Each year, billions of dollars are invested into social programs that aim to address some of the world’s biggest challenges, from a lack of access to education, healthcare, food and/or water through to natural disasters and much more. As such, social investing (also known as impact investing) has become topical with a recent report suggesting that social infrastructure investing using a combination of government and private resources leads to better aggregate results1. Given the hype, we explore some evolving themes and trends and examine what the future is likely to hold for this investment segment.
What is social investing?
Social investing, henceforth SI, is an investment whose financial return is aligned to a measurable social or environmental benchmark, often referred to as a Key Performance Indicator (KPI). These investments may be made in either developed or emerging economies often, although not exclusively, in association with government bodies. Such arrangements are known as Public Private Partnerships (PPPs).
Exploring three recent developments
Traditional PPPs with elements of social outcome
Traditional PPPs involved the contracting out of specific secondary operational functions to the private sector, such as security, cleaning and building maintenance. These contracts were usually functionally based and had no direct linkage to social outcomes (which were considered the sole responsibility of government). Recently, there has been a move towards developing PPPs which incorporate some elements of social outcomes. An example of a traditional PPP with elements of social outcomes is the Auckland South Corrections Facility, due for completion in May 2015. This initiative between outsourcing and services organisation Serco and the New Zealand Government and will operate using key benchmarks of prisoner rehabilitation, reintegration and reduced offending.
Traditional PPPs with combined primary and secondary responsibilities
Recent developments in the PPP sector have seen a move towards private enterprise providing not only secondary services but also delivering core services which have principally been the responsibility of governments, such as the provision of healthcare services. These are linked to quality service payments, controlled by arrangements which reduce payment for non-performance. For example, the Northern Beaches Hospital in Sydney, Australia will operate under such an arrangement; the tender partner for this initiative is expected to be announced in late 2014.
Social impact bonds
Social impact bonds represent a recent modern development in SI with clear definable KPIs. These bonds are primarily issued to raise money for the development and running of government social initiatives and programs such as prisoner rehabilitation. Returns are linked to measurable KPIs such as the reduction in re-offences. If the set targets are not met during a defined period then the bond does not pay a coupon.
We believe that PPP arrangements, when linked to measurable outcomes, can allow both public and private parties to optimise results by utilising their comparative advantages. The driving philosophy behind this is that there is an optimal combination of government and private alignment in social projects that will achieve the desired result. There is no one-size-fits-all model for social programs and outcomes, rather the combination of services is project-specific.
Many of those who participate in social investing do so for more than purely financial gain. However, aside from the ‘feel good’ aspect of social investing, such investments typically have provided strong stable returns from high-quality counterparties with defined downside risk. With little or no correlation to traditional asset classes, social investing can form part of a well-diversified portfolio.
We expect to see further developments in social investing in the coming years.
1KPMG, Sustainable insight: Unlocking the value of social investing, released 28 May 2014
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