Why impact investing?
In Australia, there are around 600,000 not for profit organisations of all shapes and sizes working in areas ranging from youth homelessness to nature conservation. Many want to increase their impact and become more effective, whether it be through expanding services into new areas, developing new programs or simply improving their cashflow.
While governments and philanthropy provide significant sources of funding, not for profits are being challenged as government priorities and funding methods start to shift, and as the demand for social and environmental solutions increases.
For some of these organisations, impact investment could be a useful tool for innovating, collaborating and delivering better outcomes. From establishing a new service, to building a new premises or delivering a ‘payment by outcomes’ program, impact investing has the potential to play a unique and important role in achieving greater impact.
How does impact investing work?
An impact investment occurs when an investor provides an organisation with capital – either directly, or indirectly through a fund – which the organisation can then use to develop a new income stream or expand an existing one. Unlike a grant, an impact investment must be repaid, so the investment needs to be used to generate income as well as a surplus.
There are two main kinds of impact investments: loans and equity:
Loans (Debt): If the investment is made as a loan, the borrower is typically required to repay the amount borrowed a future date, along with an agreed amount of interest. Different types of loans included secured loans, unsecured loans, senior loan and subordinated loans.
Equity: If the investment is provided in the form of equity, the investor then owns a stake in the business or entity and typically receives payments as the business grows and/or if they sell their stake.
An increasing number of not for profit organisations are recognising the benefits in growing their financial reserves and then investing this money in businesses, funds or programs that deliver positive outcomes consistent with their own mission. In this instance, the not for profit organisation is not looking for investors, but rather, assumes the role of an impact investor.
Examples of impact investments
Some examples of where impact investments may help a not for profit organisation achieve its mission include:
- Accessing a real asset that a not for profit organisation needs to deliver upon its mission such as a hospital, housing or wind turbines;
- Case Study: Australian Chamber Orchestra Fund
- Case Study: Hepburn Community Wind Park Cooperative
- Case Study: Melbourne Montessori School Community Finance Fund
- Case Study: The Murray Darling Basin Balanced Water Fund
- Establishing or scaling up a social enterprise that generates income for a not for profit organisation and/or that may deliver directly against the mission of the not for profit organisation;
- Financing program delivery to cover a not for profit organisation’s overheads when it has entered into a ‘payment by outcomes’ agreement (such as through a social impact bond or development impact bond).
- Case Study: Newpin Social Benefit Bond
What do I need to become ready for investment?
Not all organisations are in a position to attract and secure an impact investment. Find out what it means to be ‘investment ready’.
Where can I access finance or investment?
In Australia, there are a growing range of organisations and individual investors providing finance to not for profit organisations and related initiatives.
- Best to Borrow? A Charity Guide to Social Investment (New Philanthropy Capital, 2011)
- Place-based Impact Investing in Australia (I. Burkett, Department of Education, Employment and Workplace Relations, NAB, Mission Australia & JBWere, 2011)
- Intentional Investing (Association of Charitable Foundations, 2015)
- Amplify Impact Investing: the INGO Value Proposition for Impact Investing (INGO Impact Investing Network, 2016)
- A practical guide to understanding social costs: Developing the evidence base for informed social impact investment (Deloitte Access Economics, 2015)