Social impact investing 'promising' — but beware the risks

By David Donaldson

May 16, 2018

Social impact investing holds significant potential to address housing and homelessness needs, argues a new report — though there are plenty of risks, too.

Social impact investing — investment intended to generate both social and financial returns — provides a “promising framework” for addressing housing affordability and homelessness, despite a need for further evidence on its effectiveness, argues a paper by the Australian Housing and Urban Research Institute and the Centre for Social Impact at UNSW Sydney.

“We have seen that social impact investing has the opportunity to increase capital for the supply of affordable housing, and fit-for-purpose social housing in Australia,” says Centre for Social Impact CEO Professor Kristy Muir.

“This is really exciting and could be a game changer in helping to address our housing crisis.”

The federal government is evidently interested too, providing $6.7 million over the next four years to build the capacity of the social impact investing sector by undertaking longitudinal studies and developing an impact framework. Last week’s budget also added $1.6 million for a trial and its evaluation.

But social impact investing should not be viewed as a “panacea”, says AHURI, as social impact investment programs “can be complex, time consuming and expensive to establish and manage” and will not be appropriate in many cases.

“Some of the purported benefits of SII could be achieved through other means and, in some cases, other funding sources will be more suitable, have lower overheads, and/or be better matched to achieve the desired outcomes,” the report notes.

Government’s role as a market builder, steward and participant is vital if it is to be successful.

“It’s critically important that government plays the right role, as market builder, steward, and participant in the social impact investment market. In addition, we need effective infrastructure in place to support the process,” says Muir.

Government’s role includes “closing the significant financing gap that exists for social and affordable housing providers that would assist with increased investment into the sector from both SII and non-SII,” says the report.

Importantly, social impact investing should be additional to current spending in these areas, as it “cannot supplant government funding, but it can enhance the return on it by attracting other sources of capital”.

Other key conditions for success include shared understandings of social impact investment, specialist boundary-spanners who can bring organisations together, and effective and robust measurement and management systems.

Citizens who use these services should also play a bigger role in their operation.

“They are the experts in their own lives and may therefore have roles in co-creating and co-designing solutions to best meet their needs. Their involvement in SII decision-making, governance and in informing the SII planning, implementation and measurement processes is also critical to ensure that processes and policies are well targeted, equitable and inclusive,” argues AHURI.

The report is the final instalment in the AHURI inquiry into social impact investment for housing and homelessness outcomes, and builds on three previous sub-reports. The work is based on a critical analysis of 158 publications, a workshop with 32 diverse expert stakeholders, in-depth interviews with 70 key stakeholders, an online survey with 72 people across the financial, housing and SII sectors, and 3 case studies.

The report warns that there are a large number of risks associated with this field, including the complexity of the problems of housing affordability and homelessness, the potential challenges of scaling up social impact trials, an under-developed social investment market in Australia, and current laws that have not been developed with such structures in mind. Other key risks include:

  • Complexity of SII means that it may not always be implemented well or with the right model.
  • Poor design and implementation of SII risks harm to beneficiaries who are likely already vulnerable.
  • De-risking investments too far to attract investors and severing the nexus between social and financial outcomes may create moral hazard risks and reduce the alignment of interests among stakeholders.
  • Risk that SII displaces other non-SII initiatives that are providing better outcomes than SII and/or at lower cost.
  • Risk that investors’ performance expectations are not met, which reduces confidence and stalls SII.
  • Risk of insufficient targeting of SII, leading to unintended consequences for beneficiaries and/or capital not being directed where it is most needed.
  • High transaction costs of SII, which are often borne by service providers who already have limited capacity.
  • Evidence base for SII is yet to be developed conclusively and, so far, suggests that SII may be better suited to only less complex social issues.
  • The appetite for concessionary rate returns may not be strong enough in Australia to support a sustainable SII ecosystem.
  • Achieving fair sharing of risk and return is complex and, if not apportioned correctly, can have severe consequences for a range of stakeholders.
  • SII may divert capital away from grants to repayable finance that puts service providers at increased financial risk.
  • Outcomes measurement systems necessary for SII are not yet developed.
  • SII may not generate positive outcomes if stakeholders take a form-over-substance approach, or if there is unbalanced power in the stakeholder relationships.

But despite the risks, the inquiry found several promising funding models that could be adopted:

  • Housing supply bonds — to provide low-cost and longer-tenured capital to registered community housing providers (and possibly other specialist affordable housing providers). The Commonwealth Treasury intends to issue HSBs through a newly created bond aggregator.
  • Property funds (eg mutual funds, Australian real estate investment trusts; listed or unlisted and private capital impact investment firms) — to finance, develop and manage build/buy-to-rent long-term affordable private rental housing. Housing stock is held in perpetuity. Property funds place private rental housing under professional management.
  • Funding social enterprises (housing supply and/or employment/skills acquisition) — including direct debt and/or equity investments in: i) disruptive ‘deliberative development’ (self-organised consumer-led property development) that creates a new residential home ownership segment at cost that can also lock in affordability gains in perpetuity (in effect, a new market segment based solely on the utility value rather than the investment value of housing); ii) sub-market housing providers to build capacity, scale and track-record to enable future access to mainstream financing; iii) social enterprise subsidiaries that provide revenue streams back into social and affordable housing providers that increase their financial sustainability and ability to achieve their core purpose; and iv) employment/skills acquisition or other support services providers that support housing and homelessness outcomes.
  • Social impact bonds — as an incubator for government to trial new ways of providing social services that deliver desired outcomes most effectively, and importing what works back into the day-to-day commissioning of social services. SIBs can be used as part of larger housing property transactions, for instance, to deliver tenancy support services that improve tenants’ ability to maintain successful stable tenancies or to better align stakeholder interests in the desired outcomes.
  • Social impact loans — to provide credit on reasonable terms to lower income residents or disadvantaged populations (eg Indigenous home ownership on native title land) currently excluded from mainstream finance, but able to service a loan. These could be used to finance participation in shared equity schemes or purchase a home, and through developing track-record and an evidence-base, build a bridge to accessing future mainstream credit.
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