Can teaming up with finance groups save your charity?

Struggling charities will miss out on billions of dollars in funding for social impact programs if they don’t look to the finance sector for help, a new report warns.

The report, released on Wednesday by the Community Council for Australia (CCA), said with many Australian charities struggling to stay afloat, impact investing, which aims to generate social benefits as well as financial returns, could help achieve social outcomes and diversify revenue streams.

CCA CEO David Crosbie said the three main sources of charity income – government funding, donations, and fees and service charges – were all stalling, and organisations needed to look outside of themselves to generate revenue.

“What is happening right now in the charity sector is very disturbing…it’s almost impossible for many organisations to get sustained income,” Crosbie said.  

“Our vital advice to local charities is you need to bring in people with expertise in this area to talk about how the charity’s work might be able to generate an income stream.”

According to conservative estimates, the growing Australian impact investing market will be worth around $35 billion over the next five years. Globally, the market is worth trillions.      

The report said it was important charities sought the help of finance companies that understood and could mediate between government, community and finance sectors.  

Charities often lacked the tools, the time or the skills to translate ideas into financially viable proposals.   

The report pointed to the work of South Australian charity Hutt St Centre as an example.

In partnership with the South Australian Government and Social Ventures Australia (SVA), a non-profit social finance group, it set up South Australia’s first social impact bond. 

SVA raised $9 million from private investors to provide money for Hutt St Centre’s Aspire program.  The state government makes payments based on how successful the program is in reducing people experiencing homelessness’ hospitalisations, convictions and use of crisis accommodation services, reflecting reductions in their service costs.  The total expected government payments of $17 million will cover the cost of the program and provide a return for investors. 

Over 100 charity CEOs and senior leaders in the social impact sector, including PwC, Social Ventures Australia, Koda Capital, Hutt St Centre and Life Without Barriers partnered with CCA to workshop recommendations for NFPs looking to make the jump into impact investing.

The recommendations outlined the importance of using impact investing as a way to increase impact, of not losing sight or distracting from the organisations’ purpose, of measuring impact, and of making sure the program could actually generate revenue.

Sally Mccutchen, CEO of Impact Investing Australia, told Pro Bono News it was vital that impact came first for charities.  

“This is actually about how not for profits can deliver impact, so starting with that is really critical,” Mccutchen said.

She also pointed to the importance of intermediaries in setting up an impact investment proposal, and the need for the two sectors to collaborate more.

David Knowles, Koda Capital head of philanthropy, told Pro Bono News there were several questions that charities had to ask themselves before considering impact investment, starting with if they actually had a solid understanding of what impact investing was.   

“I find that many charity boards and leaders fail to understand that you have to have the ability to put together a product where you can actually pay people back and preferably pay them back with a dividend or some additional financial return over time,” Knowles said.

“If you fail to understand the actual nature of this being an investment then it’s very, very difficult for you to go on from that point.”

Crosbie added that impact investing was not for all charities. For one, some charity work could not produce an income. Impact investors also tend to favour larger investments. And the cost of setting up an impact deal could be too much for a smaller charity.

But he said the government had a role to play in catalysing the market and supporting the necessary ecosystem, which included providing money to employ the help of intermediaries.

“In an ideal world there would be a government-supported fund to underwrite the work of intermediaries – they are critical to the process but we have very few of them and they have to make money,” Crosbie told Pro Bono News.

“It is certainly a good investment by government given the potential returns.”

Knowles said the role of the government in the Australian impact investing market was one of an “enabler”, and it could save itself money by making the charity sector self-sufficient.

“It fosters a more sustainable way of funding charities instead of… [giving out]government grants…that offer no prospect of returning the money,” he said.