Look how far we’ve come: Impact investing

“Given the opportunity, people from all walks will step forward to do things that put impact at the heart of performance.”

Some date it to Biblical times, when Jewish law laid down directives about how to invest ethically. Others point to the Quakers, or John Wesley’s 18th century sermon on “The Use of Money”. Whatever its origins, impact investing is far from new.

What is new is the sophistication in our understanding of how capital can be used for good, and the growing field of investment that is helping to finance solutions to many of society’s most pressing challenges.

The past 20 years have seen the birth of a movement distinct from other forms of ethical or socially responsible investment. Today, impact investing is close to becoming mainstream. 

But it has not been without its challenges.

As the world begins to set deadlines for saving people and the planet, we look back at how far impact investing has come, and the role finance could play in a post-COVID future.

That was then

It is the year 2000. The impact investing market – if you can even call it that – is in its infancy. In Australia, there are a few isolated examples but no sense of a cohesive sector.

In the main, we’re still looking overseas.

In the UK, the chancellor Gordon Brown is launching the Social Investment Task Force, led by Sir Ronald Cohen, to work out how to attract private finance into socially-oriented businesses in deprived areas.

Meanwhile, across the pond, US strategic advisor Jed Emerson is introducing us to the concept of blended value – a “both/and” approach (rather than “either/or”) where not for profits, businesses, and investments are able to generate financial and social and environmental value.

Here in Australia, the idea of venture philanthropy – which borrows concepts from venture capital and applies them to achieving philanthropic goals – is starting to take hold. And the conversation around impact is beginning to move beyond simply avoiding harm to seeking more proactive ways of having an impact. But there is no agreement on a definition and we’re not yet calling any of this “impact investing”.

This is now

Fast forward 20 years and the term impact investing – coined in 2007 by The Rockefeller Foundation – is gaining traction the world over. 

When Australia’s Daniel Madhavan, now CEO of Impact Investing Group, started working in the sector he would explain the concept using the metaphor of a platypus. As an egg-laying mammal, it is a difficult creature to imagine; but that doesn’t mean it doesn’t exist. The same goes for doing good and making profit.

These days, no one mentions the platypus. The conversation has evolved from “what is impact investing?” to “how do we do it?”; and “what are the risks of not doing it?”.

Even big names from the world of economics, such as Nobel laureate Joseph Stiglitz and Harvard professor Michael Porter, are turning their attention to the need for a social contract between the market, the state and civil society. 

Globally, the market is now worth more than $1 trillion – even the economic shock of the pandemic has been unable to scare investors away.

Admittedly, only a fraction of this comes from Australia. To date, impact investments in Australia are more likely to be in the range of $500,000 to $10 million.

But momentum is building. A recent study from Responsible Investment Association Australasia (RIAA) found the market has more than tripled over the past two years – from $5.7 billion at the end of 2017 to $19.9 billion late last year.

Following a historic period of upheaval in the capital markets triggered by the global financial crisis, and propelled by policy developments, pioneering market builders and a growing investment appetite, the sector has evolved from a state of uncoordinated innovation into one of marketplace building.

Of course, if you want to build a new sector, you need structures and practitioners. 

The past two decades have given us Social Ventures Australia, Small Giants and IIG, the Australian Advisory Board on Impact Investing, and Impact Investing Australia, which was established in response to an industry-identified need for dedicated leadership, facilitation and capacity building.

Most recently, we’ve seen the Morrison government put $5 million towards establishing a Social Impact Investing Taskforce to explore the Commonwealth’s role in the market.

The UN Sustainable Development Goals (SDGs) are also providing an important framework, with more than 60 per cent of respondents to the 2018 Global Impact Investing Network (GIIN) survey indicating they were already tracking investments to the SDGs or planned to do so. 

We’re now seeing mainstream players testing the waters. The big four banks have been building their impact capability, and mainstream institutions have issued and structured various social and environmental bonds. In 2015, HESTA teamed up with SVA to launch a $30 million Social Impact Investment Trust – the first large-scale investment by a top 10 Australian superannuation fund. In 2018, Australian insurer QBE committed a minimum $100 million towards impact investing.

See our timeline showing the evolution of impact investing from 2000 to now

Achievements

A decade ago if you told a group of investors that you wanted to launch a $50 million impact investment product in ageing or disability, there would have been a lot of blank looks, says Rob McLean AM, former McKinsey & Company managing director. Today there’s a conversation.

Most investors would know what an impact investing product is. And even if they may still need convincing it has a role in their portfolio, this is already a significant step forward.

Then there is Australia’s first social impact bond – the Newpin Social Benefit Bond, established in 2013 to work with families whose children have been, or are at risk of being, removed from their parents’ care.

The project was one of the first in the world to follow the example of the UK’s Social Finance Ltd, which in 2010 raised £5 million to launch the first ever SIB – a form of outcomes-based contracting, sometimes known as pay-for-success financing – to reduce reoffending among selected offenders leaving Peterborough prison. 

It was closely followed by the Benevolent Society Social Benefit Bond (also established in 2013), which became the first Australian SIB to mature. Today there are 13 SIBs across Australia. While there have been various critiques and some robust debate about the aims and impact of the bonds, Australia’s contribution to the field shows that we’re not afraid to be at the forefront of innovative investments.

Goodstart was another bellwether in Australia. Led by a consortium of SVA, the Benevolent Society, Mission Australia and the Brotherhood of St Laurence, Goodstart Early Learning was created to fill the gap left after ABC Learning, Australia’s largest childcare provider, went into administration. It raised $95 million to buy 678 childcare centres, through a combination of bank debt, government loans, subordinated notes and private investment (outbidding their rivals from the private sector in the process). 

Goodstart became Australia’s largest social enterprise, and set the local benchmark for what is possible when you bring together individuals and organisations from the business, government and philanthropic sectors under a new finance mechanism. 

Challenges

Michael Traill AM nominates impact washing – where funds label traditional investments as impact investments to gain a market advantage – as the most important challenge in the sector. Traill, founding CEO of SVA and head of the expert panel behind the Social Impact Investing Taskforce, says trust in the sector cannot be taken for granted. There needs to be a level of integrity in social performance metrics, otherwise it can undermine the whole market and invite skepticism about whether there is any real impact, putting off would-be investors in the process.

Of course, it is not simple. Rosemary Addis AM argues that to prevent impact washing, we first need to get better at distinguishing between situations where people are trying to gain a market advantage and where they are genuinely struggling with the challenges of a system that is still finding its edges. She says impact investing is still a noisy and messy environment. 

Which brings us to another key challenge for the sector – impact measurement.

The GIIN defines impact investing as “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return”. The words to watch here are “intention” and “measurement”.

Here in Australia, we are getting better at measuring impact and understanding impact performance. But we still have a way to go. The sector needs to be more systematic if it is to ensure there is appropriate transparency and accountability to help people make informed decisions.

But Addis cautions, we risk holding some impact practices to a higher standard in their infancy than we hold broader accounting standards to today. Coming up with the right metrics that point to the right outcomes, will take continual conversation.

Another challenge that comes with being an immature sector is that of size. In one sense the sector has been a victim of its own good publicity. While the early success of impact investing has sparked a much-needed, and broadly-based debate around measurement and good outcomes, at this stage the publicity eclipses the actual size of the market. Traill says the debate around impact investing has been “disproportionately influential”. There is now a need to turn talk into substance.

While investors are keen to inject capital, the lack of opportunities with transparent measures of social outcomes and financial performance is a major barrier to further growth. As is a shortage of intermediaries who can advise on and create transactions.

What’s next?

If the past decade has been about putting the building blocks in place, the future is about scale. We’re talking about more products, across more areas, and more dollars in the market.

Sector leaders say we should be aiming for a $30 trillion market within the next 20 years, where impact investing is considered the rule, not the exception.

This will mean a lot more mainstream players coming into the market as the institutional appetite starts to grow; and the emergence of a market with greater depth in terms of intermediaries, advisors and fund managers.

We can also expect to see more regulation, starting as early as this year with the introduction of the EU sustainable finance package, which is expected to have a significant impact on markets around the world.

There is an opportunity for further government engagement and support, with the establishment of the Social Impact Investing Taskforce paving the way for further policy initiatives that will accelerate impact investing to scale.   

There is still a strong sense of optimism that impact investment will be a powerful driver of meaningful change. A recent study from RIAA shows that Australian investors intend to increase their allocation towards impact investments more than fivefold over the next five years, to $100 billion. While some of this research was conducted in the days before coronavirus, the evidence points to responsible investments outperforming their mainstream counterparts during COVID-19. There are hopes that impact capital can actually help to build back better. 

Perhaps, the real sign of success will be when people stop talking about “impact” investing entirely – and simply talk about the three pillars of mainstream investing as risk, return and impact. 

This article is part of a series looking at how far the social sector has come since 2000.

Read our introduction to the series: Look how far we’ve come.

See the full series here: 20 years of social change