Investing in Our Future and the Role of New Capital Markets
16 February 2017 at 8:08 am
If Australia wants impact investing to work better, the charity sector needs to be actively involved in the critical discussions, including the current government consultation process, writes Community Council for Australia CEO David Crosbie.
In many charities there is a delicate balancing act between investing in doing more and investing in the capacity to do better.
Most charities lean towards doing more, offering more services. Consequently, the charities sector generally suffers from a lack of investment in infrastructure, facilities, IT, professional development, monitoring and evaluation, reporting and communication.
Imagine if there was a national charity infrastructure investment fund with hundreds of millions of dollars available on very low interest rates on appropriate terms for investment in improving the capacity of charities.
Imagine if this fund could be leveraged with in-kind and volunteer support, philanthropy and a level of government underwriting to limit risk or underwrite a level of liquidity.
For me, provision of more dignified surroundings for clients of charity services is just one area of charity infrastructure I believe is ripe for impact investing. Too many services operate in run-down buildings with inadequate infrastructure. I also see potential in setting up a large scaled back office support capacity for hundreds of charities in areas where savings from scale and purchasing power could generate real return on investment.
There are many great examples of impact investing working to create better communities in Australia and around the world. The possibilities for new investments into the charities sector are increasing in so many ways. Whether we can and do take advantage is increasingly up to us.
The Australian government has been making positive noises about impact investing ever since the Financial Services Review suggested there was potential to better achieve some social outcomes if the impact investing market could become more active and effective.
Treasurer Scott Morrison has already highlighted the potential of impact investing to be used to alleviate some of the shortages in affordable housing and talked about his international visit to talk with those involved in impact investing in the UK. (See ProBono News story last week).
The government’s recent discussion paper on impact investing very clearly sets out some of the issues with the state of the impact investing market in Australia.
The social impact investing market is only at an early stage, particularly in Australia. There are a number of challenges for the growth of the social impact investing market in Australia:
- impact investments, especially at this nascent stage, are generally small scale, bespoke and illiquid;
- high due diligence costs for investors and intermediaries, due to the small scale of investment opportunities in Australia and the developing evidence base for social impact investments;
- the impact investment ecosystem is still developing: there are few mainstream advisers or wealth managers who are willing to provide advice on social impact investments;
- deals can have high transaction costs, often driven by the need to use specialist lawyers, finance professionals and intermediaries to establish the projects;
- a lack of accessible, high quality data to measure outcomes to determine the level of success (and payment) for particular social impact investment projects;
- limited capacity in the community sector to deliver projects, with many organisations still grant-focused and lacking the resources for complex contract negotiation and robust outcomes-measurement;
- the narrow application of social impact investment: as discussed earlier, not all social problems could or should be targeted through social impact investment and it takes time to identify opportunities for social impact investing;
- the difficulty in clearly articulating and agreeing to social outcome measures; and
- the time frames involved in achieving and measuring outcomes may not satisfy investors.
(See: Social Impact Investing Discussion Paper, Australian government, January 2017 Pg 12.)
Two main themes emerge here – scale and measurement. Scale is an issue because if it costs $150,000 to set up a deal – meeting costs, legal costs, business cases and appropriate expert advice – then even a deal of $2 million has already lost 7.5 per cent before it starts so the investment needs to return over 13 per cent to be worth pursuing.
If the deal is for $200 million (much bigger scale), then the establishment costs remain similar so the set-up will be less than 0.1 per cent. Larger scale investments with lower returns become more feasible.
Measurement remains an issue if the benefit is about social outcome. Most of us are aware of the complexity of not just counting the economic outcomes (employment, reduced hospital, justice or social security costs, etc.) but also the ongoing impact on others – family and communities.
On top of these issues, there are often hurdles such as effectively managing the higher level of risk and the challenges associated with equity and liquidity – can I sell out or get my money out early if I need to?
Impact investment is not the answer to all social problems and will not alleviate the need for government support of critical services. At the same time, there is a lot of good work already happening here. At the very least we need more capital in the charities and not-for-profit sector.
All this makes the Treasury discussion paper and consultation process on impact investing critical for most of us in the charities sector. We need to be active in this discussion to ensure the outcomes of the review are not driven by a finance sector trying to get more profitable deals done or a government seeking to reduce costs. There is nothing wrong with doing deals or saving government costs, but the motivation needs to be around improving services and achieving better outcomes for our communities.
If we want impact investing to work better in Australia, the charities sector needs to be actively involved in the critical discussions, including the current government consultation process.
CCA is making a submission to the Treasury consultation process and welcomes all views from members and others on what the priorities for impact investing in Australia should be.
Pro Bono News readers can make their own submissions by 27/2/17 here.
About the author: David Crosbie is CEO of the Community Council for Australia. He has spent more than 20 years as CEO of significant charities including five years in his current role, four years as CEO of the Mental Health Council of Australia, seven years as CEO of the Alcohol and other Drugs Council of Australia, and seven years as CEO of Odyssey House Victoria.
David Crosbie writes exclusively for Pro Bono News on a fortnightly basis, covering issues of importance to the broader not-for-profit sector.