Doing the work we do, it can be easy to forget that impact investing is a means to an end, rather than an end in itself. It is just one road that an organisation with a social or environmental mission can choose to help achieve the change they are working to bring about. And this change they are working towards is the destination.
Imagine a highway. Travelling in one direction are organisations who have a social, cultural or environmental mission such as not for profit organisations and social enterprises.
Travelling in the other direction on the highway are a range of different investors. Mission-focused investors like trusts and foundations, private ancillary funds and not for profits with reserves to invest. Also driving on this same side of the highway are individual investors who want to invest their money with purpose and commercially-focused investors like super funds and fund managers.
Imagine this flow of traffic is like the flow of capital. Capital going into the mission-focused organisations in one direction. Capital coming from the investors from the other direction.
On a well functioning highway those two directions of traffic sit side by side; they are aligned. If this is the impact investing highway, then what do we need to do to ensure that it functions well? How do we make sure that this highway is used by all those who could be using it? How can we ensure the traffic flows efficiently and effectively? I believe there are three things we can be doing now.
Firstly, we need to ensure that people know the highway exists so they have the option of using it. We need to raise awareness about impact investing – what it is and the opportunities it brings. Fortunately we are on our way here with interest growing rapidly. While some people may dismiss this as ‘just talk’, most activity starts with an exchange of ideas, often through talking! The trick of course is transitioning from talk to action, so people understand the opportunities to get on and off the highway.
We need to equip investors with an understanding of how they can invest for impact. This includes:
- Showcasing impact investments that have been made so investors can see tangible evidence of what opportunities look like and what returns are being generated.
- Building the right investment frameworks (or even better, having investment advisory firms build these frameworks) to help investors see where different impact opportunities may sit within their portfolios
- Encouraging product manufacturers and deal makers into the space to help translate demand for capital into investment opportunities.
We also need to equip the other side of the highway – not for profits, social enterprises and businesses with a social mission – with where and when they might use private capital to finance their mission and scale up their work. What does this look like? Some examples include:
- Engaging boards and management teams around the different ways private capital is being used by organisations in different ways so they can start to think about where there may be appropriate (or not) applications for their own organisations.
- Sharing learnings and build capacity by leveraging the experiences (good and bad) from organisations that have used private capital to further their mission.
- Regulating the traffic
Secondly, we need to support those that regulate the highway to do so effectively, including setting speed limits, the tolls (if any!) and making it easy for people to access the highway. That’s government in the impact investing world.
We know that there’s a number of things governments can be doing to increase the use of the highway in both directions. For example:
- Helping to build a flagship social impact investment fund that invests in for-purpose organisations and initiatives that deliver measurable social and financial returns. This Fund will act as a catalyst and champion for impact investing, encouraging innovation, diversity and scale.
- Creating tax concessions for investments into social enterprises or other impact investments.
- Build investor confidence by clarifying fiduciary duties for superannuation and philanthropic trustees, so they have no doubt ‘impact’ can be considered in addition to ‘risk’ and ‘return’.
Finally we need to think about how each lane functions and watch for gaps in the road. There will be gaps in the roads and we know about a number of these already.
We can’t expect the first person arriving at a gap to get out of their vehicle and fix it themselves for the benefit of everyone else. We need to look at where those gaps exist and fix them together. Ideally we shouldn’t be doing this when the traffic is banked up. Instead we need to look miles ahead for the gaps that exist and fix them well ahead of the traffic.
Here’s just a couple of examples of roadworks that will benefit those on or with potential to use the highway:
- Without good data on impact investments that have been made, investors don’t have a good source of information to understand risk and return. We need a data set of impact investments in Australia (yes it is going to be small to start with!) and over time we need an investment benchmark.
- We need resources (advice, time, expertise, money) to support social enterprises becoming ready for investment. Without this kind of support for social enterprises and the ability for them to successfully attract investment, fewer will be able to achieve the outcomes and scale they dream of.
Our highway is in the making. Impact investing is already happening. There are a range of amazing people and organisations that have spent years developing the market and even more who are joining that effort now.
If we think that impact investing will only ever be a back street then it will remain a back street. But to those who can see the superhighway that this can be; I invite you to join in the build. There is still plenty of work to be done, but I believe it is work worth doing: a road worth building towards a destination worth aiming for.
Daniel Madhavan is the CEO of Impact Investing Australia