Dr Ulysses Chioatto considers the role of social impact investing and asks whether directors and company officers are tied up in a short-term straightjacket.
Impact investment is a growing field of investment that seeks to create a positive social and environmental impact and a financial return, while measuring the effects of both. It is an additional and alternative approach to addressing social problems. Those problems include climate change, social and economic imbalance, a housing crisis and an overflowing penal system.
We live in a time when everyone is chasing returns, and it seems that investors are torn between seeking above average investment returns in the short term, or long-term, sustainable investments that return in three, five, 10 or more years. The challenge is that our accounting standards and corporate reporting regimes, our corporations legislation and case law around fiduciary duties of directors and officers, and our pay structures for executives, all hold us to the short-term path.
In addition to this, we have systems of redistribution of wealth and investment channelled through the silos of government, corporations and the not-for-profit (NFP) sectors, that promote waste and inefficiency. And despite the government collecting tax and directly funding social issues through welfare programs, or outsourcing contracts to NFPs to deliver such programs, many NFPs are struggling to keep up with demand. A new approach to funding must be explored, and impact investing is a prime candidate.
A global focus
Impact investing is a global concept. The recent Impact Investing Summit hosted by the UK Government and the US Department of Commerce in London in October 2016, brought together leading institutional investors deploying capital for return and impact, the scope of which is in the billions of dollars. Indeed, the linchpin to addressing social problems through investment is that corporations and institutional investors adopt a sustainable approach to investing.
This is evident in the 2013 EY survey of attendees at the Global Reporting Initiative’s (GRI) Global Conference on Sustainability and Reporting, which found that 95 per cent of the largest 250 companies in the world produce a sustainability report and as a result were considered to be environmentally responsible. For investors, having a sustainability strategy is seen as a competitive advantage, however, the heavy emphasis on environmental issues highlights the lesser emphasis on social impact investing.
In Australia, the latest ASX Corporate Governance Council’s Principles and Recommendations seek reporting on environmental, social and governance (ESG) risks for listed companies. The problem is that there is no consistent definition or standard for what “sustainability” is or how to report on the principles and recommendations, although a reporting guide is available on the ASX website.
When it comes to social impact investing and competitive advantage, it’s not about redefining management responsibility or corporate purpose; the majority of corporations already have mission statements that recognise the need for a social licence to operate. Rather, the approach is based on corporations pursuing enlightened shareholder value. That is, the pursuit of shareholder wealth with a long-run orientation of responsible sustainable growth and profit.
This resonates with a corporate social responsibility approach. The result is a richer, more socially-oriented notion of the corporate objective, shaped by a positive feedback loop with shareholders, employees, customers and communities.
Reporting in Australia
In Australia, the concept of corporate social responsibility has evolved significantly. ASX listed companies are now reporting on their social impact activities in a more sophisticated way.
Corporate environmental reporting on impacts on the natural environment has existed for more than two decades. More recently “sustainability reporting” has looked at the company’s environmental performance, as well as non-financial issues including health and safety, corruption, human rights and social impact. Today, “integrated reporting” expands companies’ responsibilities to stakeholders in a radical rethinking of the traditional corporate reporting model. Changing the accounting methods and practices of the past 600 years to account for externalities, i.e. the environment and social impact, is an alternative. The debate with that, as with integrated reporting, is how to attribute and measure those values in a way that is acceptable to everyone.
I recently reviewed all ASX 300 companies’ sustainability reporting on social impact investing activities. The findings are promising but suffer from three key challenges: reporting is not always “doing”; funding allocations are not strategic; and impact is not measured consistently.
According to The Australian Population Research Institute at Monash University, “In Sydney and Melbourne and other parts of Australia, we face a serious housing crisis with a shortage of affordable housing”. In New South Wales (NSW), our most populous state, both the NFP sector and the government hold large parcels of property that are no longer fit for purpose.
Recent investments in affordable housing by industry superannuation fund HESTA has added to a call for “social housing investment” by super funds. But the question remains whether there will ever come a time when other entities such as real estate investment trusts (REITS) are involved in social housing as part of a social impact investment strategy, unless through mandatory government arrangements such as developer funds.
A great number of ASX listed companies have established foundations, such as the ASX Thomson Reuters Charity Foundation Ltd, the Telstra Foundation, and Stockland CARE Foundation. These are funded by their associated corporations. Stockland CARE Foundation was launched in May 2015 for the purpose of delivering infrastructure and programs and initiatives that improve the health, wellbeing and education of Australian communities. The Telstra Foundation invests in youth-focused NFPs that impact social outcomes. But while these foundations (and similar corporations) seek to combat social problems, will these foundations or similar corporate vehicles ever be involved in social impact investing?
Prisoner reoffending is a persistent social issue in many countries including Australia. Reducing recidivism is critical to reducing the prison population. In an Australian first, the NSW Government, along with NAB and the Australian Community Support Organisation, is targeting prisoner reoffending through a new impact investment: On Tracc (Transition Reintegration and Community Connection). On Tracc works with up to 3,900 parolees over five years to reduce the rate of reoffending and re-incarceration by 5 per cent by 2019. Government payments and returns to investors in this innovative social investment are dependent on the outcomes achieved.
Since 2012, NAB has measured and reported on the impact of its community programs and initiatives using the social return on investment methodology. This is a principles-based method for measuring non-financial value relative to resources invested. It can be used to evaluate the impact on stakeholders and identify ways to improve performance. Similarly, the NSW Government has played a pioneering role in harnessing impact investment through its Office of Social Impact Investment. The office is a joint team from the NSW Department of Premier and Cabinet and the NSW Treasury.
NSW was the first state to use impact investment, and On Tracc will be its third venture following the Newpin and Benevolent Society social benefit bonds. These use the state’s social benefit bonds issued to address rising levels of out-of-home care for young people and show early positive results.
Collaboration is key
While work is being done to drive the growth of impact investing, progress remains slow. The greatest challenge to achieving social impact investing is for the government, business and NFP sectors to work together to encourage social entrepreneurship and manage the consquent risks.
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