Impact Investing Moves to Next Stage

Australia’s impact investing ecosystem is moving from early stage exploration into the early stages of market building according to a recent field scan, which comes as a new report reveals Impact Investment Ready Growth Grants have leveraged $1.4 million to raise over $41 million in three years.

The Australian Advisory Board on Impact Investing (AAB) has launched a field scan that reveals what has changed in the impact investing market over the last three years, what is happening now and what is needed for the future “to create better outcomes for people and the planet”.

Views From the Impact Investing Playing Field in Australia on What’s Happening and What’s Needed Next found there was a consensus the ecosystem was moving from early stage exploration into the early stages of market building.

“The good news is that almost everyone we spoke with told us that the field has developed over the last few years,” the report said.

“There is a sense that we are starting to build a track record of investments and, for most people, that we are moving from early stage exploration, where activity was happening in a more ad hoc or uncoordinated way, into the early stages of market building. People can see a field of practice taking shape.”

The latest report combines the findings from interviews with 45 key players in the impact investing market, a survey that attracted more than 40 respondents and research on local and international trends and case studies.

AAB chair Rosemary Addis said there was a clear sense things were progressing and that there was significantly more potential which people wanted to see realised.

“The shared understanding is that impact investing has strong potential if we work together to realise the opportunities and tackle the barriers to scale,” Addis said.

“Many participants see the past estimates of a $32 billion market size by 2023 as conservative, especially if governments and larger institutional investors engage.”

She told Pro Bono News, people “almost uniformly” reported that the market had shifted.

“We have moved from a more fragmented, uncoordinated innovation into something that feels more coherent and like there is actually a market in development now that they can put some boundaries around, with more and different actors involved, including some mainstream players,” Addis said.

“Also unanimously people saw potential for that to grow and to really make a significant impact in Australia provided obviously that we can address some of the barriers that are still out there. So we have made good progress but we’re not there yet.”

The report identified a stronger investment pipeline with investment deals that are attractive to large scale investors and an increased reach of impact and activity as key drivers of scale for impact investing.

Addis said there was work to do.

“When we were speaking with our Canadian colleagues last week, they used the Winter Olympics analogy of the ice skating rink – Australia has been seen as an early leader in this field and everybody has made progress at slightly different rates and with slightly different tactics depending on their own country and there is no one who is wayout in front, but what we do in this next period will make a big difference as to whether we can retain a really vibrant and competitive position for Australia in this developing global market,” Addis said.

“There is work to do in order to make the opportunities more accessible for the investors, but  there has also been a sense that a lot of the developments so far have been investor-led, and there is some important work to do to really be designing initiatives that scale, and highlighting and pushing into the system the things that are coming from the demand side, the community side.

“People see a big role for governments to play in signalling and providing the catalyst, and we need the things that will really help to crystalise and catalyse the opportunities like the first mover capital, which is part of what Impact Capital Australia is designed to provide, as well as data that will help people to operate in ways that are more streamlined.”

The report noted there was an understanding that governments and philanthropy needed to act as providers for catalytic capital who could go first, offer funding on flexible terms and may take a reduction in financial returns.

The report also called out that the availability of data to baseline, benchmark and monitor impact was an ongoing challenge.

According to field scan participants, such challenges could make or break an investment opportunity. This was seen as an opportunity for governments to support the market by providing data relevant to understanding the societal challenges.

Addis said governments had a critical role to be constructively engaged in the market building, as well as a role as market stewards.

“We think their market building role does have a big piece that’s about how they send the right signals into the market and also how they can provide some catalytic capital to help mobilise and unlock private sector capital and activity, and then governments also have a role as participants,” she said.

“There are ways in which government can be starting to address the gap that arises through the fact that demand for service is increasing but the government budgets aren’t getting any bigger and in some cases they are under even more pressure.

“So impact investing is a way that they can actually start to look at alternatives for unlocking different resources and if they do that in smart ways, in how they use the government capital, then they can create a multiplier effect by getting other people involved and by helping the market to develop so there is less reliance on them over time.”

Addis said philanthropy also had an important role to play.

“They have some of the most precious capital that we have in the markets and systems because it is flexible and it can be utilised in a way that can provide, if you like, the equivalent of angel capital for the impact market,” she said.

It comes as Impact Investing Australia’s report, Paving Pathways: A Review of the Impact Investment Ready Growth Grant, outlined how $1.4 million in grant funding had generated a median grant leverage of 23 times the capital.

Established in March 2015, the Growth Grant is an initiative that holistically addresses market gaps for impact-driven businesses to raise the investment required to scale and grow.

It provides grants of up to $100,000 for business, financial, legal or other capacity building support required for social enterprises to raise capital.

Jennifer Ziegner, program and business development manager of the Growth Grant, told Pro Bono News the overarching aim of the initiative was to prove to the market that it is possible for impact business to scale and grow to a significant level and to raise investment, as well as to close a number of gaps.

“It is really designed as a holistic market development initiative that on one side provides funding for the businesses that they often don’t have, but also at the same time develops the capacity building side in the market, which means that our funding in the end goes to the business but it flows over to the advisors, in that we allow advisors and professional service firms to actually work with impact businesses that they may not traditionally be able to do if the business can’t pay for that service,” Ziegner said.

“At the same time the initiative is also closing the gap on the investor side because we know that there are lots of investors out there who would love to invest with an impact lens but we need a better pipeline of those deals coming through.

“And so that’s really all the three different gaps the Growth Grants have been designed to solve, and to close.”

To date the initiative has supported 22 mission-driven organisations, 11 of which have already successfully raised a cumulative $40 million in debt and equity.

Sally McCutchan, CEO of Impact Investing Australia, said the findings highlighted the important role the Growth Grant has played in developing the market for investments in mission-driven organisations.

“The comparatively small amount of Growth Grant funding has had a catalytic effect in enabling businesses to raise capital and build and sustain organisational capabilities,” McCutchan said.

“A real highlight of the program is the degree of sector support and collaboration that has underpinned its success.”

The review shared key design elements of the Growth Grant that have driven its success, including specific eligibility criteria for applicants, a highly experienced and diverse panel, incentivisation through staggered payments and openness to program adaptation and flexibility.

It also highlighted a number of significant gaps that still needed to be addressed, including gaps in earlier stage funding for social enterprises; support for contract readiness; and the number and reach of high quality providers.

It said an understanding of what constituted investment readiness also continued to be a challenge for many social enterprises.

Ziegner said they were excited to share the stories and hands-on experiences of the grantees, their providers and their investors with the market.

“They are extraordinary individuals who are driven to make a positive impact through their organisations and pave the way forward to a better world,” she said.