The first Financial System Inquiry (FSI) in over 16 years has called out impact investing as a valuable and needed mechanism to fund social service delivery in Australia.

The FSI called impact investing an important tool in the Australian context, especially given reduced government capacity to fund social services. The Inquiry also noted that impact investing presented an opportunity for Australia to:

  • Reduce costs, and improve the impact of social service delivery.
  • Innovate and learn, for example by shifting from outputs to outcomes, and developing improved frameworks and tools for measuring and assessing those social outcomes.

The FSI agreed with several submissions to the Inquiry on the role of government in facilitating an impact investing market, quoting OECD policy recommendations for catalysing impact investing: “Government intervention can play a catalytic role both in facilitating the functioning of the ecosystem and targeting actions to trigger its further development. However, these actions should provide incentives for the engagement, not the replacement of the private sector and should be conducted in a manner conducive of the market” (cited in the FSI submission from Impact Investing Australia).

The Inquiry also noted two areas for clarification that would assist in catalysing the impact investing market in Australia:

  • Clearer guidance from the Australian Prudential Regulation Authority on the suitability of impact investment for superannuation trustees.
  • Updating laws to facilitate private ancillary funds (PAFs) controlled by ‘sophisticated’ or ‘professional’ investors accessing wholesale offerings in social impact bonds.

Separately, the FSI also encouraged a greater role for crowdfunding in Australia, noting that currently, regulations around crowdfunding are impeding growth of the sector as well as small businesses. Greater investments in small and medium sized enterprises (SMEs) was cited as a critical tool for economic growth and innovation in Australia. As yet, SMEs are restrained in their ability to raise funds, especially in the public domain. Globally, crowdfunding has been growing at around 50% per year.

The Inquiry encouraged regulation that would facilitate securities lending (equity and debt), as well as peer-to-peer lending via crowdfunding, while noting the need for establishing caps and limits on fundraising to protect investors. In addressing the issue of crowdfunding in 2014, the Corporations and Markets Advisory Committee made the following proposals:

  • Place a fundraising cap of $2 million over 12 months for each issuer.
  • Introduce investment limits for investors of $2,500 per issuer, and $10,000 overall, for any 12 month period, and communicate the high risks to investors.
  • Require licensed intermediaries to conduct issuances. These intermediaries would be prohibited from providing investment advice, soliciting investment, or lending to investors.

Crowdfunding platforms for business and creative start-ups (like Pozible), and social change (like StartSomeGood), do exist in Australia, but to date they have only been able to accept grants or donations to various projects. Investors do not make a profit from their investments into these platforms.

Expanding impact investing and crowdfunding could have significant implications for Australia’s social sector. Both vehicles could potentially catalyse investments in social enterprises, social impact bonds, payment by outcomes approaches, place-based investments, and collective impact programs. While numerous demonstration cases exist for these models globally, the sector is just beginning to pick up steam in Australia. Carefully leveraged, we could see revolutions in the way we think about social impact and multi-stakeholder collaborations to shape greater opportunities for economic and social growth in Australia.