Impact investing is the new black of the finance world. Essentially, it means investing with the intention of achieving social or environmental goals as well as financial returns. And although this is still only a small market in Australia, it's growing fast – along with the level of interest in developing products and projects to expand it.
Impact investing already ranges from green bonds issued by banks to making loans to small businesses in disadvantaged areas to social impact bonds from state governments to try to target particular social problems.
The fundamental appeal is to investors who want to think they are doing something to benefit society as well as themselves. But it is more deliberate and targeted – essentially more positive in nature – than the increasingly familiar approach of refusing to invest in certain industries or products.
And while the various projects funded will never replicate the massive levels of government spending on social programs, for example, the concept is designed to offer specific solutions to specific problems – often far more effectively and flexibly than governments can.
In some cases, that means leveraging private money and expertise to tackle an issue. In others, using existing government funding more strategically.
NSW Premier Mike Baird has had quite a few policy reversals of late. But he told a rapt audience at the Impact Investment Summit Asia Pacific on Tuesday that he believes social impact bonds have the potential to significantly change the future and benefit society.
In 2014, the NSW government became the second government in the world – after Britain – to launch this type of bond. The first was to fund and extend a Uniting Care program on NSW Central Coast that was trying to keep children out of foster care by giving intense counselling and support to their families.
Baird says that as a result of the program, nearly 200 children have either been returned to their families or not had to go into care over the past three years. The bond, meanwhile, has delivered a 12.2 per cent return on investment.
Several other state governments are also now beginning to experiment with social impact bonds. Victoria announced this year it will use a bond to finance helping young people escape drug and alcohol addiction, for example.
The NSW government is now committed to launching two new bonds every year, with the latest in the market aimed at reducing reoffending rates for people coming out of jail. With the current rate of reoffending 47 per cent, or almost one in two, the idea is to provide 4000 people being released from NSW prisons intensive assistance with potential blocks like writing CVs and training and getting in touch with willing employers.
Baird points out that given it costs $120,000 to $150,000 a year to keep someone in jail, the money will be well spent on prevention if the recidivism rate drops to 30 per cent. The government is also about to put out requests for proposals for bonds focused on early childhood education, adoption and youth unemployment.
Too often, according to Baird, the approach of governments has been to simply invest more money as a way of fixing social problems rather than making any attempt to assess the outcome.
Measuring those results in social terms – as opposed to financial terms – isn't a simple matter, of course.
That's why the umbrella group, Impact Investing Australia, has just released its first benchmarking report to try to calculate and standardise the social and financial returns on various products as well as the level of activity currently in the market.
This deliberately doesn't include the sort of direct investment often favoured by family offices interested in philanthropy. Instead, it concentrates on the products available to wholesale and retail investors that are deliberately designed to get financial and social returns that are measured.
On that basis, this amounted to $1.2 billion worth of investments as of June last year, dominated by around $900 million worth of bank-issued green bonds.
But the range of projects funded also included supporting people with disabilities via a platform designed to put them easily in touch with pre-vetted carers or developing an app to promote literacy and numeracy in schools or creating jobs in areas of high unemployment.
On current trends, that willing capital is already over $2 billion and expected to increase to at least $18 billion by 2020 and to extend to an even broader range of activities. Globally, the estimate is the market value of impact investing will reach between $600 billion and $1 trillion over a decade.
Rosemary Addis, chair of the Australian advisory board on impact investing, says the growth is stoked by the coincidence of different trends. That includes pressure on government budgets and the desire to get value for money as well as the rise in social entrepreneurs, and investors and philanthropists interested in helping to solve public policy issues.
And rather than the common expectation that there is always a need to trade off financial returns in order to achieve better social outcomes, in practice this doesn't seem to be the case.
The benchmarking study of 15 impact investment products in Australia found returns ranged from 5.7 per cent to 17 per cent for debt, 3.25 per cent to 12 per cent for fixed income and 0 to 12.6 per cent for real assets.
There is obvious potential for Australian superannuation funds to take up this style of investing as well. The size of the market and range of products will probably have to increase substantially before that makes financial sense to most investors.
But what is unmistakeable is the new and increasing level of interest in the idea.
"You've got to start somewhere" Addis says. Just ask Mike Baird.