Social Innovation
Introduction to impact investment
What is impact investment?
Impact investment (sometimes called social
finance) describes investments, the defining
feature of which is that they are made with the
intention of achieving a positive social, cultural
and/or environmental impact and a financial
return. This rapidly developing area generates
finance for addressing social, cultural or
environmental issues and creating new public
value.
Impact investing is a field of practice and market
development that sits within a broader context of
both social investment and financial markets. For
an introduction to social investment see the
Social Innovation webpage
<employment.gov.au/social-innovation>.
The focus on achieving both a social and financial
return distinguishes impact investment from grant
funding (which primarily seeks social impact) and
parts of the financial markets which focus
exclusively on financial return.
It often involves a mix of investors with different
appetites for risk and return, and different
priorities. It can utilise a range of existing and new
financial products and generate a range of social,
cultural and environmental outcomes and
financial returns.
Who can it help?
Impact investment is having a positive affect
internationally catalysing new markets and
encouraging entrepreneurship and innovation
aimed at solving entrenched issues and creating
sustainable solutions.
Socially motivated entrepreneurs and
organisations who find it difficult to access
appropriate finance and support in the
mainstream financial market can benefit from
access to appropriate finance to enable
development and growth of organisations and
services that create positive impact in community.
Impact investment benefits communities by
providing new opportunities to develop services,
infrastructure, and generate jobs. For example,
directing capital to affordable housing or clean
energy or investing in businesses where the
community needs jobs and regeneration.
Impact investing helps investors by providing new
opportunities to put their money to use in ways
that make a financial return and also benefit
society. It helps governments target their
spending and encourage more capital into areas
where there is need for new solutions. It also
helps philanthropists generate greater good
through their activities.
Where is it being used?
Nationally and internationally, impact investments
are being used to finance initiatives in a wide
range of areas including the arts, aged care,
community development, education,
employment, health, environmental
management, sustainable agriculture, renewable
energy, justice, social housing and international
development. The types of social impacts being
achieved include the creation of new training
opportunities for disadvantaged young people,
quality sustainable jobs in regions facing
economic change and decline, increased
affordable housing stock, improved health and
educational outcomes, and new facilities and
services that meet the needs of a community.
Who are impact investors?
Impact investors are the people or organisations
that provide the capital for impact investments.
They include governments, philanthropists,
private investors, corporations and institutional
investors (such as superannuation funds).
A range of factors influence the approach of any
given impact investor. These include: their
motivations for investing, the types of
investments they can make within their
organisational and capital structure, their appetite
for risk and their expectations with regard to
social outcomes and financial returns.
How does it work?
Impact investments track many of the existing
asset classes in financial markets, including cash,
fixed interest, infrastructure and alternative
assets. The investment opportunity can mirror
existing financial products available in debt and
equity markets or involve innovations that
respond to structural barriers or new
opportunities.
There is also a growing interest in the use of new
‘hybrid’ mechanisms by government and
philanthropy. For example, social impact bonds,
which are not ‘bonds’ in the traditional sense, are
a unique approach to contracting and financing
across sectors to achieve and encourage better
outcomes in a particular area of social need.
Impact investments can be flexible. They can also
take time to design and negotiate, and may not be
suitable in all circumstances.
One investment: Many investors:
different rates of return
Impact investments may involve one investor
providing finance directly to an entrepreneur or
organisation. They can also involve a mix of
investors coming together in a single investment,
or putting the capital into an investment fund to
finance a wider range of projects.
Not all investors want or need the same type or
rate of financial return from an investment. Not
all investors may have the same appetite or
capacity to take on risk.
The advantage of having different types of
investors involved in the one deal is that it can
help spread the financial risk. This creates new
opportunities for collaboration because creative
utilisation of even (relatively) small amounts of
capital that can assume greater risk (such as
government or philanthropic capital) can attract
even more capital to the particular issue. This is
sometimes referred to as ‘but for’ capital in the
sense that it has enabled a much greater level of
investment to have an impact on the particular
social issue, that ‘but for’ the risk capital would
not have been possible.
International experience is showing that impact
investment does not need to be a ‘trade-off’
between social and financial return.
An Australian example
The Social Enterprise Development and
Investment Funds (SEDIF) is an initiative designed
to improve access to capital for social enterprises,
and in the longer-term, catalyse the broader social
investment market in Australia.
Grant funding of $20 million has been more than
matched by other investors in three new funds to
create a total investment pool of more than $40
million.
The three SEDIF fund managers are using the
pooled capital to provide tailored financial
products, primarily loans, to social enterprises to
help them purchase premises and equipment,
develop new services, or expand existing services
for the benefit of their communities.
Further reading
For more information and examples of impact investing
in Australia, visit the Social Innovation webpage
<employment.gov.au/impact-investing>
For an overview of the Australia impact investing
landscape see IMPACT—Australia: Investment for
social and economic benefit