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What’s All This Fuss About Social Investment And Finance?


It’s too risky for you not to know about social finance

No matter how small your organisation, your board should be informing itself about what’s going on in social finance in Australia. This overview explains why—and how you can get started.

Unless your board is confident that government and philanthropic grants and donations will sustain your organisation forever, you need to be considering the emerging revenue- and capital-raising alternatives. It is short-sighted and risky for your board to put social finance and investment into the too-hard basket or to deem it only applicable to the big, well-resourced charities and community sector institutions.

Change is coming—so prepare for it now

Change is coming to the ways non-profit/for-purpose organisations access and use finance and, while it may take a while for this to sort itself out, a wise board will be taking steps now to get informed about what’s going on. Your board should be considering what changes might be needed within your organisation to avoid the threats and take up the opportunities relating to social investment. You should also start thinking about where the social finance experts are and how and when you should call on them.

Social investment sounds complex—where do I start?

Social investment is a big subject, messy and filled with uncertainty—so it can be hard to stay informed. I suggest you start by looking at the excellent NSW Social Impact Investment Knowledge Hub and Impact Investing Australia.

What overview can you give me of social finance?

The two broad areas to think about are Debt Finance and Equity Finance.

  1. Debt Finance

It can be daunting for non-profit boards to think about debt financing due to concerns about their ability to service a loan. However, there are ‘finance products’ available designed specifically for non-profits. Check out Foresters Group, SEFA and Community Sector Bank (or most other Australian banks) for more information.

Who is doing it?

STREAT is a social enterprise based in Melbourne that addresses youth homelessness and disadvantage. It negotiated a $2.5 million dollar deal brokered with NAV and Social Ventures to construct a training facility in June 2015.

Goodstart Early Learning took an innovative social-investment approach—involving a mix of loans and capital-raising—that enabled a consortium of non-profit organisations to purchase the failing ABC Learning Centres in 2009.

Your needs and aspirations may be more modest than these multi-million dollar deals but most Australian banks have some kind of social-sector lending services or programs and are adding to them daily.

Try this—Invite your friendly, local banker to your next board meeting to discuss what is going on in the area of lending to non-profit and community organisations. You might be surprised to hear what’s available!

  1. Equity Finance

Social impact investment focuses on investment opportunities that intentionally seek a measure of social impact and financial return. Here are a few key issues and hot topics to think about.

Legal Structures

In the UK Community Interest Companies and in the USA Benefit Corporations allow organisations that operate for social benefit to provide a financial return to investors. In Australia, the most common non-profit legal structures (incorporated associations or companies limited by guarantee) do not allow the non-profit to issue shares or pay dividends. This presents a considerable barrier to organisations that wish to take advantage of the growing interest in social-impact investing.

While this barrier has been discussed in reports and forums in Australia, legal reform is likely to take some time to gain traction. In the meantime, there are ways to structure a for-purpose organisation in Australia that enable it to benefit from equity investment. These include forming a cooperative or forming a hybrid structure—where a non-profit starts a for-profit organisation in which it offers equity to investors.

Who is doing it?

STREAT (again, such an innovator!) has a hybrid structure explained here.

Hepburn Wind Farm is a cooperative in which community investors purchase shares and receive dividends.

Try this—Have a board discussion on the topic, ‘Are there any parts of our organisation (or things we would like to add to our organisation) that could offer private investors a return on investment in the future?’ If so, consider finding a lawyer to talk you through your legal options.

Crowd Sourced Equity Funding

You are probably familiar with crowdfunding—where individuals and organisations raise money through small donations from money people using internet platforms (see the recording of our recent crowdfunding webinar).

Crowd Sourced Equity Funding (CSEF) is similar to crowdfunding in that an organisation runs a campaign to raise money for start-up, expansion or a specific project. With CSEFs, instead of donating money, people are able to acquire a small shareholding in the company. The legal complexities of CSEF have been under investigation by the Government for about 18 months now. In May 2014, a report released by the Corporations and Markets Advisory Committee (CAMAC) was followed by a discussion paper from Treasury in December 2014, followed in turn by a consultation paper in August 2015.

Although CSEF holds great potential for the community sector, some say the debates about it are currently dominated by: wealthy individuals and the advisors that work with them; and the start-up entrepreneurs and internet ‘platforms’ that facilitate the transactions. Alan Greig, from Employee Ownership Australia Ltd, has written an excellent summary of some of the issues surrounding CSEFs here.

Social Impact Bonds (Social Benefit Bonds)

Social Impact Bonds (SIBs), which are also called Social Benefit Bonds (SBBs), are constructed on the premise that the successful delivery of a social service will save the government money in the long term. The models vary, but SIBs/SBBs basically work like this:

  • A social service organisation raises money (often over 5 to 7 years) from private investors (generally with the help of a financial institution).
  • The social service organisation then delivers the services—applying a rigorous impact measurement and reporting
  • If the organisation achieves pre-determined levels of impact, the government will repay the investors their initial investment plus a return (external evaluators are often involved at this stage).

The theory goes that the social service organisation receives guaranteed, long-term funding that enables it to deliver well-considered services and to have more flexibility to improve its programs as it learns from experience. The organisation is more likely to achieve better outcomes for vulnerable and disadvantaged people—and these improved outcomes mean the government will save money in the future. Some of these savings can, instead, be spent on rewarding the private investors who bore the up-front risk.

Who is doing it?

The first SIB in the world was piloted by the UK Ministry of Justice and aimed to reduce reoffending by prisoners who were released from HMP Peterborough after serving a sentence of less than 12 months. Launched in 2010, and intended to run through to 2016, the program had some success but was closed early because a national policy change rendered the program it had been financing redundant.

Australia has recently embraced this innovative form of finance. The New South Wales Government is in the third year of a trial of SBBs with two programs – Resilient Families (the Benevolent Society) and Newpin (UnitingCare Burnside).

The South Australian Government has also recently announced it is negotiating a Social Impact Bond arrangement to address homelessness.

Try this—The Australian Centre for Financial Studies discusses the future of SIBs in this paper . It will take some time for Australia, and the world, to test the costs and benefits of these arrangements and to develop better ways of doing them. A canny board member will keep an eye on how things develop.

Put social investment on your board’s agenda

If your board hasn’t talked about social investment yet … it really needs to start. Put it on your next board agenda, send an email around with some of the links I’ve mentioned, befriend a banker … Any work you do now to inform yourselves will help you more strategically position your organisation for the future.

Want to learn more?

Wendy Haigh, Executive Director, Social Investment, for the Benevolent Society will be talking with me on September 30 about her experience with the Social Benefit Bond trial in New South Wales and about social finance more generally. There will be plenty of time for questions during this webinar, so come along and hear from a non-profit executive experienced in charting this complex but exciting territory.

Michelle Taylor, Senior Consultant, Melbourne

 

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