At present, the Australian impact investing market is small, fragmented and inefficient. The vast majority of impact investment deals in Australia are over $1 million – for many philanthropists, NGOs and family offices these deals are not accessible.
In 2021, Brightlight and the Australian International Development Network (AIDN) conducted research with a panel of INGOs to explore the challenges they faced when tapping into impact capital. In addition to investment minimums being too high, the INGOs also highlighted the fact that small capital raise amounts, typically under $10M, bear disproportionately high costs. On top of this, the legal, administrative, operational and bureaucratic processes required to enter the market are too burdensome.
When the entry costs and requirements are too high, this minimises the pool and diversity of change-makers or investors wanting to make impact investments. It also hamstrings the overall investment capital being mobilised.
Challenges are Growing
With the threat of climate change mounting daily, worsening famine in the Horn of Africa, and rising poverty levels around the world, more and more Australians want to create the change needed for a better global future today. The same Australians are increasingly aware of the role that their investment dollars can play in creating this change. Consequently, we have witnessed the rise of a hungry market for impact investing in Australia.
However, the potential of Australia’s impact investing market is currently only a fraction of what it could be; not enough potential change-makers are being brought to the table to invest. On the other hand, not enough passionate social enterprises can access the seed or venture capital needed for their innovative for-purpose organisations to flourish.
Reflecting on recent discussions I’ve had with experts in the ecosystem, it is clear that we need to urgently diversify and democratise the Australian impact investing sector if we want to truly unlock the power of our impact investing sector and finance the $US 2.9 trillion shortfall required to achieve the Sustainable Development Goals (SDGs) by 2030.
We need More Deals That Are More Accessible to More Investors
To counter this issue, the Good Business Foundation’s Stuart Thompson argues that there is a need for more deals and investment opportunities in the $1000-$100,000 range. At present, general understanding of impact investing is still low and overall impact investments are considered high-risk. If a greater range of smaller deals were available it would allow more philanthropists, family offices and NGOs to feel confident to engage with ‘high-risk’ investments.
Moreover, it would allow them to ‘dip their toes in’ and build confidence with a view to bigger impact deals in the future. Recognising this missing segment, several organisations are already emerging in this space. Since inception Red Hat Impact has promoted the power of crowd equity. They allow syndicates of investors ranging from $500 to $75k to come together and support impact enterprises.
We also need to urgently harness the collective power of individuals to make systematic change. We should do this by lowering the entry price for individuals to make impact investments. Organisations like Kiva are allowing sums as small as $25 to be aggregated in a way that can create meaningful sums of money to microfinance institutions globally. Good Return’s microloan program similarly allows investors to continuously lend small amounts to women entrepreneurs in the Asia-Pacific region.
Lend For Good allows investors to invest in social enterprises that have demonstrated a viable growth opportunity through crowdfunding. Uniquely, they also allow the investor to pick the specific organisation that needs capital to scale up. Tom Dawkins, Co-Founder of Lend for Good, explains that this is crucial because individuals are already making impact investments with a lower rate of return because they care about the cause. Consequently, fostering that intimate connection with the cause and moving away from traditional impact funds, where involvement is mitigated by professionals, will be key.
A New Generation of Impact Investors
The impact of lowering the entry price, and bringing more investors to the table, is two-fold; on one hand, this approach moves the investing ecosystem away from an ‘elite’ space and creates the opportunity for a more diverse set of investors who more appropriately represent the social and environmental causes impact investing seeks to address in the first place.
On the other hand, it taps into the changing demographics of the investor landscape. Last year, Brayden Howie, CEO of Action on Poverty, highlighted the beginning of a new era of giving, guided by millennials, a generation who care deeply about social issues, but also seek to take tangible action. For the millennial generation and below, the parameters of ethical investing are much wider than traditional investments. Even a morning cup of Fair Trade coffee is a scaled impact investment. The Australian impact investing market needs to ready itself for the collective power of current and future socially orientated markets. Afterall, “the largest untapped impact Fund in the world is all of us”, says Cameron Neil, Co-Founder & Director of Red Hat Impact.
Finally, we also need to diversify and democratise who has access to the seed or venture capital needed to create and scale up the impact investments themselves. At present, there is a huge gap and lack of diversity in ‘pioneer funding’ for organisations striving to do good. For example, the Harvard Business Review recently highlighted that women-led startups receive less than 3% of all venture capital investments. When only a limited number of change-makers can access capital, this caps the number of diverse organisations with brilliant, innovative ideas for making change.
There is a win-win opportunity right in front of us. If we diversify the range of investors able to make impact investments we can capitalise on the collective power (and capital) of a building wave of passionate change-makers. Plus, if we democratise and broaden the range of social entrepreneurs that can access seed or venture capital to scale, then the diversity and capability of for-purpose organisations will flourish.
Let’s put these two opportunities together and unleash the power of a more diverse and democratic Australian Impact Investment market today.
Claire Hanratty
Claire sits on the Australian International Development Network’s Advisory Committee. She previously served as CEO and Director of the Leapfrog Group in the UK from 2017 to 2020.
Prior to going to England, Claire worked at the Great Barrier Reef Foundation as the Foundation’s General Manager and then as CEO and Managing Director.
Earlier, she spent eight years with Rio Tinto in global strategy and process improvement roles and began her career in finance with BP, in New Zealand, Australia, the UK and Europe.
Hannah McNicol
Hannah is Communications and Research lead at AIDN. She is also a communications officer at Good Return, and a dual PhD Researcher at the University of Melbourne/Manchester and Affiliate of the Global Development Institute researching China’s Belt and Road Initiative in the context of Special Economic Zones in Cambodia. Hannah previously worked with the Australian Red Cross and Charities + Social Sector Team at Gilbert and Tobin.