Why impact investing?
In Australia, there are over 20,000 social enterprises operating across all industries of our economy and delivering positive social, cultural or environmental impact directly or via the income streams they derive. Alongside social enterprises, a growing number of ‘profit with purpose’ Australian businesses, including the rising movement of Certified B Corporations, are making a meaningful contribution to tackling social and environmental challenges.
These social enterprises and businesses all need capital at the startup phase. While some social enterprises may start with philanthropic grant capital or be seeded from within a not for profit organisation, others including profit with purpose businesses may look for to impact investments from investors interested in early-stage businesses.
More developed businesses with a scalable business model, often have the desire to grow and expand the size, scope and sustainability of their products and services. For these businesses, impact investing provides an important means for realising scale and achieving greater impact.
How does impact investing work?
An impact investment occurs when an investor provides a social enterprise or a profit with purpose business with capital that can then be used to develop or grow the business. An impact investment must be repaid, so the investment will need 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 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 receives payments as the business grows.
Examples of impact investing
There are many different examples of how an impact investment may help a social enterprise or for-purpose business achieve its mission including:
- Accessing a real asset that business needs to deliver upon its mission such as a hospital or housing;
- 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;
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 individuals interested in investing in early stage or more mature social enterprises and profit with purpose businesses.
- Financing Social Enterprise: understanding needs and realities (Foresters Community Finance, 2010)
- A Framework for Action: Social Enterprise and Impact Investing (UN Global Impact & Rockefeller Foundation, 2012)
- Growth Financing for Social Enterprises: 5 Options and How to Make Them Work for You (Triple Pundit)
- Profit-with-purpose business: subject paper of the Mission Alignment Working Group (Social Impact Investment Taskforce, 2014)
- Investor Perspectives on Social Enterprise Financing (ClearlySo, Big Lottery Fund & The City of London, 2011)