Social Lens for Financial Inquiry’s Final Report

The final report of the the Financial Systems Inquiry has advised the Federal Government to explore and develop impact investment as an innovative way of potentially funding social service delivery in Australia.

The report recommends the Government approach impact investing, where investments generate both financial and social or environmental reforms, with a focus on superannuation and law reform.

Specifically, the report advises the Government to:

• Explore ways to facilitate development of the impact investment market.
• Provide guidance to superannuation trustees on the appropriateness of impact investment.
• Support law reform to classify a private ancillary fund as a ‘sophisticated’ or ‘professional’ investor, where the founder of the fund meets those definitions.

Philanthropy Australia CEO Louise Walsh said impact investing was an innovative way of financing social and environmental change, that could neatly complement and amplify existing grant making practices in the philanthropic sector.

“Admittedly the first part of the Inquiry’s recommendation on impact investment, that the Government should explore ways to facilitate development of the impact investment market and encourage innovation in funding social service delivery, is very general. But hopefully in the Government’s response to the Report in 2015 there will be some more specific actions identified. The Prime Minister’s Community Business Partnership could also play a big role there,” Walsh said.

“The Inquiry’s support for reforms to make it easier for Private Ancillary Funds to be classified as wholesale investors is something Philanthropy Australia has also identified as an ‘Early Win’ in our recent submission to the Prime Minister’s Community Business Partnership. This sensible and practical reform would make it easier for more Private Ancillary Funds to make impact investments, so hopefully it can be a quick win for the Partnership.”

Social investment group Social Ventures Australia (SVA) were among those who earlier proposed via submission the establishment of a dedicated social investment bank. Executive Director of Impact Investing at SVA, Ian Learmonth, said it was great to see impact investing included in the final report.

“We hope it will now encourage the Federal Government to directly support impact investing by bolstering intermediaries and promoting innovative financial models like social impact bonds,” Learmonth said.

“A larger and more robust impact investing market will realise savings and benefits to the community and Governments at every level. It will result in increased capital flow to the community sector, enable Government to fund preventative social services with greater efficacy, and improve innovation, data collection and reporting.

“We look forward to working with the Government, and with interested parties across sectors to ensure a thriving impact investing market becomes a reality in Australia, and this report is another encouraging step to that end.”

The Inquiry was Chaired by former Commonwealth Bank boss David Murray, with the goal of examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth.

Among other recommendations, the final report suggested that the Government’s role in developing impact investment should include “offering explicit public endorsement for the significant private sector interest in this emerging market”.

“Changing community expectations about the role of Government and the financial sector in funding social service delivery highlight a need for this funding mechanism in Australia,” the report said.

“Importantly, impact investing has the potential to benefit Government and taxpayers by reducing costs and improving social policy outcomes. It can change the role of Government from paying for inputs to paying for outcomes.

“It can also benefit Not for Profits by diversifying their funding sources and helping them to develop technical expertise in benchmarking and measuring outcomes, as well as improving governance and accountability.”

Recommendations on crowdfunding were also included in the final report, which said the Government should improve fundraising regulation to facilitate innovations in fundraising emerging from new technologies and ensure policy settings were consistent across funding methods.

In Australia, current regulatory settings impede the development of crowdfunding as proprietary companies are generally prohibited from making public offers of securities (equity and debt), and shareholder numbers are capped at 50 non-employee shareholders. Start-ups or other small businesses have no viable alternative structures, given public company structures have costly compliance requirements.

The Federal Government said it intends to consult with industry and consumers before making any decisions on the recommendations. This consultation will occur up until 31st March 2015.