Does social impact investing have a place in social housing?

On 1 December 2017, the Australian government announced a government guarantee on investment in affordable housing. This partnership with the bond aggregator opens the investment door to attracting significant private investment including health and super funds looking to invest in low risk portfolios.

Social impact investing is an emerging approach, bringing together capital and expertise from the public, private and not-for-profit sectors to tackle social challenges.

By definition, social impact investment seeks to generate social change alongside financial return. Investments can be made into companies, organisations or funds, both not-for-profit or for-profit. Social impact investments can also be used to finance social services and social infrastructure.¹

To some extent Public-Private Partnerships (PPP) have been operating like this for many years to ensure rigour and transparency around risk allocation, profit share and outcomes measurement. Some of these mechanisms and performance measurement instruments can now be considered for the funding and delivery of social infrastructure and service delivery.

Why is social impact investing important?

Social impact investing symbolises a change in government commissioning and partnership approaches, shifting focus to service delivery and better outcomes rather than the traditional grant funding ‘set and forget’. It fosters a stronger partnership approach between service providers, government and the community to deliver tailored outcomes for specific populations and communities.

What makes social impact investment attractive is that it combines innovation and partnership to deliver agreed outcomes. By harnessing the innovation and capital of all sectors, better outcomes can be delivered for the most vulnerable people in our communities, breaking down silos and system barriers.

What are the benefits of social impact investing?

The ability to target bespoke outcomes for vulnerable communities is key. Value for money, contestability, transfer of risks and a cross-portfolio approach are all additional benefits of social impact investing.² Early results of social impact bonds indicate that they are meeting or exceeding their performance targets and are on track to achieve their long-term outcomes, such as cost savings to the project (noting evidence of realised financial benefits is somewhat limited in Australia given the short-term lifespan of projects to date).

Who are the players?

There are three main stakeholder groups when it comes to social impact investing:

• Supply chain: provides finance and can range from financial institutions, super funds or trusts
• Intermediaries: to develop the common ground, instruments to deliver outcomes and education and training to cross boundaries
• Demand suppliers: such as non-profits and social enterprises seeking capital to deliver a service or program

What sub-sector portfolios does social impact investing work best in?

A range of social infrastructure sub-sectors are prime ground for social impact investing. Fund investments achieved positive short-term results across the majority of key areas, including:

• Housing³: development of affordable housing with a focus on clients sustaining tenancies
• Health⁴: reducing hospital entries through the provision of home and/or community care
• Employment, education and training⁵: at-risk clients progressing training and qualifications leading to successful completion of work placements
• Early education⁶: quality early learning services delivered to disadvantaged families, supported by evidence-based parenting skills programs

The types of social impact investing

Most people directly think of social impact bonds, however social impact investing can take many forms. This includes payment by result contracts, outcome-focused grants, and debt and equity financing.

Below are a couple of examples in the Australian context:

Example one

The National Australia Bank (NAB) Climate Bond was issued in December 2014, with proceeds ring-fenced for financing a portfolio of wind and solar energy projects across Australia. It represents the first time an Australian issuer has brought a green bond to the domestic market. It was also the first bank-issued green bond certified under the Climate Bond Standard globally.

• Once completed, the renewable energy projects should generate 1.5 gigawatts of electricity which is enough to power 730,000 average Australian households for one year and avoid 3.9 million tonnes of greenhouse gas emissions
• The bond demonstrates the role debt markets play in supporting the growth of new markets and financing the transition to a low carbon economy

Example two 

Two of Australia’s leading welfare providers are developing Victoria’s first Social Impact Bonds (SIBs) to reach better outcomes for at-risk teenagers and long-term homeless people.

• Consortia led by Anglicare and Sacred Heart Mission have been chosen by the Andrews Labor Government to explore new approaches to complex social issues through the use of social impact bonds
• The Anglicare consortium, which includes VincentCare, includes a mix of individualised case management, specialist support and stable housing to improve outcomes for young people leaving out of home care
• Sacred Heart Mission will provide rapid access to stable housing and intensive case management to support Victorians experiencing chronic homelessness and/or harmful alcohol or other drug use

How do we get there?

The sector players including government, financiers, investors and service providers all have a role in the journey, including:

• Providing an environment to deliver more social impact investment transactions
• Growing the market by understanding opportunities and removing obstacles such as regulatory barriers and scale to entice the market
• Building capacity and capability of market participants

Response by the Commonwealth

The Commonwealth Government has made significant policy inroads to support this journey. Key themes include principles which social impact investments should take into account, and which require careful consideration by market participants in various jurisdictions and sectors, including:

• Government as a market enabler and developer
• Value for money
• Robust outcome-based measurement and evaluation
• Fair sharing of risk and return
• Outcomes that align with the Australian Government’s policy priorities
• Co-design

Opportunities and constraints

Conversations led by Advisian with super funds, government and service providers, have identified keen interest and overall support of the social impact investment mechanisms including the themes highlighted above.

Though, it is apparent that there are design constraints to be cognisant of, including:

• Measuring success: The ability to co-design net benefit measurements that are quantifiable and accessible within a cost-effective delivery mechanism. This would be valuable particularly from sectors that traditionally have not had a market-based funding focus or performance measurement frameworks.
• Rates of return to support investment: Difficulties faced by funding organisations to justify investment based on relatively low financial returns, risk profile, service industry maturity and competing investment grade options.
• Maturity of mechanisms: Limitations in Commonwealth sponsorship of social impact investing investments to directly funded projects; stakeholders felt this restricted state-based delivery options that were generally not as progressed in the social impact investing methodology. Cross-government funding models and tiered program arrangements across various agencies also make measurement, return and risk allocation a key challenge.
• Scale of projects: The cost of social impact investing financing can be seen as a disincentive for smaller scale projects, together with the capacity of agencies and non-government organisations (NGOs) to support costs and administrative processes outside business as usual. Similarly, the scale, risk allocation and return on investment have excluded many large-scale funds from participating based on the relatively small scale of investment projects to date.
• Localised approach: The ability to tailor social impact investment design transactions that allow for localised conditions, stakeholders and client outcomes would be welcomed. It was highlighted that a localised pilot approach could support this.

Social impact investing has significant potential and should continue to focus on better outcomes for the most vulnerable people in our communities. The benefits can be realised by breaking down portfolio silos, working as a collaborative supply chain, recognising and unlocking system barriers and by capturing investment, innovation and true alliance approached to deliver localised outcomes.

Over the coming months the Commonwealth social housing investment guarantee will be developed and will need to consider how to maximise opportunities for success. This includes investors, government and the broader community.

References

1. Impact-Australia, 2013
2. NSW Gov, Social Impact investment Policy, February 2015
3. Australian Government, 2016, Department of Social Services for the Prime Minister’s Community Business Partnership
4. STREAT The Cromwell Manor development, STREAT, 2015
5. SVA Social Impact Fund report, Social Ventures Australia, 31 December 2015
6. Beacon Foundation National Outcomes Report, Beacon Foundation, 2014