Realising the potential of social impact investing in the international development sector

Social impact investing is an investment that intentionally targets specific social and environmental objectives along with financial returns, and measures the achievement of both.
Delving deeper

The intention of some impact investors is “financial first”, however there is increasing interest in “impact first” investors that attract philanthropically motivated investors to complement their traditional philanthropy.

The social impact investment market has grown considerably in recent years, providing capital to address the world’s most pressing challenges in sectors such as microfinance, healthcare, education renewable energy, sustainable agriculture, conservation and housing[1]. With an estimated $18 billion pent-up demand among Australian investors for impact investing, coupled with the changes to the funding landscape in the international development sector in Australia, international NGOS (INGOs) are increasingly exploring how they can use impact investment to deliver on their missions.

State governments in Australia have embraced impact investing with social benefit bonds addressing issues such as vulnerable families and children, homelessness including youth homelessness, juvenile justice and mental health. These bonds have attracted a range of commercial and sophisticated investors. Despite this, impact investing is still nascent in the Australian international development landscape. While this is changing with the emergence of initiatives such as DFAT’s EMIIF (Emerging Markets Impact Investment Fund), it is important for INGOs take the time to explore whether impact investment is the right fit for their organisation, and if so what role it should play. At this stage the most rewarding form of impact investing may be through the engagement of “impact first” investors who are looking to complement their traditional philanthropy[2]:

What are the opportunities for Australian INGOs to get involved?

With this in mind, there are a number of opportunities for Australian INGOs to get involved in impact first investing:

  • Seed funding or make angel investments: Despite the appetite for impact investing, many investors are finance first focused and deem initiatives in the international development arena too risky. INGOs have the opportunity to provide or secure seed funding to develop impact first initiatives that over time will mature to also realise a financial return. By playing this “angel investor” or “patient capital” role and demonstrating models that work, IGNOs can reduce the perceived investment risk opening up opportunities for more capital investment from sources that have previously been too risk averse to invest
  • Receiving impact investments: INGOs in Australia have the opportunity to develop impact investment initiatives that receive investment and generate income. Globally, INGOs are actively seeking such investments, either to establish new social enterprises or to transition existing grant funding programs to a more sustainable models once grant funding runs out. Taking an impact first approach is the first natural step in this transition from a philanthropic funded program to one that, over time, is able to realise a financial return. This longer term strategy can explore the potential for blended capital which engages philanthropic funds, government and corporate funds, impact first investors and financial first investors.

Delivering technical assistance: INGOs play a critical role in providing technical assistance and capacity building around the globe through their mission aligned programmes. As such, they are in a unique position to support entrepreneurs and enterprises gain the skills they need to be ready for investments from other investors. To do this, assistance will require an impact first approach, focusing on the social returns until the capacity of these entrepreneurs and enterprises reaches a tipping point that enables a financial return on the initial investment. ACRE, a consortium of five INGOs supports SMEs to become investment-ready, scaling positive social and environmental impact for poor and disadvantaged rural communities[3].

How to get involved?

First, determine whether social impact investing aligns with your mission, vision and strategic objectives. This may require you to revisit your strategy through an impact investing lens. Then, you’ll need to assess whether you have the right capabilities to be able to effectively implement and sustain an impact investing approach; a recent survey of more than 40 INGOs identified the below 7 areas of strategic readiness for impact investing[4].

Our Social Impact Consulting practice can help your organisation determine whether impacting investing is the right fit for your organisation, and if so, what capabilities you require to implement it. Our team has first-hand experience working in the sector and as a member of ANDE (Aspen Network of Development Entrepreneurs), we are committed to collaborating with mission led organisations to support vulnerable communities around the world. As a nationally and globally recognised brand that is the trusted advisor for organisations of all sizes, we can bring our connections across the business, government and not-for-profit sector to support you with your impact investment journey. If you’d like to learn more about how we can help help your organisation explore impact investing opportunities please contact either Les Hems or Rob Hagget.

Supporting footnotes

[1]Global Impact Investing Network (GIIN)

[2]Rockefeller Philanthropy Advisors, ‘Impact Investing. An Introduction’ (2017)

[3]The Inclusive Business Hub, ‘The growing and critical role of NGOs in impact investment’ (2017)

[4]Based on the INGO Impact Investing Network ‘Amplify Impact Investment’ report (2016).

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