Supply of capital to the social economy
For a robust capital market to develop in support of social economy
organisations in Australia, innovative approaches to financing the sector must
be pursued. There is a need for more effective and coordinated demand for
capital from the sector, as discussed in chapter 3, and a need to increase the
supply of capital available to social economy organisations, which is the
subject of this chapter. There is scope to both increase the effectiveness of
existing sources of funding for the sector, as well potential to access capital
from commercial sources previously untapped by the social economy sector.
The committee has heard that the following stakeholders have a role to
play as potential sources of capital for the Australian social economy:
government (federal, state and local);
specialist financial intermediaries such as Community Development
Financial Institutions (CDFIs);
mainstream financial institutions;
superannuation funds and other institutional investors;
philanthropic trusts and foundations;
the broader corporate sector; and
individual retail or community investors.
JBWere noted that each source of capital available to the sector has its
own limitations and restrictions on what it can fund and how it can provide
Some types of investors will be better suited to offering social economy
organisations existing forms of finance, such as debt and equity
(or quasi-equity) capital, while other investors are unlikely to put
capital into the social economy at all without new and innovative social investment
products. Some will invest in social economy organisations directly, while
others will invest through intermediary structures. In addition, the motivation
for providing finance varies greatly across these different types of investors,
which affects the kinds of investment each group is likely to make into the
sector and the level of financial returns they expect.
The broad potential capital flows within a well developed social economy
capital market are outlined pictorially in Diagram 4.1. This diagram does not
represent capital flows as they currently exist in Australia, but is a
conceptualisation of the future possibilities for this market, as suggested by
submitters to this inquiry.
Diagram 4.1: Possible investment flows
in a social economy capital market
adapted from Centre for Social Impact, Submission 27, p. 5.
Under the depiction outlined in Diagram 4.1, the main source of direct
capital for investor-ready social economy organisations is specialist financial
intermediaries such as CDFIs. This would occur both through direct lending to
organisations by CDFIs, and through social investment funds and new social
investment products managed by these intermediaries.
This intermediary layer is in turn capitalised by investment from
mainstream financial institutions, institutional investors such as
superannuation funds, and philanthropic trusts and foundations. The corporate
sector and community or retail investors provide additional sources of direct
investment into social economy organisations, particularly organisations and
projects with a specific geographic or community focus.
Diagram 4.1 also notes that there will still be some direct capital
provision to social economy organisations from mainstream financial
institutions (predominantly through debt financing) and philanthropic sources
(through traditional philanthropic grants and increasingly through the
provision of loans and equity-like investments). The role of government is
seen as a cross-cutting issue, as stakeholders have informed the committee that
government can play an enabling role across all three layers of organisations
in the social economy.
The evidence gathered by the committee over the course of this inquiry
concerning the supply of capital to the social economy has focused
predominantly on three areas:
strengthening the role of financial intermediaries in providing
capital to the sector;
expanding opportunities for philanthropic bodies to make
investments into the sector; and
encouraging institutional investors, particularly superannuation
funds, to take up social investment opportunities.
In line with the weight of this evidence, the remainder of this chapter
focuses mainly on the potential roles of philanthropic bodies and
superannuation funds as capital providers. The role of mainstream financial
institutions, the corporate sector, and retail or community investors is also
discussed, and the importance of government as a social investor is
highlighted. The role of financial intermediaries is briefly discussed, before
a more detailed discussion in chapter 5.
Financial Intermediaries and CDFIs
Financial intermediary organisations such as CDFIs can play a key role
in allowing social economy organisations to access capital. They can do this in
by providing tailored deposit-taking and banking services for the
social economy sector, as offered in Australia by organisations such as
Community Sector Banking (CSB);
by providing tailored debt products to social economy
organisations (as offered by organisations such as CSB and Foresters Community
by providing advice and consultancy services to social economy
organisations to help them build capacity and become finance-ready; and
by acting as conduits for larger wholesale investment into the sector,
through mechanisms such as the social investment funds managed by Foresters
through their subsidiary Social Investments Australia.
The role of financial intermediaries such as CDFIs is considered crucial
in the development of social capital markets in Australia, and as such they are
considered in more detail in chapter 5, which covers the broader issue of
intermediary organisations required to support the growth of the social
Mainstream Financial Institutions
As discussed in chapter 3, social economy organisations often lack the
ability to access debt finance or other forms of capital from mainstream
financial institutions. The joint submission from the Department of Education,
Employment and Workplace Relations (DEEWR) and the Department of the Prime
Minister and Cabinet (PM&C) (the departments' submission) noted that
lenders can be myopic about the actual risks and returns associated with social
investment, attributing much higher risk than is actually present.
Foresters Community Finance (Foresters) told the committee that the
credit assessment processes undertaken by mainstream lenders may not be
entirely appropriate for not-for-profit organisations:
First of all in relation to the risk assessment or the credit
assessment, mainstream financial institutions often struggle to understand the
risk profile of not-for-profits. It is not that they are necessarily not credit
worthy but just that a mainstream financial institution may not understand
their sources of income, for example. What is required is a different type of
credit assessment, a more individualistic credit assessment.
Mr Glen Saunders, a Director of Triodos Bank, commented that small
social organisations may receive adverse credit ratings simply because of their
...there is a general expectation that if you are a small
initiative then you are higher risk... within the credit agencies like Standard
& Poor's and so on, small organisations get an adverse credit rating simply
because they are small. We think that there should be greater objectivity. If
you look at where the problems arose from the global financial crisis, it was
not the very small organisations that were the problem. There should be greater
rigor around how those valuations are undertaken, because they are very
influential in terms of what can happen.
Our Community told the committee, however, that Westpac has established
a new NFP section within its structure to work specifically with community
Additionally, the committee heard that National Australia Bank (NAB) have
introduced several initiatives designed to combat financial exclusion amongst
individuals and families in Australia.
A 2011 report on financing the NFP sector commissioned by the NAB and
written by Foresters noted that the current services offered to social economy
organisations by mainstream financial institutions in Australia do not
generally extend beyond basic banking (i.e. deposit-taking) services, and
discussed the potential roles for mainstream financial institutions in creating
a NFP capital market.
Their discussion noted that in the United States (US), mainstream
lenders offer a much wider variety of products and services to NFP
organisations than in Australia. Products offered include debt capital (mainly
focused on acquisition of property and facilities) and the provision of working
capital, although the report noted that low transaction profitability has
limited the ability of smaller organisations to access the debt market.
Mainstream financial institutions in the US also provide significant capital to
specialist lenders such as CDFIs.
The NAB report suggests three ways in which mainstream institutions
could help develop a NFP capital market in Australia, as outlined below:
engage directly with NFP organisations, developing more
specialist knowledge about the sector and a broader range of capital
relationships with the sector;
contribute to and capitalise the development of specialist
intermediaries who could then provide capital for not-for-profit organisations.
This method would pool capital from a number of financial institutions through
intermediaries who have specialist knowledge and could mitigate the risks of
direct capital provision; and
become part of a range of investors who capitalise a wholesale
fund which would provide capital to a range of specialist intermediaries
(blending philanthropic funds, grant funding and funds from financial
institutions). This provides the greatest potential for blended capital types
and returns, and allows for a systematic response to NFP capital needs, but
would require incentives to encourage financial institutions' involvement.
The three options above involve different types of risk for mainstream
financial institutions which are discussed below.
The first, directly relating to investing in social economy
organisations, exposes lenders directly to financial risk. As a result it
requires extensive knowledge and due diligence research, which often heightens
transaction costs. The public relations and social responsibility benefits associated
with working with NFP organisations may encourage many mainstream lenders to
engage with the sector. There is however some degree of reputational risk
associated with the negative consequences of enforcing a contract should a NFP
default, leading to the closure of a social service.
The second option, investing in intermediaries who then provide capital
to NFPs, involves less direct risk for the mainstream lenders. However, due
diligence is still required to ensure that intermediary organisations are able
to operate in a sustainable manner. One prominent example of this in Australia
is the strategic alliance between Westpac and Many Rivers Microfinance, to
deliver microfinance business loans to start-up enterprises in underserved
The third option, investing in wholesale funds which then invest in
intermediaries, is viewed as a more distant possibility in Australia due to the
present early stage of development in the intermediary market. Wholesale
investment funds investing in intermediaries do have an active role in more developed
social capital markets overseas, as discussed further in chapter 5.
Philanthropic sources of investment
Many submitters to the inquiry have commented on the potential role for
philanthropic trusts and foundations to invest in social ventures in Australia.
Philanthropy is a significant contributor to the social economy; Philanthropy
Australia estimates that 5000 philanthropic foundations operate in Australia,
controlling seven to ten billion dollars worth of funds and
disbursing between $600 million and $1 billion to the community sector each
Over the course of this inquiry the role of traditional philanthropic
grants and donations as a source of capital for social economy organisations
has been discussed, and emerging possibilities for philanthropic bodies to
utilise their investment corpus to finance social projects have also been
The role of traditional
Traditional grants and donations from philanthropic individuals and
organisations are currently one of the major sources of funding for many social
The committee has heard varying views about the utility of this funding source
in the overall picture of financing the sector.
Several submitters highlighted the necessity for the social economy
sector to move beyond dependence on grant funding from the government and
philanthropic sectors to more reliable and stable forms of finance.
JBWere argued that while incentives to promote philanthropy and encourage
private giving are positive, traditional philanthropy will only ever be a small
part of overall funding for the social economy.
CSB stated that access to philanthropic grant funding can be unreliable and
competitive, and using philanthropic income to leverage further finance is
difficult unless there is a long history of donations to the organisation.
Foresters noted that the utility of philanthropic donations to an
organisation can depend on whether the funds are restricted (where there are
conditions attached to the donation regarding how it is to be used) or
unrestricted. In the case of unrestricted donations, such as those solicited
through public fundraising drives, there is often pressure to spend the revenue
on direct service delivery rather than 'overhead' or organisational expenses.
Sir Ronald Cohen noted that insistence on philanthropic money reaching
beneficiaries directly can preclude the structured, long-term commitments
necessary to build and finance sustainable organisations.
Despite the limitations associated with traditional philanthropic
revenue, it is likely that grants and donations will still play a role in the
overall financing picture for the social economy into the future. Christian
Super argued that establishing new capital markets for the social economy should
complement rather than supplement philanthropy, and noted that while a
dependence on philanthropy alone can be unstable for an organisation,
philanthropic donations can be used to stabilise cash flows from other sources
and provide a revenue diversification tool.
In addition, philanthropic capital can be particularly useful at the start-up
phase for social organisations when access to other forms of finance may not be
viable, a practice sometimes referred to as 'venture philanthropy'.
CSB argued that the development of philanthropic venture capital markets will
be critical to maximise the potential of social organisations.
In addition to traditional grants and donations from philanthropic
individuals and organisations, the committee has heard that there is potential
for philanthropic bodies which hold investment funds to use these funds to
offer loans to social economy organisations, and to invest in emerging social
The remainder of this section will focus on these emerging possibilities.
The potential role of philanthropic
The Productivity Commission (PC) report noted that while the majority of
philanthropic transfers in Australia occur directly between donors and
recipients, there are various types of philanthropic intermediaries which
distribute donations or earnings from endowments to recipients,
as outlined in Diagram 4.2. These intermediaries include philanthropic
foundations, of which there are various subcategories. Some of these include:
private foundations such as Private Ancillary Funds (PAFs); and
public foundations such as Public Ancillary Funds and community
These intermediaries are often established with an initial capital lump
sum, which is then invested in mainstream financial investment vehicles, with
the return from these investments being distributed as grants to charitable
causes. Different types of foundations are established for different purposes
and have different rules regarding investment and grant-making.
The PC report noted that 'even if only a small proportion, say 5 per
cent, of the billions of dollars held by philanthropic intermediaries in
Australia were made available as a source of capital for NFP investment, it
would greatly increase the supply of finance available to NFPs'.
Ms Kylie Charlton, an expert in the field of impact investment and social
innovation, argued that with an enabling policy environment, philanthropic
foundations can play a catalytic role in the development of a robust social
capital market in Australia.
Diagram 4.2: The structure of philanthropy in Australia
Productivity Commission, Contribution
of the Not-For-Profit Sector, January 2010, p. 169.
Accessing the corpus of philanthropic intermediaries would involve changing
the traditional investment approach of these foundations, whereby they would
invest some amount of their funds into social investment opportunities with a
social benefit and potentially lower financial return, rather than simply
investing their entire corpus into the highest-yielding investments. The
committee heard that within the philanthropic sector there is some movement
towards a social investment mindset, where a blended financial and social
return is gained.
This shift towards social investment among philanthropic foundations is
more clearly developed in the UK. Sir Ronald Cohen noted in his evidence to the
committee that in a recent offering of a new social investment product—social
impact bonds (discussed further in chapter 6)—capital was accessed from the
balance sheets of philanthropic foundations (i.e. their investment corpus),
rather than from their grants allocation:
In September last year, having raised the money, we launched
the first social impact bond...we raised £5 million entirely from foundations,
and two-thirds of the 17 foundations and charitable trusts that put money up
kept it on their balance sheets rather than taking it out of their grants
allocation. That is a very significant development because you have £100
billion of assets in foundation balance sheets, and you have a couple of
billion pounds that are given away by foundations—£2 billion to £3 billion—a
year [in the UK]. So if you can begin to use these financial instruments to
attract capital from the balance sheets of charitable foundations, you start
off with a massive amount of money that can be focused on social issues.
Evidence has also been given to the committee on the potential role of
Private and Public Ancillary Funds, the possibilities presented by mission and
program-related investments, and the role of community foundations.
Private and Public Ancillary Funds
Mr David Ward from Philanthropy Australia noted that Private and Public
Ancillary Funds are the two most likely segments of the philanthropic sector to
take up new social investment options.
There are currently approximately 900 Private Ancillary Funds (PAFs) operating
in Australia holding over $2 billion in 2008-09, as well as around 1600 Public
Private Ancillary Funds (PAFs) are a type of tax-deductible private
foundation. They are unable to raise funds from the general public and must be
controlled by a body corporate. A PAF can be endorsed as a charity, in which
case it must fund only charitable deductible gift recipient (DGR) organisations,
or it can be endorsed as an Income Tax Exempt Fund (ITEF), in which case it may
be able to distribute to a wider range of DGRs depending on the state in which
it is established. PAFs cannot make grants to other ancillary
funds or other PAFs. Commonwealth
guidelines for PAFs specify that a PAF must distribute at least five per cent
of the market value of the fund's net assets every year, and must have a formal
Public Ancillary Funds are similar to Private Ancillary Funds in that
they are DGR funds which receive donations which are then distributed through
to other DGR organisations for the stated purposes of the fund. The main
differences are that Public Ancillary Funds must offer opportunities for the
general public to contribute to the fund, and must be managed by members of a
committee or board, meaning that donors may have no control over the investment
decisions of the fund.
The public ancillary fund structure is currently under review. Legislation
currently before the federal parliament would enable the Treasurer to issue
guidelines relating to the establishment and operation of public ancillary
Draft guidelines for public ancillary funds were released for public
consultation in July 2011. These draft guidelines include provisions stating
that public ancillary funds must have a formal investment strategy and must
distribute at least four per cent of the market value of the fund's net assets
This review is intended to bring the standards of accountability and governance
of public ancillary funds in line with private ancillary funds.
Program and mission related
The PC report also noted that in the US, philanthropic intermediaries
are encouraged to undertake 'program related investments' and 'mission related
to further the impact of their philanthropic activities, which can take on a
variety of investment forms, including common loans, cash equivalent deposits,
equity stakes and loan guarantees.
This type of investment is aimed at furthering the social objectives of the
foundation (for example, education or healthcare), and is based on the premise
that the purpose of a foundation is to facilitate the creation of social value,
through both investing foundation assets and grant-making.
The Canadian Taskforce on Social Finance, which presented its initial
report to government in December 2010 (see chapter 2), recommended that
Canada's public and private foundations should invest at least 10 per cent of
their capital in mission-related investments by 2020 and report annually to the
public on their activity.
Provided there is an enabling environment, there is potential for this kind of
investment to be encouraged by philanthropic intermediaries in Australia.
Submitters have also noted the importance of community foundations in
the philanthropic landscape in Australia. Community Foundations are public
funds established to serve a particular geographic region, which build up a
corpus of donations from the local community in order to invest in social
causes within that community.
Ms Rosalind Strong from the Sydney Community Foundation noted that that the
potential role of community foundations is underdeveloped, largely due to the
fact that community foundations are not widely recognised in Australia and do
not attract the same public attention as PAFs.
Catherine Brown and Associates contended that the amount of philanthropic funds
available to community foundations could be broadened if Deductible Gift
Recipient (DGR) Item 1 status was extended to all community foundations.
Mr Paul Ronalds from the PM&C told the committee that there is
potential for community foundations to play a greater role in supporting local
initiatives, and eventually transition to become fully-fledged CDFIs in some
Religious charitable development
The committee has also heard about the role of religious charitable
development funds, a funding mechanism utilised by many churches and religious
organisations in Australia.
Father Brian Lucas, General Secretary of the Australian Catholic Bishops
Conference, explained how these funds generally operate:
Parishioners will make a deposit, generally on slightly less
than commercial terms—and that will vary from place to place: perhaps 50 basis
points or a percent below what they might get in a more commercial setting.
That enables the church to use those funds to construct a school or other
capital facility. Those parishioners then have the money on deposit, generally
at call, sometimes on a term-deposit basis. But the capital that was able to be
acquired in that way is combined with other provisions and investment
opportunities that the church has. They have become very successful and are [a]
very important vehicle for providing capital.
Given the inherent social purpose for which philanthropic intermediaries
are created, the committee believes that philanthropic intermediaries should
have the option to invest a percentage of their corpus in social investment products.
The committee urges that the Australian Taxation Office (ATO), in
conjunction with the Australian Charities and Not-for-Profits Commission
(ACNC), work to develop guidance material outlining the ability of all
philanthropic trusts and foundations to make mission-related and social impact
Unlocking philanthropic investment
The PC report noted that for the philanthropic corpus to be made
available as capital for the sector, it would require 'the development of
appropriate investment vehicles and clarification of the fiduciary duties of
trustees, allowing approved loans to be included in meeting (possibly expanded)
Each of these issues were raised in evidence given to the committee, and are
Appropriate investment mechanisms
A lack of appropriate investment mechanisms could hinder the ability of
philanthropic intermediaries to make social or mission-related investments.
There are only a limited number of examples of philanthropic bodies providing
loan financing to social organisations using existing mechanisms:
Philanthropic trusts and foundations have occasionally
provid[ed] finance to enable the purchase of key real estate, usually through
the provision of bridging finance. One excellent example of this was the loan
giv[en] to Trust for Nature Victoria by The R E Ross Trust to enable the
purchase of Ned’s Corner Station, a site of conservation significance on the
Murray near Mildura. Trust for Nature was able to fundraise and repay the large
grant within a reasonable period. This was considered quite ground breaking and
is a model that could be replicated more often.
Mr Robert Fitzgerald from the PC told the committee that mechanisms to
allow loan financing from philanthropic funds would have a significant impact
for the NFP sector:
One of the things that we are very clear about is that even a
small releasing of the corpus by way of loans to non-profit organisations at
favourable terms and conditions would have a significant impact. We believe
there needs to be serious consideration of amendments to the fiduciary duties
that would allow philanthropic foundations and trusts, more generally, to be
able to lend at favourable terms a portion of the corpus.
As well as the potential for providing loans directly to organisations,
there is potential for philanthropic funds such as PAFs to invest in emerging
social impact investment vehicles such as social bonds and social impact bonds
(which are discussed further in chapter 6).
Fiduciary duties of trustees
A trustee is an individual or organisation which holds or manages and
invests assets for the benefit of another. Trustees are obligated to act in
accordance with certain fiduciary duties in the investment decisions they make
in their role. Broadly speaking, fiduciary duties are duties imposed upon a
person who exercises some discretionary power in the interests of another
person in circumstances that give rise to a relationship of trust and
Fiduciary duties are the key source of limitations on the discretion of
investment trustees in common law jurisdictions such as Australia. The most
important fiduciary duties are the duty to act prudently and the duty to act in
accordance with the purpose for which investment powers are granted (also known
as the duty of loyalty).
The specific requirements or fiduciary duties which must be considered
by trustees differ between types of investment funds, such as superannuation
funds, managed investment schemes, and philanthropic funds. The fiduciary duties
that need to be considered by a trustee of a philanthropic trust or foundation
are as follows:
foundations and trusts need to comply with any limitations in
their governing constitutions and/or trust deeds.
A foundation's investment strategy must be in line with its purpose as stated
in these governing documents.
for philanthropic trusts, the trust must comply with the Trustee
Act of the state or territory in which it is established.
This includes complying with the 'Prudent Person Rule' which states that
trustees must act as a prudent person would, performing their duties with
diligence, care and skill.
The fiduciary framework for philanthropic intermediaries necessitates
the development of social impact investment products which are structured so as
not to breach the obligations of trustees.
Philanthropy Australia noted that many foundations will not be able to consider
specific social investments simply because of restrictions in their deeds about
use of capital, or restrictive defined purposes of those trusts.
The committee has heard, however, that trustees arguably do have a duty
to consider the social and environmental implications of their investment
strategies. In April 2010 the then Assistant Treasurer, Senator the Hon Nick
Sherry, noted at an address for the Centre for Social Impact (CSI) Investing
for Impact Conference, that the obligations of trustees evolve with the
societies in which they operate:
The argument about trustees’ duties and obligations is that
trustees, in common law, broadly need to reflect society and, particularly, the
goals of the organisation that they owe a fiduciary duty to. Therefore, the
role of a trustee in a superannuation fund, and the role of a trustee in a PAF,
today is very different from the role they would have had 20 or 25 years ago,
for the obvious reason that the world has changed. The world in which we are
considering issues of investment, the placement of funds and the distribution
of funds requires a consideration of a much broader and almost certainly more
complex set of issues than 20 or 25 years ago. I think for a PAF, it’s even
more important to consider these issues because invariably, the stated goal of
a PAF will have a direct link to issues relating to socially responsible
Trustees, I would argue in today’s world, actually need to go
further than simply passing the money over to a financial institution. They
need to be actively engaged in examining where that financial institution is
placing those investments - not just to maximise the return to the fund but
also to ensure that where those monies are invested aligns with the interests
of the fund itself. So what the law arguably requires from trustees is a
significantly broader range of activities than in the past, as well as a consideration
of a more complex set of issues.
Philanthropy Australia noted that there are many foundations that are
not overly restricted in their governing documents and that could, in the right
circumstances, seek social returns as well as financial returns on their
Despite this, it is clear that currently philanthropic trustees are
generally conservative in their investment strategies. Representatives from
Philanthropy Australia told the committee that philanthropic trustees tend to
exercise caution rather than innovation in their investment strategies in order
to protect their donated corpus, and foundations are less able to take risks in
their investments than larger institutional investors.
Ms Catherine Brown agreed with this sentiment, noting that it would be unlikely
that foundations and trusts could invest in untried, speculative businesses.
JBWere also commented on this issue, and expressed concern that if
foundations target investments with a social benefit but decreased financial
returns, they may gradually lose their ability to provide grant capital to the
causes for which they were established:
All investments, whether they have a social impact or not,
will have varying levels of risk associated with them. Therefore, different
forms of impact investments will not be suitable for Trusts and Foundations as
they provide an inappropriate balance of risk and return when considered in the
light of the objectives of the trust.
...with the existing philanthropic capital that is being used
to invest to generate an income stream to provide social benefit, it is
important that it does not get diverted into products or investments that might
take it away from funding the reason it was set up.
Disbursement requirements for
Regulatory guidelines determine how some philanthropic foundations can
manage and distribute their funds, including setting minimum annual
disbursement requirements (see paragraphs 4.37–4.39). Submitters to the inquiry
noted that the reluctance by trustees to invest in social investment
opportunities that offer lower financial returns may be ameliorated by
including social investments as part of a foundation's mandatory distribution
PAFs are required to distribute five per cent of their
previous 30 June corpus each 12 months. There are costs to cover and inflation
to offset to preserve the value of the fund. Many PAF trustees believe they
cannot afford to have a significant amount of fund tied up in low yielding
assets however socially beneficial those investments may be. But if any
discount to the market returns on social investments can be treated as benefit
for the purpose of the five per cent minimum distribution, the calculation is
Existing PAF guidelines do provide for this kind of distribution in some
circumstances. Example 2 under PAF guideline 19.3 states: '[i]f a private
ancillary fund leases office space to a deductible gift recipient at a discount
to the market price the fund is providing a benefit, the value of which is
equal to the amount of the discount'.
The PC report noted that this provision can be used to allow funds to offer
organisations sub-commercial transactions to DGR organisations:
Public and private ancillary funds can enter into uncommercial
transactions (for example, subsidised loans) with DGRs that are in furtherance
of the PAF’s purpose. The difference between the interest on the actual loan
and the interest that would have accrued if it were provided on a commercial
basis is considered to be a charitable DGR distribution by the ATO. These funds
may engage with non-DGRs but only for commercial transactions. It is unknown
exactly how many loans are provided to the NFP sector by these funds but it is
thought to be relatively low.
Mr Les Hems, Director of Research at CSI, agreed that this framework
should allow PAFs to make social investments. Mr Hems told the committee:
As part of the New South Wales government work looking at the
tax implications, we have had a look at the private ancillary funds, and we
think the existing rules would allow PAFs to invest in, say, a social impact
bond or, indeed, any investment which might offer a below-market rate of
return. The PAF guidelines already articulate that, if a PAF holds office space
which it decides to rent out at a peppercorn rent, it can include the
difference between the market rate and the peppercorn rate as part of its
distribution. If that is a precedent, then I do not see how that is any
different from a PAF investing in a financial instrument which may not yield a
full market return.
Philanthropy Australia noted that they are only aware of one instance of
this provision in the PAF guidelines being utilised beyond rent, with limited
success. They state the reasons for this are a lack of awareness among trustees
and a lack of clear benchmarks for what constitutes standard returns for
different social investment products.
Awareness and education for
The first issue, lack of awareness amongst trustees, can be addressed
through the education of trustees. This includes raising awareness about the
potential for PAFs to make social investment, and also ensuring that
foundations include a clause in their investment strategy documents enabling
them to invest in social investments as an asset class.
This call for greater education and assistance for philanthropic trustees was
echoed by the Macquarie Group Foundation:
I think one of the things with the growth of PAFs and the
various changes to the legislation around PAFs is that it is a matter of
education—of people not understanding what it is they can and cannot do within
a PAF. It sounds silly, but I think it is as simple as that in some cases. They
are really confused. They are focused on the fact that they need to distribute
10 per cent and that they must have an external trustee, but then they begin to
get bogged down in what it is they can and cannot do. I think it comes down to
having better awareness and better education.
The departments' submission noted that clarification of fiduciary duties
through the provision of guidelines for trustees has helped clarify how
foundations can make social investments overseas:
In some jurisdictions, research reinforces that trustees and
boards are more likely to proceed if they are confident they can manage the
risks and if there is clear policy and regulatory guidance. This has led to the
development of guidance material. For example, in the United Kingdom the
Charities Commission publishes a detailed guidance note on the duties of
trustees and potential for funds to make mission related investments.
Setting benchmarks on standard
returns for social investment products
In order for PAFs to count the discount provided in social investments
as part of their mandatory disbursements they need to demonstrate that they are
providing a loan or investment at a sub-commercial rate of return. Philanthropy
Australia recommended that benchmark rates for various classes of social
investment be established:
Our suggested response to this is that between the Office for
the Not-for-Profit Sector, PM&C, Treasury, which we know is supportive of
this concept, and the Commissioner of Taxation along with some of Philanthropy
Australia’s members who have expertise in this area, we draw up and publish a
set of market prices for different classes of social investment—secured debt,
bonds and subordinated debt, to name three.
Philanthropy Australia suggests that an early establishment
of some market benchmarks would be beneficial and these rates can always be
adjusted in following issues if they turn out to be not exactly right, but the
benchmark rate needs to be publicly available prior to the issue launch and
needs to apply for the whole term of the issue, hence I believe that the
commissioner needs to be involved in the setting of those market rates.
Mr Brent Cubis from the Chris O'Brien Lifehouse at RPA agreed that the
ATO should issue clear guidelines about benchmark rates for these investments,
in order to assist PAFs invest in emerging social investment products.
The current guideline which enables PAFs to make sub-commercial
transactions does not currently apply to other types of philanthropic
foundations. This limits the opportunity for other types of foundations to make
similar investments without breaching their fiduciary obligations.
The committee notes the potential for philanthropic intermediaries,
particularly private and public ancillary funds, to invest a percentage of
their corpus in approved social impact investment vehicles. To enable this to
occur more broadly, there needs to be clarification of the ability of
foundations to treat any discount to market returns on social investment as
part of their minimum distribution requirements. Appropriate benchmarks and
standards also need to be established for social investment products. The
committee also considers that the role of philanthropic trustees needs to be
strengthened through the provision of more adequate support and advisory
services (see recommendation 5.1 in chapter 5).
Given that this potential for philanthropic funds to invest in social
economy organisations and social investment products is at an early stage, the
committee believes that the proposed Social Finance Taskforce should consider
this issue as part of its deliberations, with a view to providing further
recommendations about how philanthropic bodies can become informed and engaged
with social investment opportunities.
The committee recommends that the Australian Taxation Office, in
consultation with the Australian Charities and Not-for-Profits Commission and
other relevant stakeholders, issue explanatory material for Private Ancillary
Fund trustees informing them of:
the ability of these funds to treat any discount to the market
returns on social investments as benefit for the purpose of the minimum
distribution requirements; and
the necessity of including a clause regarding social investment
classes in their investment strategy documents in order to invest in social
The committee recommends that the Commissioner of Taxation, Treasury and
the Office for the Not-For-Profit Sector work to create benchmarks and
standards for financial returns on social investment classes such as debt
products and social bonds, in order to help trustees and fund managers make
informed investment decisions in this area.
The committee recommends that the proposed Social Finance Taskforce
consider the potential for philanthropic trusts and foundations to invest a
percentage of their corpus in social investment options, particularly with
whether a requirement for philanthropic foundations to invest a
percentage of their corpus in mission or program related investments is
appropriate in the Australian context;
how to develop appropriate social investment vehicles for
philanthropic intermediaries; and
any other mechanisms by which the corpus of philanthropic funds
could be better utilised to invest in the social economy.
As of June 2010, the superannuation industry in Australia held
approximately $1.23 trillion dollars in funds.
Numerous submitters have noted the potential for superannuation funds to engage
with social investment opportunities.
Mr Gordon Noble from the Association of Superannuation Funds of
Australia (ASFA) told the committee that there is a high level of interest
within the superannuation sector about making investments which take into
account environmental, social and corporate governance (ESG) factors.
Over 100 superannuation funds and investment management companies in
Australia have signed the UN Principles for Responsible Investment, a voluntary
set of six principles devised to encourage institutional investors to
incorporate ESG issues into investment analysis and decision-making.
These principles are implemented through a variety of investment practices, as
outlined by the Responsible Investment Association of Australasia in their
annual research report on responsible investment in Australia and New Zealand.
Christian Super, a relatively small Australian superannuation fund with
approximately $560 million in funds under management and around
is taking a leading role in this area through its investments in the Australian
social economy. Christian Super was recently announced as a $6 million investor
in Foresters' Social Enterprise Solutions Program, an investment that was
matched with $6 million in funding from the federal government under the Social
Enterprise Development and Investment Fund (SEDIF) initiative.
Christian Super also holds over $15 million of investment capital in
Mr Glen Saunders, a director of Triodos Bank, a social investment bank
based in the Netherlands, told the committee that while there are limited
current examples of super funds engaging with the sector, as much as two to
four per cent of some superannuation fund portfolios could be invested in this
area within the next few years.
This represents a large potential pool of capital for social investment.
Several factors were discussed over the course of this inquiry in
relation to super funds engaging with the social economy sector, including:
the requirement for super funds to focus solely on maximising
financial returns on their investments;
the potential to use social investment types as a portfolio
the need to create appropriate risk and return structures for
the need for investment vehicles large enough to attract
investment from wholesale funds; and
the lack of awareness among fund managers about social investment
options (as discussed above in relation to philanthropic trustees).
The 'sole purpose test' for
Superannuation funds are governed by a principle known as the 'sole
purpose test', which is established in section 62 of the Superannuation
Industry (Supervision) Act 1993. The section states in essence that
superannuation funds must provide retirement benefits to members, or death
benefits to their dependents or deceased's estate in the event of death. This
means that superannuation funds must have regard only for maximising the
financial returns for their members for these purposes, and therefore cannot
consider any potential social benefits when making investment decisions.
Mr Gordon Noble from the Association of Superannuation Funds of
Australia commented that there is universal support for the sole purpose test
in its current form within the superannuation industry, and that there would
not be support for any attempts to require superannuation funds to invest in
any particular asset classes.
CSB noted that the sole purpose test, which is designed to protect the
interests of fund members, has not prevented superannuation funds from
investing in new or speculative financial products in the past:
Mr Quarmby: I think the whole notion of the 'sole purpose'
test is somewhat of a shield for the superannuation funds. It is a sacred cow,
but what it has not done is truly protect the members of super funds. We have
seen huge volatility over the last 15 years where super funds were investing in
highly speculative ventures, and when the market goes down we see people losing
10 or 15 per cent of the value of their superannuation funds, and it takes some
years to come back. If we are able to manufacture a product that is a capital
guaranteed product then I truly believe that that can satisfy the 'sole
Within the sole purpose test framework there is still scope for
superannuation funds to invest in social investment classes in the right
circumstances, for instance when social projects can produce a return that is
comparable to commercial rates of return. JBWere discussed this matter with the
CHAIR: ...To what extent does the sole purpose test that
applies to trustees impact on trustees' decision-making powers? Are they
constrained from marketing themselves as a superannuation fund that invests in
socially beneficial investments? Are they constrained by taking a cut in the
commercial return which they would accept in return for a social return by the
sole purpose test and other regulations that apply to them?
Mr Thorn: Again it depends a little bit on which investment
we are talking about in the sense that if you are supplying capital at a
commercial rate of return that is commensurate with a return you get from the
sole purpose test then that is fine but if it is not it does become an issue.
It just depends where you sit along the spectrum of what the investment you are
looking at is. If you can get the same commercial return with an ethical screen
arguably there is not an issue. If all of a sudden the discount is such that it
is taking you out of the realm of that sole purpose test, that is an issue you
need to consider.
Foresters told the committee that it had operated a superannuation fund
which made investments that were of a social nature, without breaching the sole
Ms Drew: ... We previously operated a superannuation fund and
we made investments through that fund which were of a social nature. The
regulator, APRA, said very clearly to us at the time that if we wanted change
in the space we ought not talk to them, that they are just the regulator, that
we ought to talk to the politicians. That comment stuck with me over a number
CHAIR: Did APRA have a view at the time on those investments?
Ms Drew: Yes, a very clear view that as long as the
investments were considered with financial returns first and the best interests
of the members of the funds first, and all those criteria were met, there was
no impediment to making the investment, which I think is a very important
Mr Fitzgerald told the committee that superannuation funds can currently
offer members a choice of investment options with various projected rates of
return, with the onus falling on the member to decide what risk profile is
appropriate for them:
One of the significant issues that people fail to understand
is that currently members of funds are able to in fact invest in products that
provide less than a commercial return through a superannuation fund. The issue
here is the choices with the member, but of course the fund has to actually
provide the product. So, whilst there is debate about whether or not
superannuation funds should be required to invest any portion of their
activities in social purpose investments, what is clear is that there should be
a much greater activity on the part of superannuation funds in finding products,
including in the non-profit space, and offering that to members who may choose
to invest part of their superannuation funds in that product. That is an
attractive way. Again, it does not in any way conflict with the fiduciary
duties of the trustees, because the decision is with the members. The members
are currently able to choose a whole range of investments from very high risk
to very low risk. We think that avenue is also available. With a freeing up of
some of the corpus in trusts more generally, with a new product mix in
superannuation funds, you start to get potential sources from a number of
different areas without in any way conflicting trustees of these sorts of
Despite this, there is a reluctance on the part of superannuation funds
to offer their members investment options with sub-commercial financial
returns. The committee had the following exchange with Christian Super:
Senator STEPHENS: Just getting back to the crux of the issue:
lots of submissions asked us to look at how we can facilitate superannuation
funds investing in this very nascent market. Can you very succinctly tell us
where you think the sole purpose test lies in terms of your fiduciary duty and
the capacity you might see that super funds have to invest in this?
Mr Macready: Our sole purpose is to provide superannuation
benefits, retirement benefits, to our members. We, as all super funds do, have
to do that in a way that is consistent with our values. We have been very clear
in nailing our colours to the mast there and saying to our members, 'We will
reflect your values in the way we invest and we will not take a penalty in
terms of risk adjusted returns for doing so.' It is a fairly clear position of
Senator STEPHENS: That is a challenge.
Mr Macready: Over the time I have been at Christian Super,
there have been a number of times when we have had people ring up say, 'But
you're a Christian fund, can't you invest at subcommercial rates?' We have
members—both people who want the money and people who have given us their
money—saying, 'I'd be willing to accept a lower return if you could do
excellent things with it,' and we have to say, 'No. Our purpose is to provide
you with the best retirement benefits.'
CHAIR: So it rests on the fiduciary duty to discover that? You
have the flexibility to look at allowing your members to take a social return
in addition to the economic return.
Mr Macready: Yes, that is right. We do not feel that there is
a strong enough argument to be made that we could do that. We did have some discussions
with APRA along those lines a few years ago, and they ultimately said, 'If you
disclose everything to the members you're probably fine.' But we felt that it
was not in our mandate as a superannuation fund within the regulatory
framework. That being said, I think reflecting the values of our members gives
us opportunities to look at things that other funds would not.
Mr Saunders of Triodos Bank told the committee that another complicating
factor when considering fiduciary duties for superannuation trustees and
expected returns on investments is that there is no simple definition of what
is a commercial market return.
This lack of clarity can make it more difficult to ascertain whether or not a
particular investment in a social investment product is a prudent one. This
highlights the need for appropriate benchmarks and standards to be developed
for social investment options (see recommendation 4.2).
Creating an appropriate risk and
return profile for social impact investments
Christian Super highlighted that the primary concern for superannuation
funds is not purely the rate of financial return, but the level of risk
associated with an investment yielding a particular return. This 'risk-adjusted
return' is generally the primary determinant of whether or not an investment
deal is an attractive proposition for institutional investors.
Newer investment types without a well established track record are
generally considered to be higher-risk, lowering their risk-adjusted return.
Over time as new asset classes develop and there is less uncertainty about
their performance, the risk allocation can drop. In this context, Christian
Super noted that government involvement in a project can substantially lower
the risk of an investment proposition, making the risk-adjusted return more
attractive. Mr Peter Murphy, Chief Executive Officer of Christian Super, told
It all comes down to providing adequate risk-adjusted
returns. We looked at the Foresters program, probably 12 to 18 months prior to
investing in it, and we actually could not invest in it at that point because
we did not believe the risk-adjusted return was significant. But with the work
done by the Australian government in being a subordinated co-investor changed
the risk structure of that very significantly, and made the risk-adjusted
return fine for us to invest in it. As a result it is actually a good
investment for us.
Mr Michael Traill from Social Ventures Australia noted that when
establishing the Goodstart consortium, it was not allowed to state that
government was an investor, which would potentially have made the proposition
more attractive to other investors:
Accessing that funding is extremely challenging and, if you
know where to go to find it, we believe that it is possible to access it and
that it can be accelerated if you can access it in partnership with government.
Very simply, the GoodStart transaction would not have happened without the $15
million of government support...
The double jeopardy with the fundraising hat on was that I
understood some of this in terms of the commercial sensitivities. I could not
actually advertise to potential funders that the government would be a
prospective funder of this initiative. That would have had significant
consequences for the ease of raising that funding. 
Using social investments as a
portfolio diversification tool
ASFA noted that some social investment asset classes such as
microfinance, which generally provide lower returns than other traditional
asset classes, could still be useful to superannuation funds as a means of
diversifying their portfolio:
In terms of our superannuation sector, we have some areas
where impact investments are moving forward at a greater rate of knots.
Globally microfinance has become an asset class. We have at least one super
fund, Christian Super, investing in that. One of the reasons something like
that would become an asset class that is supported and invested in globally is
to understand that there is a range of factors as to why a super fund would
invest. Returns and fees are not just the issue. A key thing is to understand
the way a portfolio is constructed, and in particular the essential principle
around building an investment portfolio is diversification. In the context of
microfinance, the benefit of something like microfinance is that within a fixed
interest portfolio it can actually diversify that portfolio. This is all about
correlation in our language. What that means is that the performance of a
microfinance investment may have a different attribute and a different profile
in the way it performs than other fixed interest investments. In simple terms
that might mean that when one goes down another one goes up and, therefore,
overall your portfolio is strengthened. Risk and return are fundamental, but it
is important to understand that diversification is a way that superannuation
The value of investments in the NFP sector for diversification purposes
was also highlighted by Christian Super in its evidence to the committee:
The not-for-profit sector has a number of attractive
characteristics when looked at from a diversification perspective. We have a
lot of assets exposed to global market conditions, which are linked to the
global economy, the Australian economy and investor sentiment around the world.
The not-for-profit sector in Australia is countercyclical to a lot of those in
that when the economy is performing poorly the not-for-profit sector is more
needed and its role is more significant. What we are looking for as investors
are opportunities to invest in ways that are uncorrelated so that we have
diversified returns. The not-for-profit sector has some excellent
characteristics in providing exposure to assets that will continue to perform
well even when our equities and our global investments are performing poorly.
That makes the sector attractive, but the returns still have to be there.
Transaction costs and deal size
necessary for institutional investors
Institutional investors such as superannuation funds manage sizable
investment portfolios and undertake significant due diligence and research work
on potential new investment options, particularly when considering new or
emerging asset classes. Hepburn Wind Park noted that for an institutional
investor it takes as much effort to analyse a $25 million deal as it does a
$250 million deal, thereby lowering the transaction profitability for
large investment funds on smaller deals. In Hepburn Wind's case, their $13.5
million project was considered too small for institutional investors such as superannuation
Mr Andrew Tyndale of Grace Mutual noted that some large superannuation
funds will not look at an investment of less than $50 million, and in many
cases cannot take more than a five or ten per cent stake in the total value of
a fund; consequently, a minimum total fund size of $500 million may be required
before being able to attract investment from large superannuation funds. Mr
Tyndale argued that this lack of sufficient deal size was one of the reasons
the National Rental Affordability Scheme had largely failed to attract
investment from institutional investors such as superannuation funds.
Mr David Waldren from Grocon, the property developer responsible for
construction of a Common Ground housing facility in Melbourne (see
paragraph 4.99), noted the difficulties of scale for large commercial
developers when trying to offer assistance to the social sector:
...not just Grocon, but other[s] of our colleagues in the
sector would find a very small project to be $50 million to $100 million. In
the sector we are coming to try and assist, $50 million to $100 million is a
very big project, and prior to perhaps the last stimulus package they were
perhaps few and far between. So, there was a nexus there about how we could get
The opportunity was identified for the common ground project
in Elizabeth Street, which in round numbers was a $50 million project. The
problem with it being any smaller than that, and even at that scale, is that we
cannot be efficient in that space. We are just too big to be efficient in that
space, but we do have access to equity and we do have access to debt that we
can bring to the table, so we were keen to see how we could assist.
Christian Super's $6 million investment in Foresters shows that smaller
deals in the social economy sector can be appropriate for smaller
superannuation funds, particularly those like Christian Super with an ethical
investment mandate. Christian Super noted that investing in a social investment
managed fund administered by an intermediary such as Foresters can be a good
way for a super fund to obtain exposure to the social economy sector without
the risks associated with investing directly in a social enterprise.
These social investment funds (discussed further in chapter 5) can also provide
a larger scale for investment than directly investing in a single organisation
The committee considers that there is definite potential for the
superannuation industry to become more involved in investing in the social
economy, and notes the commendable work of Christian Super in being an industry
leader in this investment area. The committee believes that superannuation
funds should be encouraged to offer members social investment options as part
of their overall portfolio composition.
The committee notes that consultation between the superannuation and
social economy sectors will be the critical factor that determines how the
superannuation industry engages with the emerging possibilities of social
investment. As such, the committee considers that the proposed Social Finance
Taskforce should include a representative from the superannuation industry, so
as to lead dialogue on how superannuation funds can engage with this emerging
The committee recommends that the proposed Social Finance Taskforce
consider the potential for superannuation funds and other institutional
investors to invest in emerging social impact investment products, with
particular regard to ascertaining:
what clarification, if any, is necessary regarding the fiduciary
duties of superannuation funds and their ability to engage with social impact
how social impact investment classes can be used as a portfolio
diversification tool by superannuation funds;
whether incentives may be required in order to attract
institutional investment to the sector;
how social investment funds can be developed to attract
institutional investment; and
what possible mechanisms are available to lower the transaction
costs for institutional investors seeking to engage with social investment
Corporate sector investment in the social economy
The committee has heard that the private sector has a role in creating
social value and addressing social issues. The departments' submission
suggested there is an emerging awareness that corporate social responsibility
(CSR) activities are not periphery to a company's interests, but are in fact in
the best interests of shareholders and fundamental to profit creation and
Mr Andrew MacLeod from the Committee for Melbourne told the committee:
...we are very optimistic about the future as we see a
growing professionalisation and growing strength of corporate social
responsibility and social investment programs worldwide, and in fact Australia
is the home of many of the globe’s leading companies...The combined corporate
social responsibility spend of the private sector worldwide is estimated to be
$59 billion a year and growing. That is four times the budget of the entire
United Nations system.
Mr MacLeod contended that the effectiveness and efficiency of the
private sector's involvement in administering social programs is often greater
than that of publicly administered programs. He cited the example of a BHP
Billiton anti-malaria campaign in Mozambique which has reduced adult malaria
infection rates from 82 per cent of the local population to eight per
Mr McLeod also noted the potential for partnerships to be established between
the corporate sector, social sector organisations and government to create
powerful solutions to social problems.
The committee heard of several such collaborative partnerships in
Australia. One prominent example is a collaborative venture in Melbourne
between homelessness service provider Home Ground Services, the Victorian
government and property developer Grocon, which jointly oversaw the
construction of a $50 million facility to provide permanent accommodation for
chronically homeless individuals in Melbourne. Grocon donated up to $10 million
worth of savings for the project by providing their services at cost, making it
far easier for the project to be completed.
Mr Gordon Noble from ASFA noted that the contributions from corporations
to philanthropic funds could potentially drive innovative work around social
A lot of the companies that we invest in will contribute one
per cent of their pre-tax profits into a philanthropic fund. A good example of
that would be BHP Billiton. That is approximately $200 million each year that
they make a contribution on. That is an area of capital where I would encourage
engagement with the corporate sector, that is, the money it puts into the
philanthropic community. That area of fund[ing] may be able to do a lot of the
developmental work around some of these innovative ideas that come forward.
The PC report estimated that corporate philanthropy contributed around
$3.3 billion to Australia's NFP bodies in 2003–04.
The departments' submission noted that corporate philanthropy and community
investment is increasingly becoming more strategic and aligned with core
business activities. This is reflected in an increase in the level of board and
CEO involvement in setting a company's community investment activities.
In this context, it is important that company directors and management are
aware of opportunities to invest in the social economy.
The committee believes that the corporate sector has a crucial role to
play in investing in the social economy, and has the potential to provide
capital to the sector through corporate philanthropy and community investment.
For the corporate sector's contribution to the social economy to be fully
realised, company directors and senior managers must become more aware of
opportunities to engage with the social economy sector and new social
Increased awareness of these issues in the corporate sector should be promoted
through training and educational opportunities about social impact investment
and how to engage with social economy organisations, directed at executive
level staff. Some training of this kind is available through universities and
other training organisations (see chapter 5), and the committee believes that
additional training courses could be offered by organisations such as the
Australian Institute of Company Directors. The Office for the Not-for-Profit
Sector should play a role in publicising the training and educational
opportunities available in this area through its website.
The committee recommends that professional organisations such as the
Australian Institute of Company Directors and investment advisory services
develop materials and professional development workshops to inform the
corporate sector of investment opportunities in the social economy.
Retail and community investors
The committee has heard that individual investors (often referred to as
'retail' investors) can contribute significantly to capital-raising for social
ventures, particularly when the initiatives are based in a local community.
SENTECH noted in its submission to the inquiry that community investment offers
an alternative approach to social investment, looking to generate capital from
individuals rather than from corporate or institutional investors.
The potential for community investment is underdeveloped in Australia,
although there are several notable examples. Hepburn Community Wind Park
Cooperative, based in Daylesford approximately 100 kilometres north west of
Melbourne, have pioneered a model for community-owned wind power generation in
Australia. A significant portion of the $13.5 million of capital required for
the project was raised by the cooperative's 1900 members, over half of
whom live in the local area of the project.
Mt Buffalo Community Enterprise is another Victorian community
investment initiative attempting to raise finance to restore and operate a 100
year old heritage chalet in one of Victoria's National Parks. This initiative
is aiming to raise equity capital by finding five to ten thousand 'social
investors' who are willing to invest $1000 to $10 000 each in the project:
Our proposal is based on the assumption that there exists a
cohort of ‘social investors’ who will willingly invest a small component of
their total discretionary investment funds in a project that they adjudge as
delivering a form of ‘social or community good’.
SENTECH argued in its submission to the inquiry that the role community
investment can play in the social economy should not be overlooked, and that
community enterprises and investment opportunities confer the additional
benefits of increasing community engagement and strengthening ties within local
This is discussed further in chapter 8, under 'member owned businesses'.
Social economy organisations
reinvesting in the sector
The committee has heard that there is potential for social economy
organisations themselves to reinvest in other social organisations and social
impact investment opportunities. Mission Australia told the committee it is
investigating opportunities to invest capital into an innovative social impact
CSI noted that there is potential for churches to engage in emerging social
impact investment opportunities, particularly those that involve service
provision from the churches' own service agencies.
Government as a social investor
In Australia, state governments and the commonwealth have traditionally
funded the social sector through the provision of grant funding for the
delivery of social services, as well as providing occasional grants for capital
growth. Several submitters have highlighted a trend towards government 'outsourcing'
the provision of social services to non-government organisations.
The Community Council for Australia suggested that the government could take a
different role by focusing on policy outcomes in the social economy sector and
promoting innovation within the sector:
The role of government can be enhanced by taking a much
stronger policy outcome approach that enables NFPs and their communities to
develop and innovate around finances, funding and service provision to better
meet their own needs as well as the goals of government.
Government can also take a lead in piloting new ways of
funding the NFP sector and underwriting some investment approaches.
DEEWR and PM&C noted the potential roles of government as an
investor in the social economy:
Governments can also provide incentives for collaboration and
investment around particular policy priorities such as health or education. In
appropriate cases, governments can ‘go first’, providing the drive for social
innovation and catalysing action to encourage others into the market and build
Mr Glen Saunders noted that overseas there have been examples of
government expediting lending in certain areas through tax incentives. He cited
the Green Funds Scheme for environmentally-friendly investment projects in the
Netherlands, which was time limited and attracted significant funds from
financial institutions to sustainability projects.
In catalysing an emerging market for social impact investment opportunities,
Triodos Bank cautioned that the provision of funding over a significant time
period has the potential to distort the development of the market:
If the Australian government is interested in promoting this
area, we would suggest two things. Firstly, that you do not get directly involved,
and so you do not start providing lots of funds other than possibly seed funds,
because if you provide funds you will provide them in a way that will distort
the market. The point is to develop a social investment market. So, somebody
coming in without the same capital constraints that everybody else has tends to
distort the development of that and holds it back in the end. We have seen that
elsewhere, particularly in the UK, and we do not think that is helpful for the
long-term development... Our experience has been that where governments get
directly involved, other than in some limited seed funding—which I think you
have done—becomes dysfunctional very quickly.
Mr Fitzgerald noted that government providing incentives or 'top-up'
payments may be desirable in some circumstances where it is more cost effective
to top up the initiatives of a third party than to bear the whole cost of an
initiative, stating that there may be a number of instances where, unless
government is willing to contribute, the initiative will not be undertaken by
any other source.
Balancing supply and demand
While this chapter has discussed the organisations with the potential to
supply capital to the social economy sector, there is a need to balance the
supply of capital with the quality of the organisations and products requesting
it. Glen Saunders from Triodos Bank noted that simply supplying more capital to
the sector is counterproductive:
You want the amount of funds available to develop in parallel
with the project that can take up those funds. If you get an imbalance on
either side, that really creates problems. So, you do not want a huge surge of
funds to be available because then there is pressure to invest in substandard
projects. That is not very good. Nor do you want suddenly to see a huge surge
in projects looking for funds where funds are not available... in the
Australian context it should develop not too quickly and not with a sudden
surge of funds, because you have to find credible projects in which to invest.
This need to balance the supply of credible and sustainable investment
projects from the social economy sector with the right kinds of finance at the
appropriate time necessitates the involvement of strong intermediaries in the
sector, which is the subject of chapter 5.
The committee considers that attracting new sources of investment
capital and strengthening existing capital sources are critical to the long
term development of the social economy sector. The supply of capital to social
economy organisations in Australia can be strengthened through encouraging
greater involvement from mainstream financial institutions, institutional
investors and philanthropic bodies. The corporate sector and community
investors also provide valuable sources of capital for the sector.
The committee's recommendations in this chapter reflect that there are
some actions that can be taken, particularly relating to the ability of
philanthropic trustees to make social investments. Additionally, the proposed
Social Finance Taskforce should continue to investigate options for increasing
the supply of capital to the social economy.
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