Impact investment and social impact bonds

Impact investment allows investors to align their financial objectives with their personal values by investing in opportunities that offer both social and financial returns. Capital can flow from impact investments made by mainstream financial institutions, institutional investors and philanthropic funds, either directly into social enterprises or via specialist financial intermediaries (Figure 3.2). Capital held by intermediaries then flows into social enterprises through avenues such as direct lending, social investment funds and social investment products managed by these intermediaries.

Figure 3.2: Sources of funding for social enterprises

This figure shows capital flowing from three sources: mainstream financial institutions, institutional investors, and philanthropic funds, to social enterprises. The funding may either flow directly, of through specialist financial intermediaries such as community development financial institutions of social investment funds.

Unlike socially responsible investment, which takes a more passive approach to asset allocations (for example, a managed investment scheme that avoids investments in tobacco businesses), impact investors actively seek social or environmental objectives. As many social benefits cannot be captured by a particular individual, impact investment can increase the level of investment in projects with a high social return.

Impact investment is an important source of capital for organisations that may not be able to access funding from mainstream financial markets. It can encourage new markets, entrepreneurship and innovation to solve entrenched social issues. Recent examples of impact investment include:

  • The GoodStart syndicate raised $165 million for 650 ABC Learning day care centres, which GoodStart now runs on a not-for-profit basis.
  • The NSW Government launched a pilot of Australia’s first two social impact bond programs in 2011: $7 million in capital was raised for UnitingCare Burnside to support families in facilitating their child’s return from foster care, and $10 million was raised for the Benevolent Society to prevent family breakdowns.

Barriers to impact investment

More impact investment activity could trigger a marked change in the way governments deal with social or environmental problems by supporting entrepreneurs to find new solutions to entrenched problems. It could also shift governments’ approaches to dealing with these problems from paying for service delivery to paying for outcomes at the best price. However, mobilising the impact investment market may require government support, including removing barriers.

Barriers to investors engaging in impact investment in Australia may include:

  • Some superannuation trustees consider their fiduciary duties to be a barrier to impact investment. This is despite there being no explicit prohibition to impact investment provided, superannuation trustees meet the sole purpose test.72
  • Private and public ancillary funds, which provide a link between donors and organisations that can receive tax deductible donations, are unclear whether they may count discounted returns toward minimum distribution requirements.
  • Some private ancillary funds do not meet sophisticated or professional investor tests under the exemptions from the prospectus regime, despite very high net worth individuals or organisations having established them.
  • Relatively simple instruments, such as social impact bonds, are subject to onerous disclosure requirements.

Policy options for consultation

Government could provide guidance to superannuation and philanthropic trustees by explaining how superannuation trustees can facilitate impact investment within the existing regulatory framework. There may also be benefits in exploring options to better use the underlying assets of private and public ancillary funds. To enable private ancillary funds to better reflect their sophistication, it may be possible for such funds to be considered sophisticated or professional investors if the founder of the fund meets either of these thresholds. Finally, moves to simplify and streamline disclosure requirements could reduce the regulatory burden associated with social impact bonds.

Some submissions propose more active Government involvement in expanding the impact investment market. These include Government providing risk capital to attract initial investments, developing a dedicated social investment bank and introducing tax concessions. The latter should be considered as part of the Tax White Paper process.

The Inquiry would value views on the costs, benefits and trade-offs of the following policy options or other alternatives:

  • No change to current arrangements.
  • Provide guidance to superannuation and philanthropic trustees on impact investment.
  • Classify a private ancillary fund as a sophisticated or professional investor for the purposes of the exemptions from the prospectus regime if the sponsor of the fund meets either of these thresholds.
  • Simplify and streamline disclosure requirements associated with social impact bonds.
  • Undertake a more active role in expanding impact investment, such as providing risk capital and establishing social investment banks.


72 Donald, M S, Ormiston, J and Charlton, K 2014, The Potential for Superannuation Funds to make Investments with a Social Impact, University of New South Wales, Centre for Law, Markets and Regulation, working paper no. 14-3, May.