Social impact investing may be growing in popularity in some investment circles but to enter the mainstream globally, its advocates and participants need to show that it actually achieves what it sets out to do, the Organisation for Economic Co-operation and Development (OECD) said.
In a report ‘Social Impact Investment: Building the Evidence Base’ published on February 4, the OECD said that social impact investing has become increasingly relevant as social challenges have mounted while state finances in many countries decline.
Social impact investing emerged in the 1970s and is aimed at generating social benefits in tandem with investor returns.
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Opportunities therefore abound for private investors to step in and fund some projects.
“New approaches are needed for addressing social and economic challenges, including new models of public and private partnership which can fund, deliver and scale innovative solutions from the ground up,” the group said in the report.
Today, there is growing interest in this form of investing among mainstream investors, foundations as well as what the OECD calls “an intergenerational transfer of wealth”, estimated at US$41 trillion that is expected to take place over the next 50 years.
Of that, nearly US$6 trillion is expected to be directed towards social issues, the group forecasts.
These private groups can step in where state governments can’t. However, to prove that it social impact investing isn’t merely philanthropy, the fledging market has a couple of issues to overcome.
Firstly, it needs to define what social investing actually is.
“For purposes of scoping and sizing the market, it is essential to work towards a precise common understanding of what is meant by social impact investment and agree upon a working definition to clarify what is included and what is not,” the report said.
“This is important for policy makers, researchers and practitioners as well as for the overall development of the market.”
Secondly, it needs an international framework to assess actual social impact.
Together, the two – definition and assessment – should form the “evidence base” of social investing, the OECD said.
“Given the growing level of activity in the social impact investment market around the world, it is crucial to build the evidence base to understand what works and ensure that capital is put to work on interventions that achieve the intended impact,” it said.
This includes collecting data and being able to compare data across countries to better track the development of the social impact investing market.
The most comprehensive studies that exist are impact investor surveys carried out by the Global Impact Investing Network and J.P. Morgan, which look at foundations, funds and financial institutions. The first was done in 2011, and the second in 2013.
Given the growing level of activity in the social impact investment market around the world, it is crucial to build the evidence base to understand what works and ensure that capital is put to work on interventions that achieve the intended impact.
Who needs what
After analyzing data on social needs and spending in the Group of Seven countries (G7) and Australia – the markets where social impact investing is the most developed - the OECD said the areas with the greatest need are those facing challenges in health, employment and education, housing, criminal justice and family services.
For example, there is a huge need for investments in social housing, as one in 10 people in OECD countries have trouble paying for accommodation, the report said.
Another area ripe for social impact investing is criminal justice as prisons in the United States, Italy, France, the United Kingdom and many other countries are full or “over-full”, according to the report.
“Providing for prisoners is a costly process, and so innovation in crime and recidivism prevention services will be in general demand,” the report said.
The report cited Britain, for example, as leading the way in this area with the introduction of “Social Impact Bonds”, or so-called “pay for success” bonds to help reduce recidivism, or a return to a life of crime.
The programme was so successful that it was extended to other areas, such as reducing youth unemployment.
The OECD hopes that more conversations will result from this report and participants will be able to share information on what works and doesn’t.
There is also need to expand social impact investing to less developed economies where resources may be even scarcer, it said.
Robert Kraybill, managing director of Impact Investment Exchange Asia (IIX), a Singapore-based organization that seeks to provide social enterprises in Asia greater access to investment capital, agrees.
“While much of the focus of the report is on the G8 countries, many of the findings are applicable to the work we do from our base in Singapore which acts as a regional hub serving Singapore as well as the developing countries of South and Southeast Asia,” Kraybill said.
He added that industry needs to continue developing impact assessment methodologies. IIX has done such assessments for nearly 60 social enterprises throughout Asia.
Indeed, such assessments – to gauge the methods and effectiveness of different strategies - will have to be mandatory for social impact investing to flourish, the OECD said.