September 30, 2014

AFR Special Report: Social Impact Investing

Following a recent NAB-hosted roundtable event on Social Impact Investing, The Australian Financial Review today released editorial covering the topic from two journalists who were in attendance, James Dunn and Jonathan Shapiro.

NAB recently hosted a roundtable event on Social Impact Investing. Today, The Australian Financial Review released the following editorial from two journalists who were in attendance, James Dunn and Jonathan Shapiro.

Good returns from new sector

James Dunn, The Australian Financial Review

It’s the new wave of investment, which threatens to turn the world of ­philanthropy on its head, by a simple switch of focus: to apply the same ­models for ­success in philanthropic endeavours as are applied to business.

It’s social impact investing – sometimes the “social” is left off – and it is nothing short of an attempt to bring the same level of entrepreneurial dynamism that characterises business to the ­philanthropic sphere.

The idea is simple enough – to invest in efforts that not only provide a return on investment, but also target specific social needs. The return on investment, however, is two-fold. “It’s all about investments that have, or are intended to create, a positive social benefit as well as a financial return, where you measure both,” says Rosemary Addis, co-founder of Impact Investing Australia. “It’s measuring the social and the financial, where social in that context has a broad definition that encompasses environmental and ­cultural and things that generally are for the better for society.”

Although social impact investing is aimed at social problems – for example, homelessness, affordable housing, ­welfare dependency and prisoner ­re-offending – it is explicitly not pure philanthropy as we know it. Impact investing has to pay its way. “What we’re trying to do with impact investing is make investments that drive positive outcomes, such as better employment outcomes for people who face barriers to getting work, better health or environmental outcomes, or more appropriate housing solutions for people with disabilities. But at the same time, these are commercial ­investments,” says Ben Gales, chief executive of Social Enterprise Finance Australia (SEFA).

“You can actually target institutional investors with good commercial deals that lead to those positive externalities. You can look at aged care, you can look at health care, you can look at indigenous housing, there are huge ­opportunities out there with incredibly positive externalities, but actually ­giving a perfectly good commercial return. We can create investment opportunities that deliver positive externalities but also strong financial returns: we just need to harness the available funds by structuring deals appropriately,” says Gales.

Effectively, there is “no expectation of getting any money back” from ­philanthropy, even if you look upon it as an investment, says David Knowles, head of philanthropy advisory at JB Were. Whereas, in impact investing, “there’s the expectation that you’ll get back your money back and potentially an income stream from the investment”. Within Australia, the Centre for Social Impact at the University of ­Western Australia estimates that impact investing could grow to be a $20 billion sector by the end of the ­decade. Globally, JPMorgan and the Rockefeller Foundation predict that the impact investing sector would grow to between US$400 billion and US$1 trillion in size by 2020.

One of the earliest examples of social impact investing in Australia was the GoodStart Early Learning Syndicate, which was set up in 2008–09 following the collapse of ABC Learning, the largest single provider of child care in the Australian market. Four not-for-profit organisations – the Benevolent Society, Social Ventures Australia, Mission Australia and the Brotherhood of ­­St Laurence – formed the syndicate, which set out to raise capital to buy 678 of ABC Learning’s viable child-care centres, to ensure they stayed open.

The three syndicate members whose balance sheets were significant enough – Benevolent Society, Mission Australia and Brotherhood of St Laurence – invested $2.5 million each in members’ subordinated notes, and all four ­members invested $2.5 million non-cash each (paid for through advisory ­services) in members’ deeply ­subordinated notes. National Australia Bank provided a package of four senior debt facilities worth $120 million, accepting a slightly lower interest rate than ­market.

The Commonwealth government provided a loan worth $15 million – which allowed most of the principal to be repaid in later years – because the transaction was in the public interest. And the syndicate approached more than 150 high-net-worth individuals, philanthropists and foundations to invest in social capital notes: 41 such “social investors” invested a total of $22.5 million in unsecured social ­capital notes, with an eight-year term, offering 12 per cent interest annually – which GoodStart is not obliged to pay if it has insufficient free cash flow in a given year. GoodStart has been running the child-care centres since 2010: it is the largest social enterprise in ­Australia. Another example is a social benefit bond (SBB), a form of finance designed to raise capital for programs that address areas of pressing social needs. These are financial investments that pay a return based on the degree of success that the social program achieves in addressing social needs.

The New South Wales Department of Families and Community Services and Uniting Care launched Australia’s first SBB in March 2013, to fund the ­latter’s Newpin programs to support ­at-risk children in the state’s out-of-home care system to return safely to their parents. The charity runs the project, which saves the government money in the long term: the government pays the investors for each ­successful outcome that is attained.

In the first 12 months of SBB funding, the Newpin program restored ­28 children under six years of age to their families, and prevented children at risk in another 10 families from ­entering the child protection system.

Those outcomes qualified the investors to receive a 7.5 per cent return for year one of the program – against a targeted financial return of 10 per cent –12 per cent a year over the seven-year term of the bond, based on the expected success of the program in restoring children to their families.

In October 2013, the Benevolent ­Society launched a similar $10 million SBB to fund its Resilient Families ­program, an intensive family support program designed to keep children, reported as being at risk of harm, or already in the New South Wales child protection system, with their families. The Benevolent Society SBB was ­structured with two tranches to meet the different risk-and-return profiles of different investor markets. The Class P investment is capital-protected, while the Class E investment will suffer 100 per cent loss if the performance improvement of the Resilient Families program is less than 5 per cent. “We’re interested in growing a social finance market to provide new sources of funding to the social services sector not only to deal with the growing need for social services, but also to find ways to achieve lasting change,” says Wendy Haigh, executive director of finance and business services at The Benevolent Society.

If you were looking solely at GoodStart as an example of social impact investment, the mooted dual social/financial model certainly seems to stack up. “We’re earning a return of 15 per cent on the GoodStart investment, we have been for several years and probably will be for several more. In a climate of very low interest rates, it really has been a good financial ­investment,” says Haigh.

“Our social benefit bond is returning up to 10 per cent (for the capital-protected tranche) or up to 30 per cent (for the capital-at-risk tranche) if it goes well. So it could end up being a philanthropic gift, but we never went into it as that,” she says. “It was both pieces: we were investing in a measured social benefit as well as a financial return. And although it is hard to measure, we will be able to see how well the families in our service are doing compared with families who don’t receive the ­service,” says Haigh.

All you are really talking about with social impact investing is “taking into account the externalities when you consider the investments,” says Gales. “All investments result in externalities – positive or negative – as they impact outcomes for individuals or ­communities or the environment. When I was in venture capital, I used to make commercial investments but avoid negative externalities. “All we’re trying to do with impact investing is make commercial investments that drive positive externalities, such as better employment outcomes for people who face barriers to getting work, better health or environmental outcomes, or more appropriate housing solutions for people with disabilities,” says Gales.

The sector is learning to target ­institutional investors with good commercial deals that lead to these positive externalities, he says. “You can look at aged care, you can look at health care, you can look at indigenous housing: there are huge opportunities out there that have incredibly positive externalities, but actually giving a perfectly good commercial return,” says Gales.

Are we chasing numbers or actual results?

James Dunn, The Australian Financial Review

Social impact investing is meant to be a win-win: the investment delivers social services that complement or replace ­government funding; the government is able to save, prioritise and make its ­spending efficient; and the investors motivated by social impact get to see both an ­investment return and quantifiable social benefit on their committed funds.

It is a virtuous circle, but it is definitely not simply about creating a warm inner-glow for a certain kind of quasi-philanthropic investor: social impact investing should be considered an investment. But holding back a full appreciation of effect of social impact investing is the understanding of how the benefits are derived.

Wendy Haigh, head of finance and business services at The Benevolent ­Society, uses the analogy of an ambulance stationed at the bottom of a cliff, or a fence built at the top of the cliff. “In Australia, in the human services sector, we spend about $300 billion a year, but how much of that much money is wasted on the ambulance at the bottom of the cliff, when we could be measuring – and ­showing the savings from – building the fence at the top of the cliff? The right fence stops people from going to hospital in the first place.”

No other industry could afford to spend $300 billion a year and not ­measure the returns, Haigh says. But with the increasing strains on the public purse, she says, the “fact of life is we’re going to have to find a way of doing that, because we can’t afford any longer not to do it.”

Haigh points to the social benefit bonds established in New South Wales, under which Uniting Care and the ­Benevolent Society are funded to run programs to address the problem of children in the state child protection system, with an aim to return them to their families. The bond investors are paid according to the charities’ success rate in returning at-risk children to their families, or avoiding the out-of-home care system altogether.

Success for these programs does not only mean the state government saves the estimated $66,000 annual cost of ­supporting a child on foster care, but the children removed from the protection system increase their likelihood of ­continuing their education beyond the minimum school leaving age – an ­outcome with incalculable benefit.

“That’s where we can show the savings from building the fence at the top of the cliff,” Haigh says. “Across the whole human services sector there are so many examples of where we are only ­measuring inputs and outputs, when we could be measuring outcomes that really demonstrate the impact and effectiveness of services – and that’s what impact investing is enabling us to do now.”

Real costs

Rosemary Addis, co-founder of Impact Investing Australia, says the UK, and to a certain extent New Zealand, have invested in the “actuarial approach” to understanding the cost of social services.

“On the UK government’s website they’ve actually published a whole range of social issues and what it costs now for the government service provision: a ­first-time juvenile offender costs this much a year, second-time costs as much a year. But governments are starting to understand that the real cost depends on whether you’re actually stopping people going back into jail, not whether each prisoner gets an extra sausage for dinner. It’s important to get transparency around some of those things to then drive ­benchmarks against which we can ­measure outcomes,” she says.

Measurement of outcomes is the key, Professor Peter Shergold, chancellor of the University of Western Sydney and director of AMP says, because that ­enables “private-sector discipline to be imposed” on a very government-oriented sector. “The way we do [social spending] now is that governments see it as ­expenditure on crisis management. Now when you build that ‘fence at the top of the cliff’, state treasuries will start to see this as an investment in preventing costs in the future – but the social impact sector has to start to measure things properly.”

Shergold says the measurement has to be of actual outcomes. “In my days as a public servant, I ran the federal government’s Job Network [now Job Services Australia] when it was first established. We used to get payments on getting someone to work for 13 or 26 weeks, and we thought that was a good outcome. But if you stop to think about it for a minute, that’s not really an outcome, it’s an output.”

The outcome of getting someone into permanent work, he says, flow from the beneficial effects terms of things such as housing, family functionality, and health. “When you start to measure that, to say ‘this is the social value you’re getting from this investment,’ the way people think about that investment starts to change significantly,” he says.

Richard Brandweiner, chief investment officer at First State Super, says the philosophy underpinning social impact investing is that it is linked to real ­outcomes. “The model is designed to encourage social innovation in such a way that expenditure is linked to real ­outcomes, rather than the traditional ­government model of inputs or outputs, you know, we spend X and we get Z ­numbers of beds, Y numbers of schools. Suddenly now they are paying for jobs or future tax revenues or better health. ­Ultimately, that is what appeals to governments about this,” Brandweiner says.

Genuine contestability

Ultimately, the role of social impact investing can be seen as bringing private-sector techniques to bear on public-sector problems. “The whole point of the debate is that governments cannot afford to keep spending in the way that they do,” Steve Lambert, executive general manager of debt markets at National Australia Bank says. “We just can’t have the same normal social services paid for at the same level by the government going forward.”

What social impact investing is trying to do is apply capital-market private-sector technology to solve the problem in a different way, he says. “There’s a lot of debate at the moment around how do we fund the next airport, how do we fund the next railway line. It’s the same debate with how do we fund social infrastructure? “It’s possibly slightly different ­techniques, but the toolkits we’re using are broadly the same,” he says.

Shergold agrees. “Take the problem of entrenched welfare dependence. If the government keeps spending and ­delivering its programs in the same way, you could double the amount of money and deliver the programs and you would still have the detrimental impact of ­third-generation welfare dependence. It’s not just that there’s not enough money, there’s not enough innovation.”

In this context, Shergold says, social impact investing is an opportunity to start to create “genuine contestability” in social markets. “It’s a model which partly uses government money, partly uses ­private-sector money, and partly uses social entrepreneurs’ experience to deliver social benefits – whether it’s childcare or aged care or affordable housing, or whatever it is. That’s the exciting part of this, and that’s what’s attracting people into supporting it,” he says.

Ultimately, it is about “creating a ­market for outcomes”, Ben Gales, CEO of Social Enterprise Finance Australia says. “If you can use the language of the market and put a price on outcomes, you can push it out on the market and pay for outcomes. That makes a world of difference.”

Potential to improve lives, reduce burden, make money

Jonathan Shapiro, The Australian Financial Review

Paul Volcker, the long serving governor of the US Federal Reserve, once quipped that the only true innovation in finance was the invention of the automatic teller machine. He may have a point that most things in finance have been done before, but even he would have to acknowledge the enormous potential for social impact investing to improve the lives of others, reduce governments’ burden and generate strong returns for providers of capital.

Social Impact Investing is rising to prominence as the advance of tech­nology, the limit of government and the fortitude of social entrepreneurs fosters the creation of a new asset class that harnesses incentives to deliver outcomes, and produce returns from the savings they generate. The potential is enormous – as large as what governments spend on vital social services.

Sir Ronald Cohen, the British private equity tycoon who has become a figure-head as leader of the Social Impact investing taskforce, believes the sector could be as large as $3 trillion within 20 years.

While governments and charities are creating the social investing products – more capital is gravitating towards social investments. Philanthropists with billions at their disposal can now provide capital that works harder by providing incentives. And the success of pioneering transactions has caught the attention of institutional investors seeking ways to invest that aren’t tied to the whims of ­global financial markets.

The sector is being driven not just by economics, but by highly talented indiv­iduals within the finance industry. On the one hand more bankers that prospered in the industry through their skills are determined to use their knowledge for social outcomes. Cohen is one example but there are many others in the Australian private and non-for profit-sector. On the other hand, more bright young graduates with vast potential are motivated to pursue careers in finance make a difference.

“[Sir Ronald] helped pioneer a ­generation of capitalist entrepreneurs with funding that enabled their ideas to come to fruition,” QBE’s chief investment officer, Gary Brader, says.

Be successful, make a difference, get paid

“Today there’s a bunch of smart young people out there that would rather apply their talent and energy to a social good. This enables scaling up of those ideas. You can potentially be successful, make a difference and get paid,” he says.

The result is an abundance of ambition in the non-for-profit sector. Yet even though the virtues of the asset class have been universally embraced, there are still bottlenecks and hurdles that hamper its development. One of the biggest challenges is to get the balance right between social outcomes, government savings and investor returns when creating social investment products.

As social impact investing shows promising signs of developing into a true, and global, asset class, those involved in its development – from charities to financiers – are urging Australia to stay at the forefront of the global devel­opment of the asset class. “Australia has earned itself a seat at the table and loves as a nation to punch above its weight,” Brader says.

“It’s important policymakers act as enablers at the Commonwealth and state level. We don’t want to lose the head start we’ve got on a lot of other countries.”

A look at bonds through the institutional investor lens

Jonathan Shapiro, The Australian Financial Review

As a portfolio manager in the 1990s at National Mutual Gary Brader grasped the enormous potential of securitisation to lower household borrowing costs by pooling together mortgages. That experience is why Brader, who is now chief investment officer at global insurer QBE, is such an active proponent of social impact bonds.

The global insurer has committed to investing up to $100 million in social impact bonds, where payments are tied to social outcomes – with the capital to be allocated over three years in bonds issued around the world.

With a large investment book playing a crucial role in delivering returns to shareholders, Brader cannot afford to allocate funds on a purely philanthropic basis. But he’s still lured towards the opportunity that presents itself from social impact bonds. “A cold-blooded heartless hedge fund could still find these investments interesting,” he says.

“We have a duty to seek strong risk-adjusted returns and these instruments allow even the most hard-nosed investors to become comfortable.” QBE is a rare institutional investor in a space that is largely the domain of high-net-worth philanthropists and their foundations. But Brader says for social impact investing to achieve its true potential it needs to evolve into an institutional asset class.

Identify opportunities

“We want to play a role on the ground floor to identify opportunities with government and service providers and use our institutional investor lens to help create something that is going to be attractive to others in the same way they would be attractive to us.”

Brader says QBE’s global reach – it manages money in a range of currencies – provides it with a responsibility to instill global standards and share ideas about what deals work or don’t, in other parts of the world. While Brader’s mandate requires him to be return-focused, he realises that for the long-term success of social investing, the emphasis has to be on social outcomes not financial returns.

“If this space is seen as the financial or the private sector wanting to get a return, it’s not going to be embraced by governments as much as it should.

“The emphasis should be on funding social entrepreneurs in getting them funding to make a difference, and only if the government is saving money, then a share of those savings could flow to the investor.”

A more meaningful input a no-brainer

James Dunn, The Australian Financial Review

To its advocates, social impact ­investment is a no-brainer, as a means to transform the way we use capital and investment to enable more innovative and effective approaches that tackle pressing social issues, while also ­creating economic opportunity.

For governments, saving money and over-hauling social spending to become more efficient – while benefiting from increased tax revenues down the track as social impact programs help people into jobs – is both an ­attraction and a reward.

But social impact investment needs the third part of the phrase – it needs investors. And most of them will want to see “investment” before they see “social impact”.

That said, there are some natural takers for this kind of investment. For example, ethical/socially responsible investment (SRI) funds have already, by definition, declared their interest in socially beneficial investments.

Although there is only $9 billion held in specific Australian ethical/SRI funds and mandates, according to Rainmaker research – out of a $1.8 trillion managed funds market – the proportion of funds that is overseen through an ESG ­(environmental, social, governance) is much higher, given that almost all funds say they follow the United Nations Principles for Responsible Investment (UN PRI) at least in some way.

Returns compare well

“Over the last 15 years there’s been a huge increase in ethical and social responsibility funds,” Peter Shergold, chancellor of the University of Western Sydney and director of AMP Limited, says. “So we’ve got a lot of investors already who want return but will ­negative-screen, as in they don’t want to invest in making armaments or tobacco or gambling or whatever it is.

“If you look at most of those funds through the GFC and beyond, they’ve actually done pretty well compared to other funds. We can change that, to say you can ‘positive-screen’ and take the same approach and invest in things that actually do social benefit rather than simply avoiding things that do social harm. We know that market is there,” Shergold says.

“But we have to prove the positive,” David Knowles, head of the philanthropy advisory business at JB Were, says. “If you negative-screen, everyone accepts that smoking is bad for ­people and kills them, you don’t have to prove it. But we have to prove the ­positive, which to me is the single ­biggest ­challenge.”

That becomes a critical hurdle in the access to the $1.6 trillion superannuation market, says James Waddell, ­director of the debt markets product group at National Australia Bank. “In a fiduciary environment the financial outcome is the gate that needs to be walked through first, before any social outcome can be considered.

“Boards of trustees [of super funds] are nervous about the SIS Act (the Superannuation Industry (Supervision) Act) and the ‘sole purpose test’ – the test that ensures a superannuation fund is maintained for the purpose of providing benefits to its members upon their retirement, or for beneficiaries if a member dies. I think trustees recognise that they have an implicit social contract with their members. and part of that social ­contract is deploying their capital in ways which enhance the ecosystem and society, but they think first from a fiduciary perspective,” Waddell says.

On the other hand, super funds are required to consider diversification, and since the market shock of the GFC, that consideration has brought them round to think of true diversification: not just having a broad spread of assets, but having some assets the returns of which are not correlated to those of the traded investment markets of shares, bonds or property.

Proper treatment

“From the investment point of view, one of the things that is appealing about social impact investments is their lack of correlation with traditional investments,” Richard Brandweiner, chief investment officer at First State Super, says. “These investments can offer a true absolute return in the sense that a particular social outcome that you’re dealing with generally has very little correlation with broader markets or equity risks. So it really is something that we’ve got to work on making a reality, so that as this market develops, it really benefits governments, it benefits the broader community, it benefits philanthropy and it benefits investors.”

This is where the proper regulatory treatment for social impact investments has to be put in place, Shergold says. “We need to be able to make it clear to super funds, for example, that the sole purpose test is not going to be a problem if a small proportion of the investment goes into these sorts of shared-value returns,” he says.

It is not only superannuation that could be a source of ready funds. “We’ve now got about 1200 private ancillary funds, which have about $3 billion in corpus, and they have to distribute their money to charities,” Shergold says. “If there were new forms of entity which they were allowed to put money, in terms of the social benefit that they gave, that would actually transform the market at the retail level.”

Companies are thinking this way, too, Ben Gales says, chief executive of Social Enterprise Finance Australia. “I’ll give you an example. I know an IT company that had its CSR (corporate social responsibility) initiative; they were giving 1 per cent of staff time volunteering somewhere. They were approached by a community organisation, who said to them, ‘we don’t want your people volunteering with us for an hour packing cases: we want your IT experience’. For them, it has moved from CSR to CSI – to corporate social impact. Rather than donating an hour in something that’s not your core business, donate that hour in the core business. So they’re now doing all the IT requirements at the community centre, and it’s fantastic,” Gales says.

And there is another more powerful driving force coming along that is pushing social impact investment – people. “A lot of younger people are starting to look for roles in their organisations where they can actually feel that they’re making a difference, and I think that’s a really big driving force,” Katherine Leong, impact investment consultant at National Australia Bank, says. “People want to have that motivation in their work,” she says. “I think that with the millennial ­generation coming through, that’s another reason why social impact investment might take off.”

The returns can be simple to see yet hard to define

James Dunn, The Australian Financial Review

Measuring the return on investment (ROI) of a financial investment is easy: you simply divide the gain you’ve made on your investment by what it cost.

But in social impact investing, your ROI can be a very different calculation – if it can be calculated at all. How we judge the ROI in social impact investing is a “fantastic question”, says Ben Gales, CEO of Social Enterprise Finance Australia (SEFA). “There a number of approaches. I guess the two extremes are an SROI [Social Return On Investment] analysis or a simple KPI [key performance indicators] approach. The important point though is that impact is measured. If impact is not measured then it is not an impact investment.”

The main tool used to demonstrate impact is Social Return on Investment (SROI), an approach that seeks to measure the impact of a project, program, social enterprise, non-profit organisation or policy by analysing the value created from the social outcomes and comparing these with the investment needed to generate these benefits.

Gales says we need to think of the SROI as completely separate to the investment return. “An SROI approach puts a financial proxy or value on the social impact of an investment. For example, SEFA has made a loan to Food Connect Brisbane [a social enterprise that delivers seasonal, ecological food direct from local farmers to a ­community of customers in south-east Queensland]. A SROI analysis estimated that for every $1 invested in Food Connect Brisbane, $16.83 is created in social value.”

This social value includes farmers benefiting from increased revenue, consumers eating healthy food, an increased sense of community, reduced welfare payments and higher taxes through the employment of people previously excluded from the labour market. “Such an SROI is very useful as it uses the return language of commercial investors,” Gales says.

However, it is an expensive process and is itself based on a number of subjective assumptions, he says. “The expense of an SROI analysis is something that SEFA and the community organisations we support typically cannot afford. Therefore, we base our social impact assessment on simple KPIs, a set of metrics tailored to the organisation measuring scale as well as quality of impact.”

No gold standard

For example, Gales says SEFA has supported King Street Haven in Caboolture, Queensland, a provider of ­temporary crisis accommodation. “King Street Haven provide us with data on the number of clients who use their facilities, where they came from, why they needed crisis accommodation, and where they go to after leaving. We don’t put a monetary value on that, but we summarise the impact in reports to our investors and stakeholders,” he says.

“The SROI is a great methodology, but it takes nine months to get a good report out and it costs a lot,” says Corinne Proske, head of Community Finance and Development at National Australia Bank. “We’re also realising that the investor space doesn’t really want the SROI report. It’s great from our perspective, because a lot of our work is coupled with government so it actually meets government requirements, and we can then look at ­efficiencies and how do you redesign programs, but there is a space to understand what does impact ­measurement mean for the various groups of investors.”

Australian social impact investors are “more demanding of a market-related return” than their overseas counterparts, Proske says. “In some of the overseas examples, they’re quite happy that as long as you’ve got a solid social form of return, the financial can kind of waver. That’s not sustainable in a market our size, and I think we’re actually setting a return hurdle that’s much higher than what we’ve seen overseas.”

Rosemary Addis, co-founder Impact Investing Australia, says it has taken a long time to get global accounting standards for the financial side, so it will take some time to develop an appropriate social impact accounting system. “If we’re realistic, we don’t have to hold up the social impact measurement side up to a gold standard. We’re not there yet, we won’t get it right all the time, although some really good people around the world are working hard on that. But I think the measurement has to be fit for purpose.”

Obvious benefits

Addis tells the story of facilitating a World Economic Forum session with Álvaro Rodríguez Arregui, who runs IGNIA Partners, one of the big impact investing funds out of Mexico.

“He was one of the first to sign up to the GIIRS [Global Impact Investing Rating System] impact rating system that’s been developed out of the US, and he’s still an advocate for that. But as he says, ‘When I invest in a company that gives quality, affordable eyewear to people who didn’t have glasses before, I don’t need a lot of sophisticated measurement tools to know whether that’s making a difference or not.’”

It is a similar story with UK social impact investor Bridges Community Ventures, she says. “Their first funds measured how many people got jobs, and how many didn’t have them before. It was a fairly straightforward economic multiplier effect for the communities where they invested, that had been under-invested in before. We don’t actually have to make it too complicated,” Addis says.

This is where thinking of the SROI as completely separate to the investment return comes into play, Gales says. “The 15 per cent return on Goodstart [early learning centres] is a financial return. If an SROI analysis were done on the Goodstart investment it would be in addition to that return,” he says.

The Goodstart deal was a fantastic commercial return, as well as a great social impact, he says. “That’s why it is so high profile. But in effect, it was a classic private equity deal. The Benevolent Society provided the equivalent of the equity piece: the ‘deeply subordinated’ piece. The NAB, the Australian government, and social investors all ranked above them in the creditor stack. So if you view it that way, as a private equity deal, then 15 per cent looks a reasonable return. After the event it looks a no-brainer, but all good deals look like that after the event,” Gales says.

The bottom line, he says, is that some investors – impact investors – will accept a trade-off in their financial return if they are getting a strong social impact. “And that’s where SROI can be very useful,” he says.

Sourced from: Australian Financial Review, September 30th 2014