In the lead up to this week’s Economic Reform Roundtable, there’s been widespread debate about Australia’s productivity problem. In fact, the Roundtable was provisionally called the Productivity Roundtable before the government realised that solving the productivity challenge might be setting expectations too high for a single gathering.
So it’s timely to ask what contribution impact investing can make to shifting Australia’s productivity performance. To answer that, we first need to be clear exactly what we mean by productivity – a concept too often conflated with business profitability. Productivity is the level of output per unit of input. Most often when using the term, people are implicitly referring to labour productivity, meaning output per hour worked, but there are other kinds of productivity too, as we’ll see later.
How does impact investment affect labour productivity? Simply put, it equips people with greater workplace skills and capability or, as economists would say, it builds human capital. One of the primary focus areas of social impact investment is employment and training for individuals detached from mainstream work. Across Australia, for-purpose businesses have developed innovative models for upskilling and employing those with barriers to work, and impact investors have provided them with the capital to scale these efforts.
Australian Spatial Analytics employs neurodiverse people in geospatial and digital engineering professions. See Me Please hires people with disability to undertake user testing for digital accessibility. Plate It Forward trains women from asylum seeker and refugee backgrounds to work in restaurants and catering. In each case, individuals receive training which increases their own productivity and lifts the overall level of workforce productivity across the population.
Here, though, there is a catch because labour productivity is only calculated based on people already in the workforce. If for-purpose businesses train up individuals who haven’t been in work and move them into jobs, these workers may initially enter the workforce with productivity levels below the national average, thus dragging the official productivity measure down.
But their upskilling and employment is certainly an increase in the nation’s effective productivity rate because these people are now generating output when they previously weren’t (or couldn’t), and many of them will get more skilled over time. An additional benefit is that these people are less reliant on government living support (and may be paying tax), relieving fiscal pressure on the public purse.
As mentioned, there are other measures of productivity, including the productivity of capital, and total factor productivity, which assesses how labour, capital and land are combined to generate output. Total factor productivity is influenced both by technology and by the quality of business leadership.
Impact investment has implications here too. In theory, the productivity of capital is maximised by its optimal allocation through efficient capital markets, and can be assessed through risk-adjusted return. In reality, it’s messier than that and much more case dependent – thanks to externalities, risk-adjusted returns don’t tell you everything.
Take the role of impact investors in the clean energy transition. While there are recent signs of easing, investments in renewables have delivered attractive returns for some time now. The productivity benefit of these investments is that they will reduce the cost of electricity for millions of businesses across the country, increasing their output for the same value of input. Investments in waste reduction or recycling technologies achieve exactly the same thing.
All of this should give participants at this week’s Roundtable food for thought. Policy measures that increase the flow of capital to impact investments have productivity benefits: they make people more productive, and spread productivity improvements throughout the economy. There is no shortage of policy ideas out there – are we willing to grasp them?
This story is part of an ongoing series curated by Impact Investing Australia (IIA) designed to explore impact investing and related concepts. IIA is growing the market for investments that deliver measurable social and environmental benefits alongside financial returns. Our vision is that every dollar invested builds a better world.
