Social Impact Investing

Is it the new Holy Grail for the charitable/NFP sector?  Or just a theoretical concept and lot of hot air?  We look at this new area of funding in the charitable/NFP sector and some words of wisdom from a recent visiting UK expert and explorer in this area; David Carrington.

David was brought to New Zealand to share his knowledge by the good people at Philanthropy New Zealand.

What’s the problem and what is social impact investing?

The social and community sector is one that is admirable in its endeavours to look for better ways of achieving more.  When it comes to big issues to be addressed one of the biggest in the sector is funding of the social and charitable activity that is required.  The specialist magazine this article was written for, Fundraising New Zealand, is a very visible demonstration of the importance of the funding issue. 

Hence it is not overly surprising that the charitable and NFP sector seeks new and innovative ways of funding what is necessary.  And unless you have been living in a cave in recent times it is very likely that you will have heard of the terms “social impact investing”, “social bonds” or some other derivative of the term.

So what is social impact investing or social investing?  As defined by the eloquent David Carrington it is “The investment of funds in an enterprise with the deliberate intention that those funds will help to secure a clear, positive and measurable social outcome, a public benefit, whilst also generating a financial return to the investor enabling the funds to be recycled and used over and over again.”

While the definition may sound reasonably simple, it is in fact practically quite a complex area and “embraces a vast breadth and depth of investment activity”.  Specifically it attempts to bring together some very different players from very different sectors, and all the different frames of reference this entails.  It is in essence trying to mix philanthropists and foundations, with charitable/NFP service providers, with commercial and institutional finance entities looking for a financial return on their investments. 

That’s a noble aim.  But these three very different parties all come from very different starting points and with very different experience and views of the world.  You could say they all have a reasonably considerable amount of “baggage” that they bring to the table from where they live and why they are involved.  Hence trying to get a result from blending these three groups together can be an interesting exercise to say the least.  And if that cultural clash was not enough of a challenge, you can also sometimes add Government departments into the mix, as some of them are very keen to explore this new form of funding social and community issues with a mixed model.

With social impact investing all parties intersect and when it goes well it can benefit all parties; the ultimate aim.  However there is a lot of new territory to be explored before we have tried and proven models. 

So how much is actually happening?

Possibly a lot less than the media or all the talk would have you believe. 

Firstly, to successfully establish funding projects with this sort of mix of disparate parties takes a lot of time, effort, and faith.  Internationally while there are some pilot projects being undertaken in a number of countries, there are not yet many mature or solid examples of clear and stunning success.  And that is often what it takes to tip others, who may be sitting on the fence, into actual action. 

Secondly, a social investment approach is probably only applicable to a few.  This is a reasonably complex funding structure and probably only well suited to certain types of projects.   And even then, many of that subset are probably not investment ready.

However New Zealand has some issues that may be suitable candidates for social impact investment initiatives.  One of these relates to promoting social housing, especially as this tends to be an area that requires significant amounts of capital finance to build such housing.  Such amounts are often beyond the means of many individual players in New Zealand.

What are some of the likely keys to success?

Clarity - of what is expected from whom, when, and how.  What are the measures and what are the realistic expectations of each party?

Involvement of Government is also likely to be critical for success in many instances.  Social investment is a long game.  It needs Government involvement in some cases as the Government is already a big funder in the social and community space and hence they are likely to be a significant underwriting partner.  Government also has a role to play to ensure that legislation and regulation are appropriate and do not act as an impediment to the innovation needed to create successful social impact investing models.

Champions will be needed.  And these will need to come from all parties involved.    However as with seeding any new idea and walking into the unknown, these champions will need to have stamina, conviction and a positive “can do” outlook.   They will also need to avoid hyperbole that seems to have infected this term already as “a silver bullet” for the sector.

What are some of the likely barriers?

Conflicting objectives of the different parties.  Their fundamental motivations differ because of the very different frames of reference and backgrounds they are coming from.  Without a sufficient level of openness to the views of others, compromise, and focus on the overall objective, then such a mixed model is likely doomed to failure. 

Cost.  The reality is that the logistics of such a multi-party joint project is unlikely to come cheap.  Hence the projects will need to be big enough and the benefits great enough to justify the time effort and logistics that will be required to arrange and utilise this type of funding.

Patch protection.  The reality of multi-party projects is that they tend to go one of two ways;

  1. everyone working together collaboratively and compromising where necessary for the common objective (commonly known as “nirvana”), or
  2. each party concerned to protect how they fare in any interactions and ensure they are not to blame.

Parting thoughts

There is perhaps more hype and noise surrounding social impact investing than is justified by the actual level of activity.  In my view, social impact investing is unlikely to be a silver bullet for the social and community sector.  

However, there is interest in the concept and there is some, albeit limited, activity regarding trials.  If it can be made to work successfully then it could be a valuable addition to the range of funding options for social and community issues.   

“The right sort of money, for the right sort of organisations, at the right time.”

Here’s hoping.

P.S.   If you would like to see David Carrington’s excellent address to Philanthropy NZ while he was in New Zealand the presentation was filmed and is available on the Philanthropy YouTube channel.  Well worth a look!

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Authors

Craig Fisher
Consultant