Social Investment: IMPACT–Australia Forum with Jed Emerson - April 2013

Social investment leaders, including Jed Emerson, discuss the IMPACT–Australia report on growth of impact investing in Australia. The report highlights the development of the market for investment in social outcomes and was published in collaboration with JBWere.

Transcript

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Text: Social Innovation

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Text flickering through alphabet to read: Social Investment, IMPACT-Australia Forum with Jed Emerson - April 2013

Overview by Rosemary Addis

Thanks very much John and welcome everybody. I'm delighted

Rosemary Addis speaking from lectern with screen in background and speakers seated on stage

that you could join us today and I'd like to start by adding my acknowledgement of the traditional owners of the land on which we meet and pay my respects to their elders, past and present. As John said, we welcome with us today our collaborators in this work, Jed who is a global pioneer in the area and some of you may, like me and John McLeod and others, have followed his work for over a decade now in helping to see how we can make sense of some of the global trends that are looking beyond silos of social or economic and looking at how we can do things that actually work across a range of areas to create value for the whole of society and help to shape the kind of society we want to live in, and how we use the tools of our capital markets and our policy and regulatory settings, develop the leadership that enables us to actually create more of those ways of working. As John said, we're also welcoming John McLeod from JBWere who also has a long history in the financial markets and as an advisor and analyst in relation to investments, and was one of the early leaders in Australia in relation to philanthropic advisory services, and also on the stage is Alan Raine who's been working with our team here at DEEWR and we are grateful to the Productivity Commission who have made his services available to us for the purposes of this, of this initiative which has been terrific.

So, IMPACT-Australia, investment for social and economic benefit.

As you heard from John I have the privilege of leading the social innovation function here at DEEWR, and this has really enabled us to build on, on work that I've been leading here for, in the, in Australia for more than 10 years now on how we can develop more ways of working across boundaries and building social and economic value. In our work, we actively seek to work across sectors. We actively follow some of the trends for what's coming over the horizon internationally to help synthesise that and make sense of it in terms of the policy environment and what it's going to mean for productivity and inclusion which of course are core to the work of this Department. We work in a number of areas that are the enablers for creating value and for creating productivity and for innovation, and in particular, investment has been one of them, but also enterprise, incubation and other things that a lot of us use in, in economic policy terms but perhaps less so until more recently in the social sphere, and I'll come back to that. The opportunities to intentionally create social and economic value to - and intention is really important in this area because we're talking about trying to create positive benefits. Some people would argue, and I would say rightly, that all investments have some kind of impact. It's just not always positive. So what we're talking about here is investments that intentionally create a positive social, environmental or cultural benefit, as well as some measure of financial return.

Audience members making notes and watching presentation

There's a range of examples provided in the report and they include accelerating the delivery of vaccines internationally to kids who are still dying from preventable disease, to get to more families faster. It includes examples from local communities here in Australia investing in services and how we can direct capital into communities to enable them to build more economic dynamism and to create jobs. Importantly, we can actually see examples across a whole range of sectors from aged care to health to education, to social infrastructure and other services.

There's absolutely no doubt that the context for this is global and I want to talk about that a bit.

Our own CSIRO has done some fantastic studies on global trends and seen that the consistent themes that come up internationally include ones that many of you will see at your desks each day - the requirements to do more from less, higher expectations from people about the level of service that they will receive, resource scarcity at the same time that the population in the world is growing, ageing populations and different expectations from the younger people coming through, growth and development, and technology and information systems which enable us to access more information but also give us more to make sense of and enable us to be connected globally but also work more locally. The community sector is starting to grapple with financial sustainability and how to actually produce greater accountability for results in some of the areas, and how to look at the economic impacts as well as the social dimensions of what they do. Philanthropic interests and family officers are starting to question whether they need to look at how they can manage the money that they invest in a way that either supports their grant making or at least doesn't run counter to what they're trying to achieve. Corporates and fund managers are really experiencing what the real costs can be of not taking social and environmental factors into account, in some cases even threatening their licence to operate if they don't get it right, and younger people just don't want to spend their lives running between an area where they make money and an area where they're trying to make a difference.

So for government, the growing challenges of trying to do more with less, of service expectations and also of some of the dynamics that we see particularly across the western world of increasing social inequality, are things that are very real challenges. I sometimes have people from other sectors actually say to me "Government needs to say more often 'We can't pay for everything,' because that's what's going to drive some of the change that's needed in other sectors."

There's a growing recognition that government and philanthropy can't pay for everything that's needed to support the kind of society that we need and want.

If we take the example of housing internationally, the people who need housing internationally, the cost of actually providing safe housing for them runs to two or three trillion dollars. Even all the combined international aid and philanthropy is a couple of hundred billion dollars, so we just won't reach that kind of need. But also people in government work every day are often trying to bring together the desire to make a difference, and the way that they work, every day grapple with how to allocate resources and make hard decisions across a whole system, manage risk, be accountable and create positive social outcomes. And so the change in other sectors that we're seeing actually creates opportunities for government not only to stimulate innovation and different ways of working, but also for looking at how can we target some of the government spending to areas where other people won't go and leverage private investment into areas where there might be an appetite for that, and how can we build this field to get more capital circulating that's really seeking to help build the kind of society we want, and in the process, obviously create public value which is what we're about as government? And we can see the current situation through a lens of opportunity, or we can do the economic analysis and see it through a lens of market failures and information asymmetry, and it's all there. Overwhelmingly though, the extent of the trends globally and the fact that there seems to be movement in all different parts of the system - you talk to people in philanthropy you talk to people in corporates, you talk to people increasingly in the superannuation industry, in investment banks and in the community sector - and people in all of these parts of the system are trying to work out how to make sense of this, how to move forward differently, and there are some early movers, early adopters and leaders showing the way. What that tells us is as government, we at least need to understand what's going on. At a very minimum we understand this because it's really influencing the context in which we work, and we think that we can go beyond that by also being a part of it and using it as some of the tools in the toolbox of government to help make a difference.

So, in this report what we've tried to do is really to ground that conversation for Australia.

Up until now we haven't had something that looks at what is impact investing and what does it look like here? How does the Australian experience so far relate to what's happening internationally?

What would we actually need to see this grow and develop and what might the real challenges be to that?

Audience members watching presentation

And how might we take it forward, what could happen, but also what should happen, and what might be the risks if we don't do anything about this? Because often with this kind of systemic change, it takes active leadership. It takes people to step forward and say "We'll be part of making this happen," and what we found in the report is that there is an appetite for people to be involved in that, that there are some very real challenges, but also some very real opportunities and concrete opportunities to act to move the market forward. We also found that there's a real appetite from people from different sectors to be involved and we know from our work that there's an appetite for collaboration with government in the mix with that. There's a lot of literature internationally, but up until now there hasn't been a document that is a piece accessible to a broad range of audiences to help them understand it in this context.

And so I guess my admission in that sense is that part of this work was a bit self-serving because people always say, "Can you send me something?" and I've spent countless hours at my computer trying to cobble things together and now we want to be able to say "Yes we can send you this, this report."

And so it's not a policy document as much as it is really a foundation document bringing together the different pieces of the puzzle with a very real call to action at the end and as you'll see from the forewords that have kindly been provided by Minister Shorten and by our Secretary, Lisa Paul who sends her apologies today, that we think it is a really important part of the discussion for government and an important part of the productivity and inclusion agenda. So I'm going to talk just briefly about the policy context before handing over to my colleagues. When we talk about this it's important to see it as connected to things that we already do and an evolution and integration. When we're talking about that with investors, we talk about it in terms of responsible investing and the ways in which people currently approach some of the social and environmental dimensions of their portfolios.

From a government perspective, we already have a track record in market building in areas where we recognise the need to stimulate investment, where we want to actually see jobs and growth, and some of that comes through very strongly in our industry policies and in innovation policy.

Increasingly, we've been also building that in relation to environmental policy, renewable and clean energy being part of the picture and obviously for the purposes of today I'm not going into a critique of particular policies, but just demonstrating that there are examples out there that we can look to and that are really part of this conversation if we take a holistic approach about where this fits in the context for government and policy. And we've been beginning to extend it into the social and cultural domains as well, and I've put some examples up here - the National Rental Affordability Scheme, the CDFI pilots that FaHCSIA's been running, most recently elements of the cultural policy, micro finance initiatives that AusAID run and our own Social Enterprise Development and Investment Funds.

And there's been a lot of learning from these early investments including that government in this space can provide signalling, can actually provide a lot more than money in moving the conversation forward and in helping to stimulate others in the field to be taking a more active part and looking at what their contribution can be, and helping community organisations and others also think differently about how they might fund and finance the delivery of social services. We can put this in a market framework and I'm not going to spend a lot of time talking about this today, but I do think it's just helpful to, to see that if we're thinking about it from a whole policy perspective, we do need to think about the supply side, the demand side, the intermediation, what's government's role in markets - these are all really important questions and things we need to - to think about. The other thing that I think's a really important lens for policy makers in particular is that we are seeing activity on the demand side of - and we know that there's unmet need out there. We're also seeing the supply side start to move and people who control capital start to look at what they can do and get interested in this area, and one of the key things they say is "Well where's the product?

What can we invest in?" In Australia we're still developing that at the moment. There's not as many opportunities as there are overseas, but there's lots of examples for us to look to. And so one of the opportunities for government is to actually look at how some of that capital could be directed.

Are there areas that are underinvested?

Are there areas that we think are important policy priorities where maybe they should be part of the mix and the opportunity is to help craft what that could look like for other investors so that we can actually point them to some of the areas that we know need more investment and that there's potential government investment won't reach it.

Audience members watching presentation

That can't be just about risk and cost shifting because I can guarantee that the investors won't go there.

What it can be about is a different kind of conversation and bringing more capital into areas that need it. Briefly some examples from other work we've done include how that might include directing investment into communities that need it, communities that need jobs, communities that need economic activity that will help see that money stay in those communities and help build their capacity and reverse the cycle. I put social impact bonds in the mix because some of you will have heard of those in the policy context.

They're one of the cards in the deck, by no means a panacea, but they are one of the more innovative tools that is developing in relation to how we can shift some of the conversation around social services in particular to a clearer focus on outcomes and accountability for results, and finance them differently to trial innovative approaches to scale things that work and to do more in the early intervention space. I also want to just mention briefly that it's important we consider the whole range of activity that government can do in this space. Our experience has certainly been that the conversation's not just about money and that's not the only thing that people in other sectors are looking for from government here. They're looking for leadership.

They're looking for the convening power that we can bring people together to have a different kind of conversation, and we also have lots of information including about where demand is, where unmet need is, that's helpful to people in seeing where they could really invest and what they could bring to bear. Between the work we've done and what's available internationally, there's actually quite a lot for policy makers to draw upon already and so I've put a few things up here, and you'll see that there's an extensive reference list in the report as well as a bibliography. So I want to leave you with the message that this is a real opportunity space. It's an opportunity space not just about capital, but also about how we work differently with other sectors and how we respond to the challenges and opportunities in the way that the global context is changing for our community service providers, for capital markets and for governments internationally. So I'm going to end on that and hand over to Alan who's going to speak to you first a bit about the process we went through in developing the report, and then to John who's going to talk about the fantastic analysis he's done that's included in the report around market size and comparators to some of the other benchmarks we might look at in Australia and internationally, and then we're going to hear from Jed. Thanks very much.

Thanks Rosemary. I have the pleasure today of

Audience applauding

Rosemary Addis leaves lectern and Alan Raine walks to lectern and starts speaking

Developing the report, by Alan Raine

providing a brief overview of the history and processes underlying the motivation for and the development of, the IMPACT-Australia report.

In many respects, the genesis of this work came from a number of government - government-initiated inquiries going back to 2009. At this time the Productivity Commission was tasked to undertake a wide ranging inquiry into the contribution of the not-for-profit sector in Australia. This work explored ways to measure the contribution using a framework that went beyond outputs and outcomes, to consider the long term and broader impacts these organisations and their activities have on our society. The inquiry also explored how government could best support the development and effectiveness of the sector through a range of policy levers. One of the key issues identified but not comprehensively investigated, was inadequate access to debt capital as a potential barrier to the growth of some social enterprises and not-for-profit organisations. As a result of the Productivity Commission's recommendations, the Senate Economics References Committee initiated a more targeted inquiry into the access to capital issue. The subsequent report Investing for Good made 15 recommendations for government to facilitate the development of the market.

The recommendations proposed actions across a number of areas, such as - such as providing a supportive policy and regulatory environment, convening and encouraging collaboration across sectors and designing and implementing innovative policies to challenge both social economy organisations and investors to take up these new financing options.

Only two of the Committee's recommendations have not been supported by the government. Despite all this work, a number of stakeholders identified that there was no single reference point that contextualised investment for social, cultural and economic benefit in Australia. Recognising this need and building on previous collaborations, DEEWR and JBWere decided to pool resources to progress such a project. There was already a large body of information and evidence from the analysis and the submissions arising from the Productivity Commission and senate enquiries. Further, the project team had extensive knowledge and networks from which to draw on. We identified four key questions that we considered this research should address; "What is impact investing?", "What does it look like in Australia?", "What are the challenges and opportunities facing the field?", and "What are some of the strategies and actions that could build the field and develop a more integrated and coherent market?" Using these questions and a market-based analytical framework as Rosemary has pointed out, an extensive research and consultation process was undertaken through interviews and roundtables to harvest perspectives from stakeholders and to validate our own thinking.

These stakeholders represented a variety of areas including institutional funds management, responsible investing specialists, financial and investment readiness intermediaries, philanthropic foundations, social enterprises and of course, not-for-profit organisations. In addition, we periodically tested the evolving structure and content of the report with an advisory panel and we drew on the international experience and recent research that has recently been put out, including from Mr Jed Emerson who's here today, and we're fortunate that he's been able to come to Australia for the first time. The outcome of this process is the IMPACT-Australia report that you see.

It represents the first attempt to draw together a coherent narrative about investing for social and economic benefit in Australia.

Given the previous work focused on the role of government in the sector, this report was not specifically written for a government audience.

However, when listening to Jed and reading the report, policy makers and project managers alike, may like to consider whether impact investing offers an alternative policy lever for governments to achieve social, cultural and economic goals in an efficient and sustainable manner. I would now like to invite

Audience members making notes and watching presentation

John McLeod, former executive of Philanthropic Services at JBWere to talk about the potential size of the market.

Audience applauding

Market analysis by John McLeod

Alan Raine leaves lectern and John McLeod walks to lectern and starts seaking

Thanks Alan. JBWere was very happy to collaborate on this report and I guess as a long term participant in capital markets, we certainly had an interest in that, but we're also one of the first firms to set up a, a dedicated Philanthropic Services area about a little over 10 years ago now, advising individual clients, not-for-profits and that broad social sector and having a lot of interest in that area, things like social return on investment and all of that, and this just seemed like a very good fit of the capital markets experience from a firm like Weres and the interest on the social side with our Philanthropic Services area had set up. So, we really saw the power of combining those two fields together and I guess that's, that's really the basis of what impact investing is all about.

The other thing that I'd noticed, while I'd been in the philanthropic area for 10 years, the previous 15 years I was an Equity Analyst, so analysing resource markets primarily, but more broadly equity markets and strategy for where they're going and all that sort of thing, as, as well as you could, and over that time, we initially didn't really see analysts using any sort of social values, what's happening in environment, things like that in terms of their financial analysis. It, it just didn't happen 15 years ago.

But in the last 10 years we've seen a real explosion of analysts starting to get into that area including things like ESG in trying to predict where equity markets are going.

So, from that point of view we really saw this inclusion of social in overall markets as being an important aspect.

So again, a lot of those things really starting to come together. What my task is today and is included in the report is trying to put a bit of perspective on what impact investing looks like in terms of global capital markets, what growth we see, what areas we see in that field, and, and give you some examples of that. Starting off, there's a lot of confusing terms. We hear about ESG, Environmental Social and Governance. We hear about Corporate Social Responsibility. We hear about SRI -

Full screen image of PowerPoint presentation - Figure 13: Allocation of global assets

Social Return on Investments and Social Investing, all those things, and people get a little mixed up with them, so I thought I'd try and put it in a little perspective for you.

The left hand bar on here looks at the big picture of global capital markets. About $150 trillion in global capital markets, two thirds of it in bond markets, about one third in equity markets. In 2006, so seven years ago, the UN principles of responsible investing started up to try and see what was being done in that area and encourage people who are managing these funds to include some sort of responsible activities in their investing.

All they really asked is for people who were in that field to sign on and agree to a few, not soft, but relatively soft principles for that, but say that they had an interest in that area, and in that seven years - you can see in the middle bar there - we've gone to about 15-20% of that total, so 1,000 institutions in 50 countries have signed on and said "Yes, we are including and looking at some sort of responsible investing in our overall investing market." So from zero to 15-20%, that's pretty good in that period of time.

Moving and getting a little bit more detailed, moving to the third bar there to the right, there's a few groups out there that globally are asking institutions, "Look, if you're doing more than just signing on in a soft way, but really analysing these ESG principles in your investing, really taking them into account, what sort of proportion have we got there?" So these are just professionally managed funds and of those, we see the same sort of percentage, about 20% of those, or around $14 trillion is being managed with a, a very strong ESG bent. Now, what sort of areas are they doing, or what sort of mechanisms are they using to do that? The pie chart there looks at the different ways of putting an ESG bent on, and the prime one at the moment is leaving out bad stuff, so negative exclusion screening, and you can see in there that, that the dark blue area is, is the largest of those. So leaving out tobacco, things like that.

But what we're starting to see is increasingly groups are getting more sophisticated in how they do this and although at this point impact investing and community investing is a relatively small part of that ESG market, it's still around $90 billion in total for those combined areas of impact investing and, and community investing, but it's a very fast growing area, so people are getting more sophisticated, wanting to take a, a much deeper approach in that.

And perhaps to demonstrate that, the evolution of this market particularly in the US where a lot of it started - and that's a lot to do with Jed, he'll talk to you in a moment - the way of doing this has been through funds, so funds have been set up to try and select impact investments and manage those, and really do all that analysis for people who are interested in the area.

This chart on here looks at the number of those funds that have been set up and the cumulative total, and what we can see there is an explosion in these funds in the last few years, in fact a doubling of them since 2007. There's $40 billion sitting in these funds under management that is purely focused on impact investment. In 2013, this year, there'll be another $9 billion added to that, so it's really growing at quite a rapid rate now.

And the range of areas that these funds look at, and the locations that they look at - this chart's on location in the report, but I thought I'd focus a

Full screen image of PowerPoint presentation - Figure 16: Global funds investment by sector

little bit on the sorts of causes or sectors that they're interested in investing in and we can see those down here. And I guess the big one and the long term one that's been around and people know about is microcredit, and you will have all heard of the Grameen Bank in 1976 that started up and they were one of the first to do this with micro loans.

That is the biggest area, but it's not the fastest growing area now. It's, it's not at maturity, but it's been growing at an exceptional rate.

The newer areas that are coming through that are providing real scale are things like housing, so affordable housing, aged care, those sorts of things, and I think the interest for that area is particularly significant in that it provides real scale to investors. You need a lot of small deals in microcredit to get the dollars. With things like affordable housing you can get real scale, and when our super industry starts to look at this, they're interested in scale in those sorts of areas, so it's interesting to not just look at the size or the number of deals, but actually where the dollars can go in these sorts of fields.

The final chart from me - and I do love my charts, so you'll have to excuse charts here, chart central - is we've tried to look at the potential growth in this field and so what we've done is gone at it from a few different areas and we looked at what microcredit did and we're saying "It's not mature," but it's starting to mature much more than the other fields.

Microcredit grew at 38% over the decade from the

Full screen image of PowerPoint presentation - Figure 20: Capital for impact investment

mid '90s to the mid 2000s, and as I mentioned, Grameen Bank in '76 started that up. The Boston Consulting Group did a good survey or study in England where they looked at a number of different social sectors - and just in England, relatively mature economy there - and looked at the potential growth for impact investment in certain sectors in England, so not in emerging nations. They came up with a very similar growth rate potential over the next four or five years of around 38% as well.

A few other groups have looked at the growth rates there and come up with around 32%, so the Monitor Institute in the US did a good study, another group looked at bottom of the pyramid type areas - that was JP Morgan and Rockefeller - and came up with a low thirties percent growth rate, and they're talking over the next 10 years, so quite significant growth rates. What we then tried to do was say "Well what might this look like in Australia?"

Australia hasn't at this point got the benefit of the funds where we can easily go and add up the number of dollars that are in there. We're really at the moment, deal-by-deal examples and you'll all be familiar perhaps with ABC Learning Centres which have gone in to be Goodstart Early Learning.

That was a, an example of a relatively large for Australia, but single deal entity in that field.

Rather than add a lot of those things up, we've gone and looked at what's happened in the US, the size of impact investment markets there and compared that to their not-for-profit sectors and to their capital markets, and said "If we had that same relativity in Australia, what would the size of the field be here?"

and we've come up with around the $2 billion growing to $32 billion over that decade period for Australia. So, still significant, but I think if you look at in the terms of the circle on there, that represents the blue dot compared to Australian capital markets.

So it's still a relatively small portion of that, and I think it's very interesting.

One of the, I think better meetings that we've had so far this week has been with the superannuation funds in Melbourne, and it's interesting to look at the size of dollars there. They have $1.5 trillion under management at the moment, projected to grow to about five to six trillion by 2030 and equity markets in Australia, and bond markets, are only around $3 billion.

So, at the moment they're mainly invested in Australia, but they're going to have to go a lot overseas to satisfy where they put that money in the next five to 10 years. These sorts of markets provide a potential large place for investments that also give us this social return as well, and I think there's growing interest in there, in that area.

But look, enough from me. Jed's going to have a chat to you now and I think he's really trying to get you to invest or get the Australian market to invest in that large blue area for, for impact investment, so take the whole field. Pass over. Thanks Jed.

Audience applauding

John McLeod leaves lectern and Jed Emerson speaks from stage

So first off, as has been said, this is my first time down

Global market insights by Jed Emerson

under so thank you very much for the opportunity to come.

I appreciate the Deputy Secretary's support for this work and the opportunity to really collaborate with Rosemary and her team in producing this document. I think that there, there's a real opportunity here to be a part of a global capital market that's evolving, that's coming forward and I think Australia is a little bit behind the curve, but not that far behind the curve. So I think there are some real opportunities here. As John has said, I am interested in the big circle. I, I spent a number of years focusing on targeting American foundations and saying "Gosh," you know, "You're, you're basically executing a strategy where less than 5% of your total asset base is actually being used to advance your mission," and that's the 5% payout that American foundations use to make grants with, and 95% of your assets, which is the corpus, is often not only neutral to the mission, but often times invested in the very companies that are creating the problems that their grant making is trying to approach. And I realise that on the one hand $850 billion was a big amount of money and we should put that to work certainly, but then I also realised I was kind of working with the wrong end of the horse because instead of focusing on what, you know, kind of comes out of foundations, we really should focus on the corpus of the foundations and in fact, on the global capital markets themselves. And so I'm really most interested in how do we harness the, the big blue circle of the $140 trillion of global capital that's available potentially for impact, and I think though that I'm also interested in another blue circle, another blue dot, and, and that really is the planet as a whole. And I think that in some ways when we talk about impact investing, it can become very complicated. There's a lot of jargon for people who aren't exposed to or comfortable with structured finance and different ideas around investing and it can be kind of intimidating but Albert Einstein once said about the Theory of Relativity that it's very, very simple, but that doesn't mean that it's easy, and I think it's the same thing here. It's really very, very simple, but that doesn't mean that it's necessarily easy.

And so it's important I think to step back from the seeming complexity and really understand how easy this is, and when I step back from impact investing, when I step back from the silos of non- profit, for profit, and governmental entities, when I really think about "Fundamentally, what is this about?", I think it's really about the planet. It's really about how we view ourselves in the context of the earth, how we view ourselves in the context of the generations to come, how we view our responsibilities to manage not only financial assets but natural assets in order to ensure that we provide not only for our generation, but for others. And I think that when we reflect on the, the earth, I think we see that it's whole, we understand that it is complete, and yet, as we go through life we're actually asked to accept the idea of a bifurcated world.

We're basically asked to embrace the notion that you can disaggregate value, that you either do well or you do good. You go into the non-profit and the public sectors, or you go into business.

You either make money or you give money away.

And the trick here is that as long as you stay on either side of the divide, the bifurcated understanding of the world works pretty well, and we've created a lot of financial wealth that has truly lifted millions of people out of poverty, accidentally but it has done that. We've created a non-profit sector and an NGO community globally that has served and assisted and intervened in the lives of, again, millions of people, and we've been very, very successful playing in this bifurcated space. The problem is that it's not enough.

Whatever the issue is that you care about, whatever the cause or the concern that you have, you cannot grant your way out of that problem.

The public sector does not have enough money to throw at the issues that are undermining our long term success and survivability, and as we've seen, especially in the last, you know, five to 10 years, the mainstream capital markets are not structured in a way to advance the broader interests that we all share.

And so it's important that we understand that, that really the time has come for us to move away from a success agenda that says that the measure of performance for non profits

Full screen image of PowerPoint presentation - Image of Albert Einstein with Text: "Try not to become a man of success, but rather try to become a man of value."

is how many people you served as opposed to how many lives you've transformed, or that the measure of success of a corporate executive is short term profits as opposed to long term value creation for shareholders and community stakeholders, to an orientation that says that it's just not about success, it's about value creation. It's about sustained value creation.

And I came to focus my own work on this concept of value because I found myself having the same conversation with different people in different silos, all of whom were grappling with what was fundamentally the same set of challenges, which is to say the shortcomings of a traditional way to think about value creation either from a non profit or a for profit orientation, and what I concluded was that when I was talking with a social entrepreneur, or a for profit entrepreneur in a mission driven for profit company, I was talking to somebody who had come up against the limits of what you could do within a traditional non profit or for profit structure. When I was talking with a venture philanthropist or a for profit social investor, I was talking with investors who basically were looking to, to leverage capital beyond the tools and the initial frameworks and practices that were available to them, and what I realised was that what all these folks were grappling with was fundamentally this, this notion of wanting to operate within a world that was both and as opposed to either/or. They were intuitively recognising the fact that the value that they wanted to create and advance in the world, the way that they wanted to manage their assets and build organisations was to create entities and to advance investment vehicles that would allow them to capture a greater value set than an either/or orientation would have allowed. And so I began focusing on this idea of value as being fundamentally whole, as being non-divisible, as being a blend, of being integrated, of environmental, social and economic elements, and began to realise that over time I had become completely agnostic in terms of organisational form, that I really don't care if something is for profit, non profit, cooperative or hybrid structure.

And when I think about capital, I don't think in terms of either philanthropy or market rate investing.

I simply think about different forms of capital that generate different types of mixes of return that integrate, again this, this broader understanding of environmental, social and economic performance and impact. And I think that what we're seeing really is that there's a recognition of the idea that this bifurcation, these walls that we have are really self-imposed. They're simply a reflection of our limited capacity to envision something other than what we have inherited from traditional ways of thinking about capital and organisation. And so, what we're really talking about is bringing together what have been, I think, individual pursuits and various practices where people have been on their own trying to advance a different way to think about capital and community and company. And so if we think about it, community development, finance, microfinance, socially responsible investing and program related investing, even if you think about it, traditional, fundamental and value investing that comes out of the traditional capital market space, are all really aspects of the same conversation and the same set of pursuits. And what's happened in the last five to 10 years that's different is that these have really in many ways been - you can think of them as, as block parties, where we've identified within these different silos of activity, and what's happened in these last years has been people have been leaving the block and coming into the avenues, and suddenly connecting the dots in new ways. And the reason I think that the term 'impact investing' has really catalysed a lot of thinking is that all of a sudden people kind of say "I can see myself under that broader banner,"

and where you stand depends on where you sit. So a lot of people have a certain orientation depending on what has brought them to that parade, but at the end of the day people are recognising that this really is simply about how do you maximise the impact of the capital and the resources available to you, and what are the various ways that you can do that?

Now, as we think about impact investing, the field has a definition that, that is presented here and that we can explore. My definition is probably a little more broad than that of the field itself, but the basic idea of impact investing is that we're talking about mobilising

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capital with the specific intention of generating positive social and/or environmental impacts together with financial returns. That's all it is.

And I think that we're really talking about this, again, on that integrated basis, but there are various ways that you can do that. There are different actors who can access various types of capital, there are different institutions and organisations that can receive capital on various terms, but at the end of the day we're simply talking about how do you mobilise capital, often times private capital, for public or common good? Now the, the challenge for the conversation today and the work that we've been involved in and discussing is what then is the role of government in helping to create an enabling environment that can really free up those resources and that I think is the majority of the - our conversation today will focus on that. So I'll kind of set that aside. But the reality is that the simple pursuit of that pretty easy idea has really spun out a whole set of organisations and initiatives around the world, all of which are driving different parts of this shared agenda. Examples of the kinds of funds that have been created in these past years are things like MicroVest which manages $150 million in debt and equity funds and has had consistent financial performance since its inception, Root Capital which has put out $170 million in various small interest loans to small shareholder farmers and has had no defaults since its inception, or things like the Calvert Foundation that has moved - or that - I'm sorry, that manages $500 million and again has had no defaults.

And so there are ways that people are finding to allocate capital to invest in change and to do it on a basis that gives you different levels of financial return. Now in some cases people are pursuing fully risk adjusted rates of return for whatever asset class they're investing in.

In other cases, investors opt to receive a below market return, a concessionary rate to what they might otherwise receive for that asset class, but in all cases we're really talking about investors who are basically wanting to, to use the energy of the market, the power of capital to create community change and to advance corporate development in a different direction. Just as some quick examples, microfinance has brought financial inclusion to over 100 million people and mobilised $50 billion of capital. If we think about the transformative effect of the technology of cell phones, M-Pesa has enabled 300 million mobile money transfers so that, you know, a farmer goes into the village, sells the produce and it goes into an account that his wife back home can then draw upon to pay bills and can do business. In India we have a situation where there are 73,000 private schools that operate in areas where the government schools will not go and these private schools often times are, are undercapitalised and have over demand. And so the Indian School Finance Company lends capital to these institutions so they can grow, they can hire up new teachers and they can expand their services.

And in the United States of course we have a long tradition of community development finance and housing finance. One example is Enterprise which has mobilised $11 billion of investable capital and converted that to 280,000 units of affordable housing that will remain affordable year-in, year-out over time. So as we think about it, we're really talking about kind of two things. Now, I really like this slide because on the one hand it kind of drives down into what impact investing is as an area of practice that you can allocate to. But to my mind - and this is where I kind of differ from the field a little bit - when I work with the families that I'm involved in, in developing and executing impact investing strategies, we're looking across the spectrum and we're saying "Regardless of what the category is, how do we think about the nature of impact in a given asset class, or investment strategy?" And so it really becomes more of a lens that you look at the entire portfolio through, as opposed to a single space that we're trying to allocate capital to.

Now, what we're really dealing with I think, is a coming together of a number of parts of this conversation, but it's really kind of simple if you think about it, and that is that on the one hand we're talking about traditional investing where in mainstream capital markets, increasingly investors and fund managers are exploring how do you understand the effect of off balance sheet risk and liability? And when I say that I mean how do you think about the effect of climate change, decreasing access to water, pandemics, I mean a whole host of things that traditionally investors have not taken into account because it's off balance sheet, it's an externality? How do you think about the effect of those factors on your ability simply to make money, right, and the inverse of that question is how can you move capital to have an effect on environmental, social and other factors in the community?

How can capital be a catalyst for change and impact?

And I think part of what's happened is that these two parts of the conversation have really come together, and people use different language, they have different assumptions, they're looking for different things, but at the end of the day what we're all talking about is how to understand total performance of capital, and that's really the energising element that I think keeps a lot of us at the table. Across from the capital conversation is the, the reality that we're also creating new organisational forms and types that will complement that capital. And so in the old days you would basically think in terms of non profit or for profit. Today there is really a host of ways to think about organisations across the spectrum that are themselves at different stages of development, that require different forms of capital, that need to have different types of regulatory support in order for them to kind of come forward. But the idea is when we're managing a portfolio of investments, we want to pull on as many tools as possible to allocate across a spectrum of assets into a variety of different organisations that fall across that spectrum, from purely philanthropic to purely commercial. And, quite frankly that's the fun of the conversation is that there are more and more entrepreneurs out there who are coming to the table with a commitment to pursuing profit with purpose, and there are more and more investors who are saying "I care about financial performance, but I also need to be consistent with, with why I'm investing to begin with,"

and I think most folks invest capital as a means to an end. There, there are very few people out there who are pure investors, who all they care about is the metric. It's usually wanting to earn money and create wealth in order to do something else, in order to provide for a retirement, in order to put children through school, in order to provide for a long term, you know, wellbeing of the family. I mean it's a host of things like that and when you step back from, you know, the pure financial perspective on investing and get into the issues of why do we invest, why do we as a society care about how capital markets function, it opens up a wide range of ideas.

Now, as we get into this new set of conversations, we realise that we're really needing a new set of skills to pursue that. There will always be a place for traditional social workers. My first degree was a Masters in Social Work.

I consider myself a social worker who's career has kind of gone horribly astray, but you know, I think there is always going to be a place for that.

There will always be a place for good business people who basically really can do the deal and understand what that means, and increasingly there's a demand and a requirement for a whole set of actors who play in the muddy middle, and we're seeing more and more initiatives that are bringing folks from one side or the other together to learn new skills, to understand the, the fresh application of existing skills, and to really move forward, and, and there's really - the, the demand side on this is pretty incredible.

When JP Morgan announced the creation of a social finance unit within the bank - not affiliated with their corporate foundation, but within the bank itself - and they, you know, listed this out in their intranet, within a week they had over 1,000 people volunteering for what were I think maybe 10 slots.

If you go to almost any of the business schools in the States at this point, the demand from students for education and learning around impact investing and social entrepreneurship is pretty incredible. And in fact at HBS, there are all these kind of extra curricular clubs that people join in like marketing and finance and things that I, I don't really understand the appeal of, but people still go into these things in their free time.

The largest, highest demand club at Harvard Business School is the Social Enterprise Club. And the thing I think that also is acting as a catalyst, there are certainly kind of people like myself who are, kind of, at a space where we just see a different way that we want to drive, you know, our career and our opportunity, but people in their 20s are coming to this conversation kind of whole cloth, and for them the idea that you would possibly spend any amount of your life working at one thing that you didn't really like that much, in order to later do something that you really wanted to do, is just anathema to them.

And so, many of these young people are coming to the table saying that they want to be involved in the pursuit of profit with purpose and then in fact, that's just a given and, and the idea that you would do anything other than that makes no sense.

But all of this raises a set of issues for us in terms of how we think about monitoring and regulating investments that are driven for multiple returns. We know how to monitor philanthropy. We know how to monitor, although we do a very poor job of it, commercial market investing, but how do you monitor these types of deals that are being structured for not simply financial performance or social impact, but rather both/and. How do we find the leadership to step up and drive toward that vision? We're talking about needing to, to have people who really can see where we're headed and work at all levels of the conversation to help advance that. How do we understand the new metrics? It's fine to say that there is qualitative value to social impact and to show pictures of smiling children and claim that we have, you know, achieved some level of impact in the world.

It's fine to say that, that everything needs to be boiled down to an econometric, and if you can't measure it, you can't manage it, so therefore you'd better be able to manage everything. But how do you push back the spectrum of performance to be more inclusive of qualitative factors?

How do you represent qualitative performance on a quantitative basis so you can actually build the functioning capital markets where you can exchange social equity?

How do we think about this challenge of unlocking philanthropic capital? How do we move that money which is already in, in the States' context - I'm not sure how it works here, but in the States you receive tax consideration at the time where you create the foundation and yet, that foundation continues to be managed on a financial performance basis, over time, which, which for many of us is, is kind of counter, counter-intuitive to how you would think those funds would be managed. And then finally how do we really move that $140 trillion in mainstream capital market into an investing posture that is more understanding of the broader value set that investors are seeking to, to advance?

This whole conversation is one that's in evolution, and I think that the, that the papers that Rosemary and her team have produced, not only the last one - this is really the latest of three documents that have done, I think a really good job framing the impact opportunity in Australia - but there's this process of evolution where you go from kind of one-off deals to boutique kind of bespoke structures, to funds that you can actually invest in, then to secondary markets and broader capital markets, and you need to have intermediation that allows you to kind of mix and match, and all of this is evolving over time and you need different parts of that to be in place in order for other parts to move forward, so it's a process. It's a process that's played out in different ways in countries around the world.

It's a process that's happening globally and it's a process that's happening here in Australia. So as we think about what it takes to really build that kind of industry, and what's worked in that process, investing, investing in platforms that allow multiple actors to come together and explore common practices and ideas and kind of find each other in a very fragmented space has been very helpful.

Figuring out ways to mobilise allies, often times allies who don't even know they are in the same game, is a challenge. We were talking earlier this week with the folks from the, the pension funds, the super, super - I can't - I'm too jet lagged, so I can't actually get the second part of that phrase out, but, and what was interesting was, we came on this point of realising that in some ways what's inhibiting forward motion in this discussion is that you've got the wrong money talking to the wrong deals.

And so they were saying that they were - they, they felt bad because they would have conversations with social entrepreneurs who really were kind of in a, in a, a venture, an early stage of, of development and looking for a type of capital that they just couldn't provide.

And what they really wanted was to see could you create kind of impact, fixed income instruments, right, because that's really what they wanted to invest in and what they're positioned to do with the kind of capital under their management. And so part of this process is one where - and this is a place where I do think government can play a role - is to convene the right sets of actors so that they can have the right conversation about what the opportunity is and what the type of capital needs to be in order to act on and capture that opportunity set, and all of which is to say that, while I think certainly in the States we've given up looking to government for money for anything, so that's not it. But there's an opportunity to, to use this conversation to access pools of capital that to date have been off the table, and pools of capital that can be leveraged for impact and for community change, and the role of government really I think is one of enabling that process to take place, to create regulatory tax and policy structures that really encourage people to come together in the ways that we're describing.

And so the policy structure becomes critical to advancing this at the, the international level as we roll up regional initiatives that are all part of this global process. So I think ultimately the question is, as we think about this international map of activity, where is Australia's place on that map, and how do the people in this room and who are watching via the internet, collaborate and work together to capture and convert the opportunities that are in front of you into the possibilities for positive investment in the future?

So I'm just going to leave it at that and we can segway into the broader conversation.

Audience applauding

Jed Emerson returns to seat on stage

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