Ethical investing with social benefits

Most of us are familiar with environmental investing – or even socially responsible investing – through which investors exercise their rights not to invest in companies they don’t believe in, such as the move by some health-related superannuation funds to pull out of tobacco-producing companies.

Through socially responsible investing, or SRI, investors can also choose not to invest in companies that have bad human-rights records. Also in this field is corporate activism, whereby investors – usually large institutions – invest in companies to change their practices by exercising their voting powers. Investor voting against remuneration reports at AGMs is one example of this.

To add to this list is the growing field of impact investing. This is investing in programs – usually partnerships between private and public interests – that try to achieve some kind of social change, in addition to investment returns.

Last year, in an Australian first, the NSW government announced that three community sector programs had been chosen to pilot social-benefit bonds.

A social-benefit bond is a form of funding for social services. The government pays a social services program provider an agreed funding amount on condition that the program achieves certain performance targets.

The three pilot providers were UnitingCare Burnside, Mission Australia, and the Benevolent Society.

The UnitingCare Burnside Newpin Bond was the first of the three to launch this year and it has just been forced to close to new investments a month early as a result of the high demand.

The Newpin Bond funds a program to educate new parents to return children in out-of-home care to their families. UnitingCare Burnside worked with Social Ventures Australia to develop the investment.

The saving to the NSW government is the cost of the out-of-home care, which is approximately $37,000 a child each year. There are also indirect savings, which are harder to quantify. The number of children in out-of-home care is not insignificant. As of June last year, there were 17,200 children in out-of-home care in NSW.

The targeted return for these programs is high, in line with the risk-return payoff. It is forecast to be between 10 per cent and 12 per cent annually over the seven-year period of the investment.

The executive director of Social Ventures Australia impact investing, Ian Learmonth, is also working with Mission Australia on a bond aimed at preventing recidivism. While the Newpin Bond was oversubscribed, Learmonth says there was a broad spectrum of investors across the institutional and retail space.

The bond was only seeking to raise $7 million, but it did have a minimum investment of $50,000, which makes it reasonably accessible. Learmonth says a number of investors invested the minimum amount, as did a handful of self-managed super funds.

Learmonth says the Mission Australia bond they are working on will be quite a different structure to the Newpin Bond, but the minimum investment will be the same. This means investors who are so inclined will soon have another opportunity.

These are very new kinds of investments, and before anyone jumps in, they should consider how this type of investment fits in with their overall portfolio and investment strategy.

The Newpin Bond – along with the other two bonds, which are expected to be launched this year – will be keenly watched by investors and governments. If successful, it could open doors for social programs that are greatly in need of funding, while also providing a unique investment opportunity.

David Potts is on leave

The original release of this article first appeared on the website of Hangzhou Night Net.

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