Impact investing: A force for future good and... financial returns

Increasingly, investing is no longer just about economic return. There is a growing number of investors wanting their money to fund companies that are as committed to a better world as they are to their bottom line. However, finding a home for that capital is not easy because the outcomes of ESG commitments are not always clear, and because of a proliferation of investments marketed as being "socially responsible".

Impact investing, which is underpinned by defined and measurable positive outcomes, offers an opportunity for investors to realise material benefits for groups experiencing social and economic disadvantage through investment.

Impact investing – what it is and, how it differs from other investments

Impact investing brings together the private, community and government sectors to address complex and entrenched social disadvantage that governments cannot solve alone.

Social impact investments seek to achieve measurable and positive social outcomes while also delivering financial returns. These can include debt and equity in private and public companies, with flexibility to target a range of returns based on an investor's goals while, importantly, measuring the achievement of both social objectives and financial returns.

While there are several investment strategies and commitments that consider social, environmental and charitable factors, most of these strategies usually value financial benefit as their primary incentive (sometimes, with little regard to measuring positive social impact). Impact investors, however, go further by actively and intentionally seeking opportunities that are purposefully structured to produce measurable positive social outcomes.

Impact investing continues to grow domestically and globally as investors look to attain tangible social outcomes to address social disadvantage that are different to – and broader than – accepted corporate ESG commitments.

Impact investing – global markets

From a global perspective, the impact investing market has been the strongest in the UK and the US.

The UK has led the way in terms of scale for impact investing with a market value amounting to approximately £58 billion. This market position is largely attributed to the UK Government's support for impact investing through continued funding via various outcomes funds and policy reform. A notable initiative was the creation of Big Society Capital, an independent specialist finance institution, with four major banks for the purpose of solidifying and scaling the impact investment market in the UK.

The US impact investing market boasts a total market value of about ~US$96 billion and is largely driven by market appetite for social impact investing as social impact investing continues to grow globally. Like the UK, the US Department of Treasury has supported social impact investments by establishing the Social Impact Partnerships to Pay for Results Act which acts as an outcomes fund for social impact initiatives.

With the trend of social impact investing on the rise, governments worldwide are and will continue to support social impact initiatives through funding (co-investment with the private sector) and policy support which presents a unique investment opportunity for corporates that may be looking to realise significant social impact alongside financial returns.

Impact investing – Australian Government activity

In the 2023-24 Federal Budget, the Australian Government announced a $100 million dollar commitment over five years to establish the Outcomes Fund as part of its broader $199.8 million Targeting Entrenched Disadvantage package. Through the Outcomes Fund, the Commonwealth will make payments to State, Territory governments and service delivery organisations (such as social enterprises) for programs that achieve agreed and measurable outcomes, alleviating longer-term government expenditure. It is envisaged that the Outcomes Fund, through appropriate market signals and outcomes-based contracts – eg. social impact bonds and payment by results contracts developed under a common framework – will contribute to significant growth in the number and size of social investment opportunities in the Australian market. To support the success of the Outcomes Fund, the Government is similarly looking to build capacity and viability of social enterprises who will deliver outcomes projects.

While not itself a novel idea, the Outcomes Fund emerged as a key recommendation of the Impact Investing Taskforce Expert Panel, along with the introduction of an "Impact Investing Wholesaler", which would effectively stand as the Clean Energy Finance Corporation equivalent in the social impact space (noting that the government is yet to move on the Taskforce's recommendation for such a wholesaler).

Since the Budget announcement, Treasury has conducted staged consultations as part of its co-design process to develop the Outcomes Fund in conjunction with key stakeholders from across the private and public sectors. As at the date of this article, the process is ongoing with the Commonwealth Government expected to approve the design of the Outcomes Fund during the 2024-25 Budget development process.