trustees consider their fiduciary duties to be a barrier to impact investment.

• Private and public ancillary funds providing a link between donors and organisations that can receive tax deductible donations are unclear whether they may count discounted returns toward minimum distribution requirements.

• Some private ancillary funds do not meet sophisticated or professional investor tests under the exemptions from the prospectus regime, despite very high net worth individuals or organisations having established them.

• Relatively simple instruments, such as social impact bonds, are subject to onerous disclosure requirements.

“Government could provide guidance to superannuation and philanthropic trustees by explaining how superannuation trustees can facilitate impact investment within the existing regulatory framework,” the interim report said.

“There may also be benefits in exploring options to better use the underlying assets of private and public ancillary funds. To enable private ancillary funds to better reflect their sophistication, it may be possible for such funds to be considered sophisticated or professional investors if the founder of the fund meets either of these thresholds.

“Finally, moves to simplify and streamline disclosure requirements could reduce the regulatory burden associated with social impact bonds.”

Impact investment allows investors to align their financial objectives with their personal values by investing in opportunities that offer both social and financial returns. Unlike socially responsible investment, impact investors actively seek social or environmental objectives.

According to the inquiry, more impact investment activity in could trigger a marked change in the way governments deal with social or environmental problems by supporting entrepreneurs to find new solutions and could shift governments’ approaches to dealing with these problems from paying for service delivery to paying for outcomes at the best price.

The Inquiry called for views on the costs, benefits and trade-offs of the following policy options or other alternatives:

• No change to current arrangements.

• Provide guidance to superannuation and philanthropic trustees on impact investment.

• Classify a private ancillary fund as a sophisticated or professional investor for the purposes of the exemptions from the prospectus regime if the sponsor of the fund meets either of these thresholds.

• Simplify and streamline disclosure requirements associated with social impact bonds.

• Undertake a more active role in expanding impact investment, such as providing risk capital and establishing social investment banks.

Donor peak body Philanthropy Australia says it is pleased that the Financial System Inquiry has looked at impact investing, which recognises the fact that Australia’s financial system has a broad role, including facilitating improved social outcomes as well as delivering economic returns and other objectives.

“Philanthropy Australia is passionate about the opportunity to grow impact investing in Australia, and the Financial System Inquiry interim report has outlined some interesting issues,” Philanthropy Australia CEO Louise Walsh said.

“On the face of it, some of the issues identified could be rectified relatively easily – for example, when it comes to delivering better clarity for Private Ancillary Funds about whether they may count discounted returns toward minimum distribution requirements, all we need is a minor update to the Private Ancillary Fund Guidelines 2009.

“The report also mentions the role of tax concessions in supporting impact investing, stating that these should be considered as part of the Tax White Paper process. We think this is reasonable, but the broader policy settings including tax concessions should also be considered further as part of the re-established Prime Minister’s Community Business Partnership.

“We’ll be putting in a submission responding to the interim report and the issues it’s raised, which will hopefully lead to improvements in the policy framework for impact investing,” Walsh said.

The Financial Services Inquiry is Chaired by former Commonwealth Bank boss David Murray, who said the goal was to examine how the financial system could be positioned to best meet Australia's evolving needs and support Australia's economic growth.

Social investment group Social Ventures Australia (SVA) were among those who earlier proposed via submission the establishment of a dedicated social investment bank to break down the barriers currently preventing easy access to capital for social sector organisations and projects.

Submissions in response to the Interim Report are due by 26 August 2014.