By Sabina Curatolo
Director of Government Relations and Policy, Impact Investing Australia
The welcome announcement by Victoria’s Treasurer, Tim Pallas, on 21 July of a Victorian social impact bond (SIB) pilot scheme, has brought to four the number of Australian state governments committed to trialing this payment by outcomes instrument. Through this pilot, Victoria’s first SIBs will target disadvantage by focusing on drug and alcohol treatment, and young people transitioning from out-of-home care.
New South Wales pioneered this approach in Australia in 2013 with the launch of two social benefit bonds (as they are known in NSW), aiming to improve outcomes for families at risk. Additional impact bonds and related approaches to outcomes driven practice are currently in development in NSW. Other state governments including Queensland and South Australia have also announced impact bonds and initiatives at various stages of development. Responding to increasing public demand and budgetary limitations, these governments are looking to new ways of bringing together diverse groups from business and community to tackle entrenched social issues.
The announcement of the Victorian trial came on the back of the launch of Victoria’s first green bond (18 July 2016) to finance projects delivering various environmental benefits. The first Australian State to issue a green bond, there is a strong and growing demand for this type of investment opportunity and this $300 million scheme was fully subscribed by a diverse range of investors within 24 hours.
The Australian SIBs story is echoed globally. Since the first social impact bond was launched in London 2010, over 60 projects have commenced in 15 countries, with over 21 of these already reporting positive social outcomes and 4 projects that have fully repaid investor capital.
As with any new venture, not all SIBs trials will be successful. Recently in New Zealand negotiations for a planned SIB have reportedly ceased. Of itself, this would not generally be considered newsworthy. Any type of negotiation can meet an impasse and often, parties return to the table and discussions continue. But some SIBs, like any program, may not be successful. Fundamental to the growing success of this and other impact investing approaches will be the further creation of evidence of what works and what does not, and importantly, what will lead to the success of future trials.
A financing mechanism for the payment by outcomes approach, SIBs are just one tool in the impact investing landscape, which is evolving rapidly.
Governments have a critical role to play in building the market for impact investments and growing the opportunities to harness private capital for positive social impact. The leadership of the Australian state governments trialling SIBs is welcome and timely. We can expect to see governments increasingly play more active roles to enable and participate in impact investing. Without stronger support from government, the potential for impact investment in Australia will not be realised.
Governments have a well-established role in market development. They operate in all financial markets as participant, enabler and condition setter. The regulatory environment and fiscal policy are important drivers (or disincentives) for the development of markets and government leadership can build confidence and catalyse the market.
The Australian Advisory Board on Impact Investing – made up of business and community leaders – has been working with counterpart national boards in 12 countries to grow the impact investing market internationally. Already around the world, governments are taking active steps to enable and catalyse impact investing. For example:
- The UK Government has recognised the value of investment through a dedicated whole of government strategy outlining how the Government will continue to support and encourage the social investment sector throughout the UK. Here is Australia, with NSW having pioneered the country’s first whole-of-government strategy for impact investing.
- The EU has established a Social Impact Accelerator to catalyse impact investment by serving as a fund of funds and stimulating finance for social enterprise.
- The US has been actively changing policy settings, including issuing new guidance for the Employee Retirement Income Security Act of 1974 (ERISA) which will allow private pension funds to consider environmental, social, and governance factors, in addition to financial returns, when making investment decisions; as well as creating and passing legislation to expand federal support for state and local social impact bonds.
- The Portuguese Government launched the Social Innovation Fund (SIF), a wholesale financing instrument, as part of its Social Innovation initiative to create a social investment market in Portugal.
- The UK Government launched Big Society Capital, the first impact investment institution of its kind in the world, created to drive market development. Other countries are now working to establish similar institutions, including in Australia with Impact Capital Australia.
- The United Nations has recognised the importance of social investment through the recent establishment of a Social Impact Fund.
In Australia, real gains are continuing to be made in the development of impact investing. Australia has an opportunity to play a leading role in growing the impact investment market locally, in our region and globally. With our significant capital markets, dynamic social sector and growing social enterprise movement, we’re in a unique position to take impact investing to the next level, delivering better outcomes for Australia and the world beyond us.