Demand for social impact bonds outstrips supply

Demand for social impact investment is higher than supply, with only $1.2 billion committed in capital in the last five years and an estimated $18 billion gap expected in the next five years, a new report says.

According to the Benchmarking Impact: Australian Impact Investment Activity and Performance Report 2016, between the 2010 financial year and the 2015 financial year there were $1.2 billion of projects undertaken using social impact bonds, with returns on some investments up to 17 per cent.

State governments are looking to the private sector to solve their increasing infrastructure and service delivery demands as pressure mounts on constrained budgets.

Social impact bonds are increasing in popularity as funding models, with the NSW government paving the way in 2014 with a $7 million project to reduce the number of children in its foster care system that has returned a yield of 7.5 per cent in its first year.

In July the Victorian government announced its first use of a SIB would be to finance programs to get young people out of drug and alcohol addiction.

Green bonds dominate

The report, which was commissioned by Impact Investing Australia, found 92 impact investments were made between the 2010 financial year and 2015, with at least 36 of these made in 2015.

In 2015, green bonds dominated the sharp increase in dollar value, whereas the bulk of transaction volume was debt finance to social enterprises.

"On a dollar-weighted basis, most investment was directed to environmental outcomes, reflecting the size of green bonds," the report said.

The return for fixed income was between 3.25 per cent and 12 per cent and zero to 12.6 per cent for real assets.

Market nous vital

Global Impact Investing Network chief executive Amit Bouri said the report and market intelligence would play an important role in the development of impact performance measurement standards.

"Achieving a more sophisticated and rigorous approach to impact measurement is central to growing the market for impact investing," he said.

"The better we can measure impact and agree what constitutes success, the more effective we can be at directing investments to areas and issues of greatest need." 

The report will be launched at a summit on impact investing, the Impact Investment Summit Asia Pacific, which begins in Sydney on Wednesday with high wealth investors from around the world, including the impact investment group which represents Bill and Melinda Gates, the Rockefellers, Omidyars, the Ford and Heron Foundations.