Developing intermediaries in a social capital market
A prominent theme over the course of this inquiry has been the
importance of intermediaries in the development of a capital market for social
There is a need to support and encourage the emergence of intermediary
organisations in the sector, as they have the potential to provide much of the
enabling structures which will allow market development to occur.
The joint submission from the Department of Education, Employment and
Workplace Relations and the Department of the Prime Minister and Cabinet (the
departments' submission) commended the work of intermediaries across a number
of spheres within the sector:
Specialist social economy intermediaries are emerging around
the world to support the growth of social enterprises, aggregating and matching
finance, developing innovative financial products, promoting the development of
capabilities and skills, providing physical and virtual collaboration spaces,
improving technologies and providing networks. Intermediaries also play a
valuable role in education and advice necessary to inform legal and business
structures to support investment and appropriate types of investment for an
organisation and its stage of growth and sources of capital.
This chapter focuses on the role of intermediaries in the sector,
looking at the roles that can be fulfilled by intermediary organisations in
developing a social capital market, the types of intermediary organisations that
can play these roles, and suggestions from submitters on how intermediaries can
be supported and encouraged in Australia.
The role of intermediaries
The committee has heard that intermediary organisations can play a
variety of roles in supporting the social economy and promoting the development
of a social capital market, including:
linking suppliers of capital with appropriate investment
helping organisations become 'investment ready' by providing
services, advice and training to social economy organisations;
contributing to the education and research base for the sector;
developing new measurement frameworks and tools; and
investing in innovation in the sector.
The presence of intermediary organisations is lacking in Australia,
reflecting the early stages of capital market development for social economy
organisations and social impact investments.
Mr Michael Traill from Social Ventures Australia (SVA) commented:
... If you go to the UK you will see there is a diverse,
eclectic, interesting, sophisticated, intermediary market. It is very limited
in Australia. You have obviously done your homework. You are talking to all the
known suspects in Australia. It is not a big group. And that is a real pity.
Types of intermediary organisations
A 2011 research paper from the Young Foundation and the National
Endowment for Science, Technology and the Arts in the UK classified social
venture intermediary organisations into five basic categories:
people, network and expertise;
marketing and distribution; and
The role of each of these types of intermediaries, and their relevance
in the Australian context, is discussed below.
Financial intermediary organisations
Financial intermediaries are seen as crucially important to the
development of a capital market for social economy organisations.
Financial intermediary organisations have been described as 'organisations that
link investors and social organisations, bringing sources of finance to social
ventures and packaging investments into structured financial products that
deliver a mix of social and financial returns'.
Financial intermediaries have the potential to offer a host of financial
products and solutions to social economy organisations to move the sector away
from a sole dependence on grant capital.
Some financial intermediaries operate essentially as niche banks,
providing banking services and loan capital directly to organisations based on
their expert knowledge of the sector. Some intermediaries manage social
investment funds or act as a broker for social economy organisations and
investors to mediate the creation of social investment 'deals'. Financial
intermediaries also work with social organisations to build capacity and help them
become investment ready.
The departments' submission commented on the lack of financial
intermediaries providing capital to social economy organisations in Australia
at the present time:
There are relatively few financial intermediaries in
Australia which specialise in providing community development finance; an
overview was provided by the Productivity Commission. The Responsible
Investment Association of Australasia and New Zealand identified 11 community
finance providers in Australia in 2010 with total assets of $1,331 million, an
increase of 15% on last year’s adjusted figure of $1,157 million. There is a
more mature international market of such organisations. Examples include
Charity Bank (UK), Triodos Bank (NE) with operations in a range of countries,
Venturesome (UK) and Vancity Credit Cooperative (Canada).
The Productivity Commission (PC) report also noted the role of these
organisations, and argued that financial intermediaries such as Community
Development Financial Institutions (CDFIs) are a crucial source of capital for
the NFP sector in Australia. The report recommended the government explore
options to encourage the financial intermediaries sector to offer appropriate
products and services to the NFP sector.
Linking suppliers of capital with
Financial intermediaries can play a key role in linking investors to
investment opportunities. Working with both social economy organisations and
investors, intermediary organisations can act as brokers between the two
sectors. As Christopher Thorn, the Executive Director of Philanthropic Services
at JBWere, explained:
...intermediaries are required, if you like, to educate the
market and bring both the providers and the suppliers of the capital together
to have those conversations. If they fully appreciate and understand the issues
on both sides, they can then look to build appropriate opportunities whether
they be initially discussions leading through to investment opportunities or
executing transactions. As we pointed out in the submission, there is nothing
unusual about that. In the history of capital markets over time the role of the
intermediary to do that has been quite fundamental.
Intermediaries have an emerging role working with social economy sector
organisations to build capacity and help them to develop investment products
that are more likely to attract investors. At the same time, they liaise with
potential investors to help match them to suitable investment opportunities. At
present there are few intermediaries playing this role in Australia. Notable
examples include Foresters Community Finance, SVA and JBWere's Philanthropic
Mr Toby Hall, Chief Executive Officer of Mission Australia, told the
committee that accessing intermediaries with expert knowledge of investment and
financial markets is vital to creating viable investment propositions for the
Mr Traill from SVA noted that the GoodStart deal (see paragraph 2.25) would not
have been possible without the help of intermediaries which had access to a
network of potential investors to provide capital:
Finally, and this has come up again and again in the
submissions that we have seen, we believe the role of intermediaries in this is
vital. You can put us saying that down to naked self-interest, but we can say
with some confidence and authority that you have to go to intermediaries who
know how to access capital, particularly at the early stages of this market.
Markets are built on the ability to access funding. In the kind of occasionally
painful and tortuous nine-month journey of raising funding for GoodStart, if we
did not know where to go to get that money, if we did not have the heavyweight
support of people like Robin Crawford, who is chairing GoodStart and who
personally underwrote $5 million of that $45 million of social capital, it
simply would not have happened. So we need access to people with that sort of
horsepower for this market to develop fully.
Intermediaries managing social
One way by which intermediaries can leverage capital into the social
economy is through managing specific social investment funds. As discussed in chapter
4, a significant barrier preventing institutional investors such as
superannuation funds from entering the social economy market is a lack of
sufficient deal size and therefore high transaction costs for social investment
opportunities. Social investment funds can provide an opportunity to overcome
these barriers, allowing intermediary funds managers to aggregate investment
opportunities and create the sufficient size to attract large-scale investment.
These funds present less risk for institutional investors than investing
directly into a single organisation or project in the social economy, and shift
the burden of the bulk of the research and due diligence work required from the
investors onto the fund manager. This in turn lowers the transaction costs for
There are a couple of examples of social investment funds operating in
Australia. Foresters have established a Social Impact Property Fund, which
attracted investment into a fund to purchase commercial property to be leased
to community organisations.
The two Social Enterprise Development and Investment Funds (SEDIF) recently
announced by the federal government to be administered by Foresters and Social
Enterprise Finance Australia (SEFA) are another prominent example of this kind
of arrangement, where investors put capital into a fund which then provides
finance to many social enterprises (see chapter 8).
Christian Super commented in its submission that working with an
intermediary with extensive experience in the social economy sector made it
easier for it, as a superannuation fund, to consider channelling investment
into the social economy sector.
Investment funds managed by intermediaries with extensive sector knowledge
provide an alternate investment product for institutional investors and an
entry point for the broader investment market:
The investment through a social investment managed fund
provides the wider investment community with an alternative way to obtain
exposure to the social economy sector. Investing through a fund allows
different funds with different risk profiles to be established to suit varying
risk appetites among investors. Additionally, within each fund, different unit
classes can be created to cover the whole spectrum of investors such as capital
warranty units, subordinate units, senior units, etc. Under the right
structure, the units can be bought and sold in the wider market, increasing the
liquidity for investors. This will open up the investor universe for the social
economy sector and increase the funding sources and flows mentioned above.
Building capacity and investment
readiness in social economy organisations
As noted in chapter 3, many social economy organisations in Australia
are not sufficiently 'investment ready'. These organisations need a variety of
support mechanisms to develop capacity to present sound financing propositions
and take on debt.
The departments' submission noted that 'as in business ventures of all types,
expert advice on the most appropriate source and form of finance for the needs
and stages of the venture is critical'.
Intermediary organisations help social economy organisations become 'investment
ready' by providing training, mentoring and expert knowledge and skills. They
are aware of the types of finance available and which is most appropriate for a
particular organisation, and can match needs with the full spectrum of finance
The national business development and support service for social enterprises
administered by Social Traders (see chapter 8) is an example of this kind of
work in Australia.
The PC report noted that financial intermediaries such as CDFIs usually
'work with NFPs to develop an understanding of their organisational form,
capacity and operation as part of the due diligence process prior to
This work has considerable impact; organisations surveyed in the UK reported
significant improvements in their revenues and beneficiaries and an ability to
raise additional investment as a result of support offered through a social
The capacity building work of intermediaries helps to create a pipeline
of credible investment opportunities for social investors, which is one of the
primary challenges in developing a social capital market.
Experience in the UK, where there has been a strong focus over the last decade
on the provision of additional capital into the sector, has shown that social
investors with capital to invest still often struggle to find enough credible
projects in which to invest.
Providing expert knowledge of the
A crucial role for financial intermediaries is to develop a deep
understanding of the sector and social investment issues, enabling them to
provide more tailored services than mainstream lenders. JBWere noted that there
has often been a mismatch between commercial financial products offered and the
real financial needs of NFPs. There is also the risk for financial
organisations to get drawn into providing services or capital that they are not
set up to provide. Such scenarios have the potential to lead to an erosion of
trust and create justifications for providers and investors not to enter the
Because of this, 'intermediaries who understand the challenges of this market
will fulfil an important role in ensuring trust and confidence is built through
the utilisation of the right products and services offered to appropriate and
Because financial intermediaries which focus on providing services to
social economy sector organisations are better placed to understand the needs
of these organisations than mainstream financial institutions, they can offer a
more realistic assessment of the organisation's capacity and ability to repay
debt. Intermediaries can offer tailored financial products which account for
the often peculiar needs of social organisations. Foresters noted that this
process is especially important for the emerging social enterprise sector,
stating that intermediaries can potentially channel and structure capital in
ways that would not be possible with traditional financial institutions.
The role of financial advisors and
While the prominent financial intermediaries in the Australian context
are specialist organisations such as Foresters and SVA, the role of financial
advisors and financial planners has also been raised. The Centre for Social
Impact (CSI) noted that some mainstream advisors to investors are becoming
aware of social investment:
There are a small number of mainstream advisors to
institutional and individual investors that now endorse social investment.
These mainstream advisors are restricted by the sole purpose test and fiduciary
duties, and rely on recommending ‘investment grade’ investments. A number of
specialist advisors have also emerged to address demand for ethical investment
and to provide advice around the operation of Private Ancillary Funds (PAFs).
The Community Council for Australia contended in its submission that financial
specialists engaged with the sector are necessary to facilitate increased
access to finance for the sector:
Perhaps even more than other areas, the development of an
active and engaged group of finance specialists is an important pre-requisite to
establishing more financing options for the NFP sector. To this end, it is
important to listen to those from the finance sector who are currently active
in this area. If governments, not-for-profits and the community can better
support their role, it is much more likely more viable investment and financing
options will be developed over time.
There is a need to increase the awareness among advisors of the
opportunities to invest in the social economy. The Australian Financial
Review recently noted that the potential for philanthropy to be expanded
through the role of professional advisors is largely being missed. In order to
realise this potential wealth managers, accountants, lawyers and financial
advisors need to become informed and engaged with philanthropy and social
Ms Rosemary Addis, Social Innovation Strategist for DEEWR, told the committee
that work in this area is occurring overseas, with some philanthropic
foundations working to educate financial advisors about options and issues
relating to social investment.
Dr Richard Seymour, from the University of Sydney's Innovation and
Entrepreneurship Research Group, noted that the education of executives in the
finance sector could occur through short courses managed by private
institutions and universities, complemented by formal university courses (see
also 5.49-50 below).
The committee considers that there is currently a lack of awareness of
social investment issues among financial and philanthropic advisors in
Australia. The role of financial and philanthropic advisors in supporting
social investment and offering clients information about emerging social
investment options needs to be strengthened in Australia. This should be done
through educational materials and training courses. The Office for the
Not-for-Profit Sector can also play a role in publicising the training and
educational opportunities available in this area through its website.
The committee recommends that philanthropic and financial advisory
services promote and encourage opportunities for social investment and
engagement with the sector.
Community Development Financial
The PC report made special mention of CDFIs, a particular type of
financial intermediary. The report identified that CDFIs 'increasingly play an
essential role in providing credit, financial services and other services to
not for profits'. It described these institutions as:
...sustainable, mission-driven, independent financial
institutions that supply capital and business support to individuals and
organisations whose purpose is to create economic opportunity and social
capital in disadvantaged communities or underserved markets. CDFIs provide
social and financial returns to their investors by using flexible capital
products to meet the needs of NFPs to effectively serve these markets while
managing their inherent risks.
CDFIs differ from conventional lenders in that their focus is on
underserved markets and their emphasis is on social as well as financial
outcomes. They also differ from charitable responses as they do not provide
products and services for free.
The committee has heard from several well established Australian CDFIs,
including: Foresters Community Finance, which provides a range of financial
products and services to social economy organisations as well administering
several social investment funds;
Community Sector Banking (CSB), a specialist social sector bank providing
banking services to over 5000 not-for-profit organisations around Australia;
and Social Ventures Australia, which provides debt and equity investment as
well as strategic support to social economy organisations and projects.
The committee has also heard from organisations with experience
operating microenterprise loan funds (a sub-class of CDFIs). Many Rivers
Microfinance provides loans to individuals and enterprises which are often
unable to obtain finance from mainstream lenders. Many Rivers provided 98
microfinance loans in its first three years of operation, and is significantly
scaling up its operations to establish offices in 20 regional centres by 2015.
DF Mortimer & Associates operated a microenterprise loan fund between 1998
and 2003, the ‘Landcare Revolving Loan Fund’, which operated in Northeast
Victoria providing microfinance loans to farmers to assist them establish farm
forestry for commercial and environmental benefits.
Types of CDFIs
CDFIs take a variety of approaches to supporting underserved sectors of
society and creating economic opportunity. They may focus on particular
products, geographical communities or social problems. They may focus on
supporting individuals or may tailor their services to small businesses and
organisations. The main types of CDFIs currently operating internationally are
outlined in Diagram 5.1.
Diagram 5.1 Types of CDFIs
& products offered
do they serve
for-profit organisations dedicated to social, community or environmental
objectives, offering traditional banking services.
like mainstream banks they provide products to both individuals and
Sector Banking (AUS)
Development Credit Unions
typically not-for-profit they promote community ownership of assets and
savings, and provide affordable consumer credit and retail financial services
as well as counselling and business planning assistance.
on financially excluded individuals and communities.
Credit Union (Canada)
Street UK (UK)
Traditional Credit Union (AUS)
Development Loan Funds
self regulated they can take a variety of legal forms (for or non-profit) and
areas of focus. For example, small business, affordable housing and non profit
focus on housing, enterprises and non-profit and community development
Murex Investments (USA)
Development Venture Capital Funds
regulated, they provide equity and debt investments typically focusing on the
scaling of businesses and entrepreneurial capacity.
seek higher levels of return than loan funds, they target enterprises in
startup or growth phases in disadvantaged areas.
Bridges Community Ventures (UK)
Ventures Australia (AU)
regulated and generally non-profit, they are a subset of the loan funds
category. They provide micro (very small) credit/loan services to individuals
low income individuals and very small businesses.
Social Ventures Australia
Scoping Study, Community Development Finance Institutions (CDFIs): A new
option for addressing financial exclusion in Australia, December
2009, p. 19.
CDFIs obtain funding from a variety of sources, often combining public,
philanthropic and private funding. They use a range of approaches to provide
products and services to those who normally have difficulty securing finance
from commercial lenders. As SVA outlined in its scoping study on CDFIs in
The mechanisms that CDFIs use to enable them to operate where
commercial providers do not compete include: securing grant funding from
government and philanthropic sources; providing products specifically designed
to meet the needs of the underserved (such as, mortgages on affordable housing;
loan products for non-profit organisations; credit and debit services for
people on low-income); gaining access to capital at below market rates (from
governments, philanthropic organisations, private investors); lowering
operating costs (for example, by using volunteers, operating in spaces with low
rent, gaining in-kind infrastructure report from banks).
Current CDFI activity in Australia
The PC noted that there are currently very few intermediary
organisations operating in Australia that could assist NFP organisations to
The SVA scoping study identified less than ten CDFI-like organisations in
Australia, operating a total loan portfolio of $150 million. Only six of these
organisations offered products or services to NFP and community organisations.
The study also noted that there is significant scope for the emergence of a
CDFI sector in Australia.
FaHCSIA CDFI Pilot Program
In January 2010, the federal government announced a CDFI pilot program
to be administered by the Department of Families, Housing, Community Services
and Indigenous Affairs (FaHCSIA). This pilot allocated $7.5 million in funding
to 'provide one-off grant funding for business development purposes to selected
community finance organisations offering fair, affordable and appropriate
products and services aimed at the financial inclusion of disadvantaged
Australians'. The pilot is designed to test the CDFI model
for addressing financial exclusion by providing capital and infrastructure
funding to a small number of Australian CDFIs.
Under the program, $6 million has been allocated to the successful CDFI
applicants to fund operational and business development costs such as technical
assistance, product development, operational support or research. This funding
has been complemented by capital funds sourced from National Australia Bank and
By structuring the program in this way, taxpayer money is being provided to
help facilitate the establishment of the sector itself rather than simply
providing grant capital to organisations. The successful applicants that have
been allocated funding are:
Foresters Community Finance;
Community Sector Banking;
Many Rivers Microfinance;
Fitzroy and Carlton Community Co-operative; and
Fair Loans Foundation.
The pilot program is scheduled to run until March 2012. The government
has not yet decided whether the program will be continued thereafter.
Representatives from FaHCSIA told the committee that the department has also
commissioned CSI to explore the legislative and regulatory environment needed
to build a sustainable CDFI sector and the role of government in this
development. FaHCSIA noted that pursuing the development of a CDFI sector in
the longer term will require whole-of-government positioning and coordination.
Financial intermediaries overseas
Experience in the US and the UK can help inform the development of
Australian financial intermediaries such as CDFIs. Both these markets are more
advanced than in Australia, and have benefited from government initiatives to
encourage the development of the sector.
CDFIs in the United States
The CDFI sector in the US is relatively well developed compared to most
other jurisdictions, with over 1000 CDFIs currently in operation.
Seventy per cent of these organisations have been established since the
introduction of two major policy initiatives in the 1990s.
The majority of CDFIs in the US provide products and services for underserved individuals
and businesses, with investment in community groups and social enterprise
representing roughly 5 per cent of CDFI investment in 2008.
In 1977, in response to an inquiry showing a severe shortage in access
to finance among low-income communities, the Community Reinvestment Act (CRA)
was introduced, which encouraged depository institutions to meet the credit
needs of the low income neighbourhoods in their service areas.
Lenders are given a CRA rating according to their community finance activities,
which is then taken into account by the regulators when approving new branches,
mergers and acquisitions. Subsequent amendments to the Act in 1995 explicitly
recognised loans and investments in CDFIs as CRA activity. This served as a
strong incentive for banks to provide low-cost loans and investments to CDFIs,
which were able to leverage these resources to provide community development
In 1994, the Clinton Administration also established the CDFI Fund, a
government body which provides capital funding grants, equity investments and
awards for technical assistance for CDFIs through a variety of programs.
As well as providing direct funding through Financial and Technical Assistance
Awards, the CDFI fund also delivers targeted funding through several programs
aimed at specific areas within the sector including affordable housing and
Native American initiatives. The Fund also administers the New Markets Tax
Credit Program, which permits taxpayers to receive a credit against income taxes
for making equity investments in designated Community Development Entities such
Since its establishment in 1994, the Fund has awarded over US$1.1
billion to community development organisations and financial institutions, as
well as attracting private-sector investments to the sector totalling US$29
billion through its New Markets Tax Credits program.
Recent experience in the US shows that CDFIs are not immune from the
fluctuations that affect the finance industry as a whole. One of the largest and
longest-running CDFIs, the Chicago based ShoreBank, suffered significant losses
in the aftermath of the US recession that followed the 2008 global credit
crunch, and was subsequently declared insolvent and closed by US regulators in
CDFIs in the United Kingdom
The CDFI sector in the UK has seen significant growth over the last 15
years, with key support from the government. In response to a report published
in 2000 by the UK government's Social Investment Task Force, several measures
were put in place to help develop the CDFI sector. These included:
establishing the Phoenix Challenge Fund, which from 2000 to 2006
distributed approximately £42 million to around 60 CDFIs in the form of revenue
grants to support operational costs, capital grants for on-lending to
businesses, and a loan guarantee fund to stimulate banks and other
organisations to lend money to CDFIs;
the introduction of a Community Investment Tax Credit (CITR),
which allows those who invest in approved CDFIs to receive an income or
corporation tax deduction to the value of 25 per cent of the investment;
establishing a Community Development Venture Fund (Bridges
Community Ventures) to provide equity and new equity capital for CDFIs, with £20
million in initial government funds matched by £20 million from private
the provision of initial funding for the establishment of the
Community Development Finance Association (CDFA), a trade association for the
CDFI sector which continues to receive ongoing government funding.
These measures saw the number of CDFIs in the UK grow rapidly, with the
CDFA reporting 66 operating CDFIs in the UK in 2010.
Data from the CDFA indicates that roughly 40 per cent of CDFIs in the UK offer
products and services to NFP and community organisations.
Public sector funding has been vital to the CDFI industry in the UK, and a 2010
government-commissioned review of the sector recommended that the public sector
continue to support CDFIs in the UK.
As well as financial intermediaries, various other types of intermediary
organisations may play a role in strengthening the development of social
organisations in the creation of a social economy capital market. As mentioned
earlier in this chapter, these intermediaries work in the areas of people,
network and expertise; monitoring; marketing and distribution; and innovation.
Capacity building intermediaries
As well as support relating to financial investment readiness,
intermediaries offer support services that assist organisations build their
capacity more broadly. As CSI stated in its submission, 'intermediary
organisations such as legal practices, accounting firms, professional advisory
services, IT services and governance support organisations [are] also a
necessary component of a capital market'.
There are a number of intermediary organisations in Australia that offer
advice and assistance to NFPs on legal issues such as choosing a legal
structure. CSI noted that some law firms provide pro-bono or low fee support to
social economy organisations, but the delivery of these services remains
relatively ad-hoc and not systematically tailored to the needs of social
economy organisations, especially with respect to attracting investment.
A small number of organisations do offer tailored support, such as PILCH
Connect, a Victorian firm offering comprehensive legal advice and services to
not-for-profit organisations. The Australian Charity Law Association also
provides advice and support to the sector. Ms Juanita Pope, Senior lawyer for
PILCH Connect, informed the committee of the importance for social
organisations to receive appropriate legal advice:
We would submit that barriers to accessing legal assistance
have a direct connection with the availability of finance to not-for-profits.
For example, a charitable group that receives good legal advice in its
incorporation stage will be better placed to access tax concessions, such as
DGR, that are often needed for finance...
We see our service as an effective model for supporting
not-for-profits with their legal and legally related issues, and the advice
that we can provide and the assistance that we give to build capacity to
not-for-profit groups can help them to access finance opportunities or even,
indeed, assess the situation that they are in and contemplate their options.
Other networking and educational organisations provide additional
support services such as management and governance support, business
development, strategic planning and other training services for social
organisations. In Australia, organisations such as Matrix On Board provide
consultancy and training services in these areas.
Another capacity building organisation, Our Community, reaches over 55 000
member community groups with a range of services including a website with
comprehensive information and educational materials, a training company,
newsletters and technology initiatives.
Our Community told the committee that they had completed work with Westpac Bank
to create around 120 000 free educational guides to distribute to community
organisations covering three topic areas: a guide for community treasurers; a
guide for community groups looking to invest their funds; and a guide for NFP
board members helping them to understand company balance sheets and manage a
set of organisational accounts.
Education and research for the
The committee has heard that teaching programs for social enterprises,
incorporating expertise such as managerial finance, strategic management and
enterprise development, will help build the capacity required for organisations
to take advantage of new funding opportunities.
The need for ongoing academic research to support the sector was also
Several organisations in Australia are offering teaching courses in this
area. CSI, which was established in 2008 as a collaboration between the
business schools of four Australian universities,
offers a one year Graduate Certificate in Social Impact, covering areas such as
social investment, corporate responsibility, leadership for social impact and
social impact measurement.
The University of Sydney Business School has been teaching a specialist
postgraduate unit on Social Entrepreneurship as part of its Innovation and
Enterprise teaching program. The School for Social Entrepreneurs Australia offers
a nine month program to support aspiring social entrepreneurs in establishing
There are also several Australian academic groups undertaking research
in the areas of social innovation, impact investment, philanthropy, social
enterprise and governance. CSI has completed studies on financial exclusion in
Australia, microenterprise, social procurement, workplace giving, social impact
bonds and NFP governance.
The Australian Centre for Philanthropy and Nonprofit Studies at the Queensland
University of Technology undertakes research on social enterprise, charity law,
nonprofit governance and regulation.
The University of Sydney Business School is conducting research relating to
social enterprise, including a partnership with Social Enterprise Finance
Australia to undertake research relating to the SEDIF initiative.
Internationally, philanthropic foundations have also played a leading
role in developing the dialogue, research base and practise for social impact
investment and the social economy.
Developing market infrastructure
and measurement frameworks
Intermediaries can help provide the necessary infrastructure for the
development of a social capital market. This infrastructure includes common
language, robust and accepted performance metrics and publicly available
benchmarking data (see chapter 7).
CSI outlined the need for effective measurement and evaluation frameworks in
The role of effective measurement and evaluation frameworks
forms a necessary foundation for a capital market for social economy
organisations. This can ameliorate the considerable level of information
asymmetry between parties to social investment. To encourage the ‘blending’ or
‘sharing’ of social and financial value there must be effective measurement,
evaluation and reporting frameworks. The integration of multiple sources of
value in a single reporting approach is the aim of the International Integrated
Reporting Committee’s Integrated Reporting Framework, with a discussion paper
due for release later in 2011. In addition, the Impact Reporting and Investment
Standards (IRIS) is developing an independent and credible set of metrics for
measuring social and environmental performance and the Global Impact Investing
Rating System (GIIRS) is exploring a ratings approach to assessing social and
Market infrastructure such as trading platforms also supports the
linkages between investors and the social economy sector. In Australia, the Indigenous
Stock Exchange (ISX) has performed this function in the area of Indigenous
businesses and social enterprise. The ISX website allows indigenous
entrepreneurs seeking funding to list details of their projects onto online
'trading floors' which potential investors can then view.
This aggregation of potential investment opportunities into one location can
thus create linkages between entrepreneurs and investors. The aggregation of
potential targets for philanthropic donations is also being realised through
organisations such as Karma Currency Foundation, which operates a charitable
gift registry allowing individuals and organisations to choose from over 1000
charitable projects to which they can donate.
In addition to platforms which aggregate information about social
investment projects, there is also potential for the creation of centralised
platforms which offer performance data and evaluative information about
particular social investment opportunities. JBWere suggested in its submission
that the government could fund an independent NFP ratings agency for impact
investments, helping to provide transparency and accountability in the market,
protecting and informing investors.
Under this proposal, the ratings agency would use criteria such as social
impact, financial return and risk to derive a rating or series of ratings to
allow investors to adequately compare investments and match them to their
needs. These ratings would be complemented by additional information about the
organisation and the investment opportunities being offered, giving potential
investors the best possible advice. Mr Thorn of JBWere commented:
...in terms of the rating piece, it is really around creating
a body of research that enables the not-for-profits to become more investment-ready
and understand what they need to do to attract social capital in its various
forms and it also helps potential investors understand—if they put their money
in and they accept a social discount—the value they are generating for the
discount they are receiving.
Investing in innovation in the
Intermediary organisations can also help drive innovation in the sector.
This can include investing in and supporting start-up and innovative social
ventures, as well as developing new financial products and investment
opportunities for the sector.
The SEDIF initiative, administered through the finance intermediaries
Foresters and SEFA, includes funding to be directed to early stage and start-up
social enterprises (see chapter 8). These 'incubator' funds are seen as a way
of promoting innovative ideas in social enterprise. The Cape York Institute
contended in its submission that funding for innovation and early stage social
impact programs could be extended to ventures which do not derive income from
While the current SEDIF model currently invests in innovation
and supports capability development, it has neither the mandate nor the scale
to support social impact programs that do not "derive a substantial
portion of their income from trade and reinvest the majority of their
profit/surplus in the fulfilment of their mission".
A broader Social Investment Fund could play a similar role
for all social impact programs. This could be a philanthropic type model that
supports program development and directs investment of grants and donations,
such as the Venture Philanthropy Company. Alternatively it could be an
expansion of the current SEDIF model to enable investment in social impact
programs whose business model allows for sustainability.
Moreover, intermediaries can help develop new and innovative financial
products for the social impact investment market. This has happened in the UK
with the development of new social investment vehicles such as social impact
bonds (discussed further in chapter 6).
Developing the intermediary market in Australia
As has been noted, intermediary services for social economy
organisations are lacking in Australia, particularly financial intermediaries.
The PC noted in its submission to the inquiry that there could be several reasons
for this state of affairs:
...the failure of intermediary or support services to develop
may reflect the ad hoc nature of the funding building capacity in the NFP
sector. In part this is because such services require some continuity in their
funding to be viable, but it is also because most NFPs fail to recognise the
value to their enterprise of hiring such intermediary services.
Participants in this inquiry have been supportive of the attempts by
government to stimulate investment in the market through intermediary-managed
initiatives. As Ms Kylie Charlton, an expert in impact investment and social
innovation, told the committee:
A number of recent initiatives of the Australian Government
such as the SEDIF and the pilot for Community Development Financial
Institutions (CDFIs), along with the announcement by NSW Government to pilot
Social Benefit Bonds, serve to commence the process of developing efficient
intermediation. These initiatives will help to establish demonstrative funds,
develop backable fund managers and create accessible investment product, and
are commendable first steps. It is likely however that further similar or
complimentary initiatives will be needed to effectively address the challenge
Developing links between intermediaries
Many intermediaries provide multiple services to organisations, and
there is a need for social organisations to be able to access intermediary
services across all the areas canvassed in this chapter. The interrelated
nature of intermediation to the sector was highlighted by Ms Pope from PILCH
Our submission is that a network of intermediary services is
critical, and our services work with each other in order to support
not-for-profits. Our services are often contingent on the supports of other
Some positive collaborations are already happening in Australia,
including linkages between academic groups and finance intermediaries. The
strengthening of these kinds of collaborations and intermediary networks will
be crucial to developing efficiencies and economies of scale within the social
economy, and need to be encouraged.
intermediaries in Australia
Foresters outlined in a 2008 research paper the factors it sees as
crucial to the development of a CDFI sector in Australia, namely:
an enabling policy and regulatory environment for CDFIs;
the adoption of realistic timeframes for development in the
sector over the long term;
the development of partnerships between CDFIs and mainstream
encouraging innovative models for CDFI development;
a CDFI peak body and high profile 'champions' for the sector; and
development of good evaluation tools for the sector.
The SVA scoping study undertaken for the FaHCSIA pilot program also
commented on what may be required to develop a CDFI sector:
Fostering a strong, viable CDFI sector in Australia will
require ongoing government support, including: provision of access to low- or
no-cost wholesale government-sourced loan capital; establishment of tax
incentives to encourage private and philanthropic investment in CDFIs; and, the
allocation of grants to support product development or infrastructure.
Mounting a comprehensive program for nurturing CDFIs across
Australia will entail securing the support of many stakeholders, as well as a
significant lead time.
The PC report argued for the possibility of CDFIs leading the
development of a market for NFP debt products, stating that Australian
governments should consider initiatives to grow existing CDFIs and develop new
CDFIs to encourage competition and awareness. The report noted that both
start-up funding and ongoing support for development activities may be
required, but took the view that government support should not be extended to
establishing a capital fund from which CDFIs can borrow.
The PC report recommended at the time of its inquiry that Australian
governments explore options to encourage CDFIs to develop appropriate financial
products and services for the NFP sector.
The difficulty of financing
Many Rivers contended in its submission that intermediaries can have
full and unlimited access to loan capital from current financial markets if
they maintain a good repayment rate on loans, incorporate a bad debt provision
that is fully funded into their business model and keep their costs at a
reasonable and low level.
Other witnesses argued, however, that financing the work of intermediary
organisations such as CDFIs can be particularly difficult.
Foresters told the committee that it is likely the CDFI sector in Australia
would require ongoing subsidisation to some extent to operate effectively:
There is some debate about whether CDFIs can ever be fully
self-sustaining or whether they really require a mix of income. Certainly, the
unfortunate demise of a large CDFI in the US recently, ShoreBank, indicates
that some external subsidisation on an ongoing basis is probably required for
these institutions to continue to operate effectively. But the comfort for
government there is that it gets to the double bang for its buck in a way,
because the government investment is matched by generated income to fulfil a
This sentiment was echoed by Mr Ian Gill, Chief Executive Officer of
Ecotrust Australia, talking about his experience working with CDFIs in the US
...in my experience with community development financial
institutions, they almost universally do not pay their way on a year-to-year
basis, purely through the market value of the transactions that they do. Frankly
I am always a bit suspicious of a CDFI that is either making a profit or paying
its own way, because the whole point of a CDFI from my point of view is to go
into non-market-ready or higher risk areas and do the loans that conventional
financial institutions will not do. If they are making money at doing that,
they have probably become too conservative in their loan book, and I have seen
that happen time and time again. My rule of thumb is that, if a CDFI is
generating about 70 per cent of its required revenue a year though its loan
book and needs to find 30 per cent in subsidies from somewhere else, that is a
good thing; I do not think that should be treated as a bad thing. But that does
require a bit of a cultural change to some degree.
The committee has heard that government could help some overcome the
challenges associated with financing intermediary work by providing direct
support to CDFIs and through encouraging private sector investment in these
Should government provide long-term
direct support for the sector?
The committee has heard mixed views about whether or not government
should provide financial support to the CDFI sector in Australia on an ongoing
basis. The scoping paper undertaken in 2009 by SVA for the current CDFI pilot
program suggested that a sustainable Australian CDFI sector would require
ongoing government financial support.
The PC report, while acknowledging that both start-up and organisational
funding may be required for the sector, recommended that any government
financial support for the CDFI sector should be time limited, so as to ensure
the long term sustainability of the sector.
Mr Robert Fitzgerald, the commissioner of the PC inquiry into the NFP sector ,
explained to the committee why the commission took this approach at the time of
its report, noting that ongoing funding for CDFIs may be worth considering in
...The CDFIs are an emerging and exceptionally important
financing source for the sector. We believe the government should encourage
their growth and development. We believe that the work done so far in Australia
but also overseas gives us confidence that this particular area, CDFIs, can be
a very significant contributor to the financing of the sector. There are a
number of ways to approach that in terms of government support. The view of the
commission, as I indicated, was that wherever the market is responding then the
role of government is not to overly intervene in that. We identified that CDFIs
could be provided with access to capital by the government in their
establishment or developmental phases, but that would be a short-term
arrangement. In other words, we did not see government as an ongoing or permanent
pool of funding for the CDFIs. You can do that. Both in North America and in
Britain we have seen various models. The difficulty is one of principle and
risk to the government. To what extent should in fact the government be a
funder of these CDFIs? What are the risk inherent in that? Are there issues
around moral hazards and so on? Our view was to say the government should be
supportive. One of those could be short-term funding, particularly in the
development phase. We were less convinced that long-term funding of the CDFIs
was appropriate. Nevertheless, other countries have done so and, as I have
indicated to you, there may be evidence that warrants a rethinking of that
particular issue, but that was our view at the time.
Dr Ingrid Burkett noted that too much government support for
intermediaries can lead to an overdependence on grant funding in intermediary
organisations, which does not set a good example for the organisations
intermediaries work with:
Senator STEPHENS: ...The evidence that we had from our
Canberra hearing was that to grow a social capital market in Australia we
actually need to invest in intermediary services and that that should be the
responsibility of government. If government wants to grow a social capital
market and create these new sources of finance then it has to do more than
enable, it actually has to invest in the intermediary services. Would you have
a comment on that?
Dr Burkett: Yes. I think intermediary services are
absolutely fundamental to the growth of this sort of new social capital market
or impact investment. Where I think there is a glitch is if we create a raft of
intermediaries who are not social enterprises in their own right, who act like
the traditional not-for-profit organisation and are totally grant funded, and
then advise their constituents, if you like, not to do as they do. So, I think
that is a real tension because the work of intermediaries is quite difficult to
finance and we need innovation in that space.
Christian Super argued in its submission that CDFIs need some level of
government support to maintain their financial health over the longer term:
Our experience assessing CDFIs has reviewed that their
financial health on a stand-alone basis is not sufficient to carry out all the
work they need to do to help CSOs [Community Sector Organisations] have access
to funding. Our experience further informs us that the existence of some level
of government support is necessary to attract and retain investors and ensure
that more of CDFIs exist to help the sector...
Most of the CSOs that are helped by CDFIs need more long term
funding than short term funding hence the need for a government commitment to
funding CDFIs (and their investors) for the long term to give confidence that
the CDFIs will be able to carry out their duties throughout the duration of the
Christian Super list possible options for government support to the CDFI
sector as: long term funding for the acquisition of assets and short term
operational costs of CDFIs; educating the investor and social economy sectors
on funding options and performance measurement for the social economy; and
encouraging the aggregating of capital raising across multiple social economy
organisations through shared investment platforms.
DF Mortimer and Associates argued that government support of
microenterprise loan funds is a cost effective expenditure of public monies
towards identified social problems, particularly because grants of loan capital
to micro-enterprise loan funds will be recycled many times over.
The forthcoming CSI study, commissioned by FaHCSIA and to be released in
the coming months, will help inform the debate about the role of government
support for CDFIs and financial intermediaries more generally.
Encouraging private sector investment
As well as the option for government to provide funding directly to
CDFIs, legislative measures could be used to encourage private sector
investment into CDFIs and other financial intermediaries. CSB stated in its
submission that the CDFI market in Australia should be developed in a manner
that maximises co-contributions from corporate, philanthropic and social
investor markets, and contended that the success of initiatives such as the
CDFI pilot (in which it is a participant) and SEDIF would be enhanced if there
was an appropriate legislative framework and incentives to mobilise markets
towards investing in CDFIs.
Some partnership approaches are emerging in this area. Many Rivers
operates in partnership with Westpac, providing banking infrastructure and loan
funds to small enterprises through a ‘real’ Westpac business loan. In this
arrangement Westpac provides the loan capital while Many Rivers retains control
over lending decisions.
This kind of model is to be encouraged, as it utilises the strengths of both
the mainstream bank (in providing capital, organisational support and advice)
and the intermediary (close knowledge of the target communities and
The committee has heard that tax incentives and funding guarantees could
both be utilised to attract private investment. Experience from the US and UK
shows that any tax incentives need to be carefully structured. The New Markets
Tax Credits program has been highly successful in the US, attracting over US$29
billion in private investment into the sector since its inception. In contrast,
the Community Investment Tax Relief (CITR) program in the UK has not generated
as much investment in the sector as initially envisaged. This is largely due to
the initial narrow scope of the incentive scheme, which excluded investments in
organisations providing personal finance or finance for the purchase of
The UK government is currently working to review the CITR scheme and how its
effectiveness can be increased.
Christian Super noted that funding guarantees from government, or
government involvement with a CDFI generally, could lower the risk profile of
CDFIs and thus encourage institutional investment.
As noted in chapter 4, government involvement was one of the principle reasons
Christian Super felt comfortable investing in the SEDIF initiative. The PC
report suggested that the provision of government guarantees for private
investors may hinder the development of an efficient market in the long term,
but that government intervention in such areas may be warranted in specific
Encouraging partnership approaches between CDFIs and mainstream
financial institutions is another approach to strengthening the emerging CDFI
sector. FaHCSIA told the committee in relation to the current CDFI pilot: 'Leveraging
investment by the banks to work with CDFIs is a central element of the project.
It is clear that the involvement of major banks is a critical component for the
sustainability of CDFIs in the medium to longer term'.
Wholesale social investment banks
The committee has heard that social investment banks and wholesale
providers of social investment capital can play a role stimulating the
provision of capital to intermediary organisations. These wholesale lenders can
provide finance to a range of financial and other intermediary organisations,
providing an additional layer of capital for the sector.
A wholesale social investment bank is also more likely to attract large-scale
commercial investment for channelling into the sector.
UK Big Society Capital
The Social Investment Task Force in the UK, which operated from 2000
to 2010, considered that for social capital markets to be fully developed
in the UK there needed to be a wholesale institution designed specifically to
channel capital into the social economy. In July 2010, British Prime Minister
David Cameron announced that the government was looking to establish a 'big
society bank' in the UK to provide this role.
Sir Ronald Cohen described the function of this bank as being 'a financial
engine for the social sector, attracting capital by blending social returns
with financial returns and tax incentives'.
The 'big society bank' concept was brought to fruition with the launch
of Big Society Capital Group on 28 July 2011. The group has an initial capital
input of £600 million. This capital consists of £400 million sourced from unclaimed
assets left dormant in UK bank accounts for over 15 years, as well as £200
million in equity capital from four of UK's largest mainstream banks.
Big Society Capital (BSC) describes itself as a financial institution that aims
to develop a market for investment made on the basis of positive social impact
as well as financial returns, in order to boost the ability of social
enterprises, voluntary and community organisations to deal with social issues.
The group's proposal to the UK government in May 2011 stated that its
two key roles are to be a wholesale investor in the sector as well as a social
investment champion. It plans to act as a wholesale investor into the social economy
co-investment of equity or debt in social investment funds
managed by intermediaries;
provision of subordinated capital such as affordable loan finance,
equity and quasi-equity investments to social investment intermediaries and
investment in existing intermediaries through long term equity
investment in infrastructure organisations supporting the sector;
investment and underwriting for innovative financial products
such as social impact bonds (see chapter 6).
BSC also seeks to be a champion for the social investment sector,
through information sharing and networking, research, capacity building,
promoting best practice in the industry and the provision of advice on market
development for the social economy sector.
Prime Minister Cameron commented on the role of BSC at its launch in
I've seen the amazing work that Britain's social enterprises
already do to tackle some of our country's most intractable problems. I believe
that Big Society Capital will play a major role in injecting significant
resources and financial innovation into these social enterprises, while at the
same time attracting further funding from charitable foundations, private
individuals and other investors.
BSC represents a large injection of public capital into the social
investment market in the UK. The press release announcing the launch of BSC
stated that it 'will be run independently from government with decisions around
funding being made by an impartial investment committee'.
Mr Glen Saunders from Triodos Bank expressed concern that such a large
provision of public capital could have distortionary effects on the market in
Senator STEPHENS: Do you want to make any comments about the
Big Society Bank?
Mr Saunders: That is an excellent example of what I was just
saying. I wish it would not happen. It is basically a government initiative.
There is a well developed market, with quite a number of different social
lending initiatives in the UK. You get the Big Society Bank, which becomes
dominated by political interests—things people want to develop and so on—and so
everybody starts to chase those pounds, in that case, and it distorts the market.
Our preference would be that the government use its influence
and funding to remove barriers rather than to try to do it itself, which is
what the Big Society Bank is really doing. Triodos in the UK, as these things
go, has to be involved with that, but we would rather it was not happening.
Potential for a wholesale social
investment bank in Australia
Mr Greg Peel, Chief Executive Officer of CSB, argued that a wholesale
funder operating like BSC could help mobilise capital into the sector in
We have just come back from a trip to Big Society Capital. I
think that style of structure is an excellent way, if we use that capital
rightly, to mobilise the markets again—not just as a pure investor in social
enterprise but as a leverage tool to maximise co-contributions for the
market—and that would be a really important part of this.
Mr Les Hems from CSI told the committee that a wholesale social
investment bank could help drive institutional investment into the social
It is actually the functioning of the wholesale bank that is
the crucial thing, because that can be driving funds co-investing in funds like
the SEDIF and the CDFIs. I think it will open up the funds to a broader set of
policy issues. I am thinking here particularly in terms of the affordable
housing and funding community housing organisations that may be a beneficiary
of a wholesale investment bank which is targeting social impact as well as
We think the institutional investors will feel more comfortable
investing in a wholesale social investment bank, like Big Society Bank, rather
than the individual funds. We know that deal size is a big issue for super
funds and so on. So the wholesale social investment bank is perhaps a domain
where we get institutional investors involved and allow the more retail
investors to get involved in subfunds, which are related to policy areas where
they may have an emotive link as well as a desire to at least get their capital
back and a suitable return on their capital.
Following on from Diagram 4.1 (see p. 62), diagram 5.2 outlines the role
a wholesale social investment bank could play in capitalising the social
economy in Australia, providing funds to financial intermediaries and social
investment funds, while leveraging investment from institutional investors and
mainstream financial institutions.
Currently there are no social investment banks operating in Australia,
and raising the initial capital for such an organisation would be a primary
challenge. BSC sourced the majority of its initial capital from unclaimed
monies in dormant bank accounts. In Australia there is over $636 million in
unclaimed money held in dormant accounts,
however existing provisions already provide for unclaimed assets from
Australian bank accounts to be transferred to the Commonwealth after a period
of seven years,
making the reallocation of these funds more difficult.
Diagram 5.2: Possible investment
flows in a social economy capital market (with a wholesale social investment
adapted from Centre for Social Impact, Submission 27, p. 5.
The committee considers that the development of intermediary
organisations in Australia, particularly CDFIs, is a crucial component in the
development of a robust capital market for social economy organisations. The
committee believes that potential exists for government to support in some
form to the CDFI sector, with a particular emphasis on start-up funding and
funding for ongoing operational costs and organisational development. The
committee agrees with the PC report's finding that such support should not
initially extend to a capital fund from which CDFIs can draw funds.
The committee notes that the current CDFI pilot program and SEDIF
initiative are providing support for a small number of Australian financial
intermediary organisations, and suggests that lessons learned from these
programs should be used to guide further government involvement in the CDFI
sector in Australia. The committee notes that the current CDFI pilot program is
limited to organisations providing products and services to excluded
individuals. The committee considers that, in line with the PC's
recommendation, Australian governments should investigate options for providing
support for CDFIs offering financial products and services to social economy
organisations in Australia.
The committee notes the potential for tax incentives to be used as a
means of encouraging private investment into the CDFI sector, however further
work needs to be done to determine if this is appropriate in the Australian
context. The committee notes that the Centre for Social Impact (CSI) is
currently undertaking a study, commissioned by FaHCSIA, looking at the
legislative and regulatory environment required to build a sustainable CDFI
sector and the role of government in this process. This study, to be released
later this year, will help inform the debate about whether or not tax
incentives to support CDFIs may be useful in Australia. The committee considers
that the proposed Social Finance Taskforce would be well placed to consider how
the CDFI sector may be encouraged in its role of providing products and
services to social economy organisations, what government support is needed and
what incentives may be required to attract private investment to CDFIs.
The committee does not believe that the creation of a wholesale social
investment bank through public funding is appropriate in Australia at this
time. Such a wholesale bank may be appropriate in the future when the capital market
for social economy organisations is more mature.
The role of intermediaries in building the capacity (both financial and
non‑financial) of social economy organisations is also crucial to the
development of the sector and needs to be strengthened. Government can
facilitate this by promoting existing initiatives, for example through the
Office for the Not-for-Profit Sector website, and through providing funding to
initiatives in some circumstances.
The committee recommends that the proposed Social Finance Task Force
consider possible options to develop Community Development Financial
Institutions in Australia, taking into account:
the findings of the forthcoming study commissioned by FaHCSIA
into the current regulatory and legislative environment for Community
Development Financial Institutions in Australia;
whether tax incentives should be established to encourage
investment in CDFIs in Australia; and
any other initiatives that may benefit the development of CDFIs
investing in social economy organisations.
The committee recommends that Australian governments explore options to
promote and strengthen intermediary organisations that provide capacity
building, training and support services to social economy organisations.
Navigation: Previous Page | Contents | Next Page