This paper aims to explore the emergence and nature of impact investment in Australia and how it is shaping the development of the social enterprise sector.
Impact investment is an emerging approach to financing social enterprises that aims to achieve blended value by delivering both impact and financial returns. In seeking to deliver blended value, impact investment combines potentially conflicted logics from investment, philanthropy and government spending. This paper utilizes institutional theory as a lens to understand the nature of these competing logics in impact investment. The paper adopts a sequential exploratory mixed methods approach to study the emergence of impact investment in Australia. The mixed methods include 18 qualitative interviews with impact investors in the Australian market and a subsequent online questionnaire on characteristics of impact investment products, activity and performance.
The findings provide empirical evidence of the rapid growth in impact investment in Australia. The analysis reveals the nature of institutional complexity in impact investment and highlights the risk that the impact logic may become overshadowed by the investment logic if the difference in rigor around financial performance measurement and impact performance measurement is maintained. The paper discusses the implications of these findings for the development of the Australian social enterprise sector.
This paper provides empirical evidence on the emergence of impact investment in Australia and contributes to a growing global body of evidence about the nature, size and characteristics of impact investment.
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One of the main constraints to the growth of the social enterprise sector, both in Australia and internationally, is a lack of access to appropriate capital (Burkett, 2010; Nicholls, 2010). A recent report notes that Australian social enterprises face “challenges associated with accessing suitable social finance, particularly at consolidation and expansion stages of development” (Barraket et al., 2016, p. 40). In recent years, impact investment has emerged as a novel approach to financing social enterprises by providing access to debt and equity finance (Addis et al., 2013). Impact investment aims to achieve “blended value” by delivering both impact (social, environmental, economic and cultural) and financial returns (Emerson, 2003). Impact investment differs therefore from other “positive” investment strategies such as “ethical investment”, “socially responsible investment” and “sustainable investment” through its pursuit of blended value and measurable social impact, as opposed to merely mitigating negative externalities (Ormiston et al., 2015). Whilst impact investors focus on investment opportunities beyond social enterprise, the development of this field is seen as strongly aligned with the blended value orientation of social entrepreneurship (Moore et al., 2012).
Impact investment is not regarded as an academic field of inquiry in its own right, yet leading practitioners and academics would argue that it is emerging as a new field of interest (Höchstädter and Scheck, 2015; Nicholls, 2010). Situating the research within this emerging context provides an opportunity to explore a new field of academic endeavor as it expands and is negotiated alongside the more established field of social entrepreneurship. Similar to many emerging fields of study, academic research on impact investment is lagging behind more detailed practitioner studies (Nicholls and Daggers, 2016). The early academic literature on impact investment has tended to focus on describing and defining the emergence of impact investment (Höchstädter and Scheck, 2015; Moore et al., 2012; Nicholls, 2010); understanding investment decision-making (Hazenberg, Seddon, and Denny, 2015; Spiess-Knafl and Aschari-Lincoln, 2015); and exploring the challenges, concerns and opportunities presented by this evolving activity (Brandstetter and Lehner, 2015; Donald et al., 2014; Evans, 2013; Glänzel and Scheuerle, 2015; Ormiston et al., 2015). The academic literature to date has failed to appreciate the tensions associated with pursuing blended value and has not considered how the emergence of impact investment is influencing the field of social entrepreneurship.
In seeking to deliver blended value, impact investment combines potentially conflicted practices, rationales and priorities from mainstream investment, philanthropy and government spending (Nicholls, 2010). Collectively, these conflicted practices, rationales and priorities can be referred to as “institutional logics” (Friedland and Alford, 1991). Institutional logics are the “rules of the game” that shape interests, meanings, power and politics within organizations (Thornton and Ocasio, 1999). The persistence of competing, potentially conflicted, institutional logics over time is defined as institutional complexity (Greenwood et al., 2011). Impact investment could be described as a site of institutional complexity in light of the competing impact logic (focused on social welfare, community development and environmental sustainability) and investment logic (focused on delivering commercial financial returns to investors) (Lehner and Nicholls, 2014; Nicholls, 2010; Ormiston et al., 2015). The lens of institutional complexity informs the research question:
How is the nature of institutional complexity in impact investment shaping the development of social enterprise in Australia?
The paper adopts a sequential exploratory mixed methods approach to study the emergence of impact investment in Australia through qualitative interviews with impact investors and a subsequent online questionnaire. The data assist in characterizing the nature of institutional complexity in the Australian impact investment market by illustrating the number of active investors, the volume of investment, the types of financial returns being sought and the nature of the impact. The data also detail how differing approaches to performance measurement utilized by impact investors reflect the nature of institutional complexity, revealing the relative importance of financial and social returns to investors and how this may be shaping the development of social enterprise in Australia.
The paper begins with a review of the literature, detailing the emergence of impact investment in Australia and developing institutional complexity as an appropriate lens to examine the competing aims of delivering both impact and financial returns. The next section details the sequential exploratory mixed methods approach, before presenting the key findings on impact investment activity in Australia and associated performance data. The paper concludes with a discussion of how impact investment is shaping the development of social enterprise in Australia.
The emergence of impact investment in Australia
Australia presents an attractive setting in which to explore impact investment. The Australian Federal Government has enacted various reforms and initiatives in recent years to seed the growth of impact investment (Ormiston and Seymour, 2013). Multiple Australian Government departments have initiated activities with various impact foci including social, cultural and environmental (Addis et al., 2013; Burkett, 2012). The launch of the Social Enterprise Development and Investment Fund (SEDIF) in 2010 was arguably the most significant development in advancing the growth of the Australian impact investment field (Ormiston and Seymour, 2013). These funds were established to “target sustainable support and finance for social enterprises to grow and develop” (DEEWR, 2013, p. 5). Through SEDIF, the Australian Government provided one-off grants totaling AU$20m, which were matched by private sector investment to seed the establishment of three impact investment funds. Matched investment into these funds was provided by a combination of diverse investors including:
local and international social banks;
charitable trusts and foundations; and
State governments have also begun to explore impact investment across Australia. The NSW Government launched two social benefit bonds (also known as social impact bonds [SIBs]) to facilitate keeping families together. In 2015, the NSW Government launched its own social impact investment strategy that aims to increase activity within the state (Addis et al., 2015). The Victorian, Queensland, South Australian, West Australian and Tasmanian state governments are all at various stages in actively considering how best to mobilize impact investment initiatives (Charlton et al., 2014). In 2015, the South Australian Government announced a homelessness SIB, and the Queensland Government provided AU$2m for feasibility studies into SIBs (Addis et al., 2015).
Alongside catalytic government activity, diverse groups of investors have acted as pioneers in the impact investment ecosystem, including philanthropists, charitable foundations, high net worth individuals and superannuation funds (Addis et al., 2013). Landmark transactions in social enterprises such as Goodstart Early Learning, Hepburn Community Wind Farm and STREAT cafe have provided investors opportunities across varying asset classes, including fixed income, infrastructure and private equity, while generating impact in the areas of education, renewable energy, health and employment generation (Charlton et al., 2014). On the demand side, the potential for impact investment is large: Australia has a mature social enterprise sector with over 20,000 enterprises operating across diverse industry settings (Barraket et al., 2010).
Institutional complexity in impact investing
In seeking to fulfill multiple objectives, organizations are influenced by different values, beliefs and rules that shape institutional action and define what is meaningful (Friedland and Alford, 1991; Thornton and Ocasio, 1999). Multiple streams of institutional theory have grappled with questions about how organizations manage the tensions that arise in institutionally complex conditions where multiple logics and rationalities are present (Greenwood et al., 2011). In addition to the dominant institutional logics perspective, Thornton et al (2012) highlight the parallel explanations in Boltanski and Thévenot’s (1991) logics of action and the competing stream of research following Scott’s (1995) work on the regulative, normative and cultural-cognitive institutional pillars. This paper adopts the institutional logics perspective, as this theme has been the main focus in studies of social entrepreneurship (Nicholls and Huybrechts, 2016; Pache and Santos, 2013).
Numerous studies adopting the institutional logics perspective have established that plural logics can coexist over the long term (Hoffman, 1999; Reay and Hinings, 2009) to varying degrees of harmony and incompatibility (Delbridge and Edwards, 2013). Greenwood et al. (2011) highlight that emerging fields are more likely to experience institutional complexity as various social actors compete to define the dominant logics, whereas more established fields generally experience greater stability in logics. Whilst impact investment would be characterized as an emerging field, the related fields engaged such as social entrepreneurship, finance, philanthropy and government welfare are at varying stages of maturity with more defined logics.
A significant stream of literature has focused on institutional complexity in social entrepreneurship and social enterprise as organizations strive to create blended social and financial returns (Barth et al., 2015; Maibom and Smith, 2016; Mason and Barraket, 2015; Muñoz and Kibler, 2016; Nicholls and Huybrechts, 2016; Pache and Chowdhury, 2012; Pinch and Sunley, 2015). Much of this work has focused on the emergence of hybrid logics that combine two or more distinctive logics (Battilana and Dorado, 2010; Battilana and Lee, 2014; Doherty et al., 2014; Jay, 2013; Pache and Santos, 2013). In the fair trade movement, for example, organizations within the ecosystem have been shown to draw on a conflicted range of logics, juggling the demands of the market with those of social justice and welfare (Nicholls and Huybrechts, 2016). Similarly, in their study of social entrepreneurship in the UK social sector, Tracey et al. (2011) explored the creation of new organizational forms that respond to hybrid logics drawn from institutional complexity. The field of social impact investment could potentially be understood as being guided by a hybrid logic of its own (Lehner and Nicholls, 2014; Nicholls, 2013).
Similarly to the work on institutional complexity in social entrepreneurship, scholars have considered the tensions that emerge within corporate social responsibility activities, as traditional corporations embed programs that benefit community and the environment (Christiansen and Lounsbury, 2013; Doh and Guay, 2006). This research has focused more heavily on shifts in logics to bring in a “stakeholder” or “social” logic, rather than looking at the emergence of an institutionally complex field. Within finance, potential contradictions that emerge between community/development and financial/commercial logics have been observed in local banking (Almandoz, 2012), microfinance (Kent and Dacin, 2013) and socially responsible investment (Arjaliès, 2010). Kent and Dacin’s (2013) insights on the dominance of commercial banking logics in microfinace provide a fruitful lens for examining the traditional investment logics at play in impact investment.
The emerging field of impact investment is an ideal setting in which to explore the nature of institutional complexity given the pursuit of blended value and the associated “impact” and “investment” logics. Early theorizing on impact investment suggests that the field is combining the distinctive logics of government spending and philanthropy focused on public and social benefits (the impact logic), with conventional investment logics focused on financial returns (the investment logic) (Nicholls, 2010). Practitioner research on impact investment at a fund level has revealed an equal focus on social and financial outcomes (Clark et al., 2014), indicating an equal focus on both logics. However, as an emergent field of inquiry, there is scant evidence to demonstrate whether impact investors attend equally to social and financial outcomes and how the nature of institutional complexity is shaping the social enterprises in which they are investing.
To understand the nature of institutional complexity, Zilber (2002) suggests an attention to the interrelationships between logics, social actors and actions. Binder’s (2007) study of transitional housing organizations provides an insight on importance of human agency in understanding how social actors make sense of, interpret and enact institutional logics. Turning to actions, institutional logics can be understood as embodied in material practices and actions of organizational actors (D’Aunno et al., 1991; Suddaby et al., 2013). Institutional complexity can therefore shape the implementation and adoption of new organizational practices as social actors embody field-level logics in their everyday actions (Lounsbury, 2007). Jarzabkowski et al.’s (2013) work on institutional complexity draws on practice theory to examine the embodied repertoires of practice and show the importance of exploring organizational actors and their actions to understand the nature of institutional complexity. Together, these studies highlight the need to study the interplay between logics (e.g. impact and investment), actors (e.g. managers and investors) and actions (e.g. investment activity and performance measurement) to understand the nature of institutional complexity.
Research design and methods
This study utilizes a sequential exploratory mixed methods framework to develop theory in the emerging field of impact investment (Creswell, 2009). Focusing on the emerging field of impact investment in Australia, the study began with qualitative data collection by utilizing semi-structured interviews with impact investment asset managers. Once the qualitative data were collected and analyzed through coding to search for emergent themes, quantitative data were collected through an online questionnaire. In this study, the quantitative research provided support for the qualitative insights by providing hard data about the nature of investment activity, performance and measurement, providing evidence of how institutional complexity is experienced and how, in turn, this is shaping the development of the social enterprise sector in Australia. Table II details the process, procedures and products of sequential exploratory mixed methods in this study.
The research setting was defined as impact investors in the Australian market as of the end of the 2015 financial year (June 30, 2015). The sample included only organizations that managed investment products that met the following criteria:
domiciled in Australia;
actively investing in the Australian market as at June 30, 2015;
wholesale or retail product available to multiple investors;
seeking positive financial returns (i.e. not grant making); and
intentional positive (social, environmental, economic and cultural) impact that is measured.
The sample was identified through an international literature review and consultations with over 100 practitioners and experts. This process resulted in a qualitative sample of 18 Australian impact investors, estimated to be representative of the entire Australian impact investing retail and wholesale market. While senior members of all 18 organizations participated in qualitative interviews, only 11 of these organizations participated in the subsequent online questionnaire, disclosing investment activity information, performance data and attitudinal data to performance measurement. Table III summarizes the list of research participants.
Qualitative data collection and analysis
The researchers conducted 18 in-depth semi-structured interviews that explored impact investment strategies, impact areas of focus and approaches to both financial and impact performance measurement. Interviews were designed to explore the roles of different types of data throughout the impact investing process and provide evidence of the perceived importance and roles of both impact and financial performance to various stakeholders. Interviews were conducted by the two lead authors and took place either in person or over the phone in Sydney and Melbourne, Australia, and lasted approximately 1 h. All interviews were audio recorded and later transcribed to maintain an accurate record of the participants’ language and to assist in the processes of interpretation and analysis.
The data were analyzed through pattern inducing (Reay and Jones, 2016) qualitative thematic analysis (Braun and Clarke, 2006). The researchers engaged in a careful reading and re-reading of interview transcripts to code chunks of text into categories that were then grouped into six themes that emerged: asymmetries, data uses, institutional complexity, measurement practices, outcome areas and stakeholders. The data management software NVivo was used to ensure a robust approach to the thematic analysis and to review consistency and discrepancies in coding between the two researchers. Table IV provides a sample coding table that describes each of the six themes and illustrates sample categories and codes.
Quantitative data collection and analysis
The questionnaire was initially drafted prior to qualitative sampling through the literature review and extensive stakeholder consultation phase. However, this instrument was substantially revised following qualitative data collection and analysis and then piloted with industry experts before being circulated as the final online version. The questionnaire collected data on the characteristics of the impact investment products, asset types, investment activity, financial performance, impact performance and attitudes toward performance measurement. Respondents were asked to provide data on expectations, targets and actual performance for both financial and impact performance via an online questionnaire, administered via Qualtrics, a secure online website, which was live for six weeks from April to May 2016.
Of the 18 organizations that participated in the qualitative phase of this study, 11 respondents managing 15 impact investment products provided quantitative data in response to an online questionnaire (Table III). Of these 11 organizations, nine respondents provided financial data for 14 products (71 assets); and a different sub-set of nine respondents provided impact data for 12 products (58 assets). Of the remaining seven organizations that did not complete the questionnaire, three were actively fundraising (and hence had no activity and performance data to report), three were judged to be outside of the domain of impact investment following qualitative analysis and one chose not to disclose investment activity and performance data because of inadequate resourcing to complete the questionnaire, as well as reservations in disclosing potentially sensitive performance data. This constitutes a representative sample (n = 11), where 73 per cent of organizations managing wholesale and retail impact investment products and active in the Australian market at June 30, 2015, participated in both interviews and the online questionnaire.
The researchers performed a series of steps with the quantitative data to organize and analyze data collected from the questionnaire. First, investment activity data were aggregated to give a picture of the size and scale of impact investment in Australia. Next, the raw performance data were organized to calculate financial performance ranges for each asset class and financial performance relative to expectations and analyzed for aggregate average returns. The raw performance data were also analyzed by impact performance, organized into four analytical frameworks:
by number and type of beneficiaries affected by the investment;
by outcome area or investment theme;
by actual performance relative to target performance; and
screened for any thematic consistency in the way in which impact measurement was being approached.
Finally, the attitudinal data were aggregated, summed, averaged and organized to demonstrate statistical trends in performance measurement.
Interpretation of qualitative and quantitative results
The researchers conducted a third stage of analysis, interpreting both qualitative and quantitative results together. This included iterating between qualitative themes and quantitative data to examine the relationship between both types of data. For example, when the researchers identified a salient qualitative finding that suggested that financial data might be prioritized over impact data, they explored the quantitative data to examine whether there was contradictory or confirming evidence of this. Both qualitative and quantitative data together informed the researchers’ interpretations of overall data trends and themes. Whilst the data were collected in a sequential mixed methods approach, the presentation of findings is not sequential, rather it presents a series of iterations and combinations between qualitative and quantitative insights.
The findings present an overview of impact investment activity in Australia to give an indication of the size of the market and describe the core characteristics that influence the nature of institutional complexity. Overall, the findings shed light on how the dominance of the investment logics may be shaping the development of social enterprise in Australia.
Impact investment activity in Australia
The Australian impact investment market has grown rapidly, beginning with an aggregate product value of $30m (across two transactions) in 2010 and growing at an annual growth rate of over 100 per cent between 2010 and June 30, 2015 (herein referred to as FY15). The FY15 market represents approximately $1.2bn of capital committed across 11 organizations managing 15 impact investment products (i.e. funds and unit trusts). During data collection, new impact investment products began to enter the market subsequent to the FY15 market valuation date, and qualitative interviews suggest that projections for commitments to this market at the end of the 2016 Australian financial year were at least $2bn. Looking at investment activity in terms of asset classes, outcomes areas, investment stage and risk-return profiles sheds light on how impact and investment logics are playing out within the field. Further, understanding the focus of investment activity, investment size and outcome areas helps assess whether impact investment is meeting the needs of social enterprises.
Investment activity by asset class
The data provide insight into the diversity of impact investment products in the market, with the largest concentration of products in private equity and debt (n = 7). The largest asset class by aggregate product value was by far fixed income at $914m, dominated by green bonds, which focus on investing in environmental outcomes such as greenhouse gas emissions reductions (i.e. by upgrading and retrofitting existing buildings with environmental improvements). Green bonds constitute 98.5 per cent of the fixed income asset class in the sample and 75.8 per cent of the overall sample at $900m. This is largely explained as green bonds invest in larger-scale projects and have the ability to attract large sums of money from institutional investors. Qualitative evidence suggests that the dominance of green bonds is likely to continue as increasing demand from institutional investors is providing an upward growth trajectory for this asset class. The interest from institutional investors for large-scale impact investment products (bonds, funds, etc.) is one of the drivers for the growth of this market:
There’s been an over interest [from institutional investors in green bonds], when we issued our bonds, we were looking for about 500 million, we had about 800 million […] and about 25 per cent of those were new investors. [P3]
Table V illustrates market value broken down by asset class, aggregate product value and number of products.
Despite the dominance of green bonds by market value, investments (deals or transactions) taking place in the current Australian impact investment market are largely characterized by relatively small private debt transactions, with the largest volume of transactions occurring through Australia’s SEDIF managers. The activities of the three SEDIF managers represented 92 per cent of all investment transactions in FY15. These transactions, in aggregate totaling $16.9m to FY15, represent less than 2 per cent of total aggregate product value and have all been sub-million-dollar deals, with an average loan of $200,000 being made to community organizations and social enterprises. These findings regarding asset classes highlight the potential conflicts between the needs of institutional investors and the needs of social enterprises.
Investment activity by social outcome area
Nine social outcome areas were identified as a framework prior to data collection, and the sample verified that investments fit broadly into these investment themes. Australian impact investors are investing in assets that intend to create benefit in:
early childhood and learning;
mental health and well-being;
physical health and disability;
families, communities and inclusion;
housing and local amenity;
employment training and participation;
arts, culture and sport;
income and financial inclusion; and
conservation, environment and agriculture.
The private equity and debt funds have invested in all nine social outcome areas, having done more deals in outcome areas of financial inclusion, employment and housing. The fixed income products to date have invested in outcome areas of education, physical health and environment, with the majority of market share by market size in outcome area of environment, because of the size of the green bonds. The real asset funds have invested in outcome areas of art and culture, financial inclusion and environment. The SIBs to date have invested only in outcome area of families. Table VI presents the number of investments (deals) and market dollar of value of investments organized by outcome area. The data in this sample indicated that 92 investments were made between June 30, 2010 (FY10), and FY15, and at least 36 of these investments were made in FY15. The total market value of $1.04bn is less than the value of committed capital ($1.2bn) as not all capital has been deployed in investments and private debt is being repaid.
By market size, the large majority of the market to date has invested in outcome area of environmental outcomes (88 per cent by market value of transactions to date; Table VI), attributable to the sizable green bonds and a wind farm in the sample. However, from a transactions volume perspective, or analyzing the number of investments made, there tended to be more deals done in the outcome area of income and financial inclusion (19 per cent). There were also a large number of deals done in outcome areas of environment (14 per cent) and employment (12 per cent). Qualitative data provide a potential explanation for these top six outcome areas, suggesting that investors are focused more on disadvantaged populations (such as indigenous, impoverished and disabled populations) than outcome areas (such as arts, environment or housing) when designing investment themes and strategies:
Everyone here has a strong interest in Indigenous outcomes. [P1]
[…] our team does the engagement with communities that we’re working with […] [We are] helping to drive those employment outcomes and make sure that local employment is the best option for the business. [P5]
Targeted stage of investment
The data reveal that managers target different stages of investment, with some funds targeting more than one stage. It was notable that there was no investment support at the start-up or seed stage and the large majority of respondents are targeting mature-stage investments, paralleling trends in mainstream finance and investment. Five products invest in early-stage investments to test ideas or products; five products invest in growth-stage investments with operating assets and less predictable earnings than mature assets. The most popular investments are mature-stage investments where assets are operating and earnings are more predictable, with ten products focusing on this stage. The qualitative insights further highlighted the preference of impact investors for mature stage investments:
If it’s a genuinely good impact investment idea, mature organization with strong balance sheets, we’ll invest in it. [P9]
Similar to findings regarding asset classes, the insights on targeted stage on investment suggests that impact investment in Australia is potentially not meeting the needs of the social enterprise sector by excluding early-stage social enterprises.
Risk and return
In general, participants did not feel there should be a “trade-off” between market rate returns and social impact; however, they did perceive greater risk involved in impact investment than traditional (non-impact) investment. When speaking about the risk-return trade-off, one participant noted that the institutions and high-net-worth individuals who invest in the impact investment products have a range of risk-return appetites, driving different strategies:
I think there’s a range of investors here, so if you look at some of the social bonds that have come out, some of them are philanthropic investors […] or they are happy to put their capital at risk if they get a higher [social] return […] In the past often people have said, “Well this is more risky, less return.” The fact of it having the same return is actually a good thing. The majority of investors will be in that space. [P3]
The majority of respondents (10/12) felt that there was not a trade-off between financial returns and social impact, and nearly all respondents (11/12) were targeting market rates of return over the long-term. Although nearly half of respondents (5/12) reported perceived above market risk for impact investments generally, when asked about specific types of risk in their portfolio, participants reported that their impact investment portfolio was commensurate with market rate risk. These conflicting views suggest that respondents may still be calibrating risk perceptions and may warrant further exploration in future research. The qualitative data help explain the conflicts in the survey responses, suggesting that perhaps, some participants were more comfortable talking about potential risks and trade-offs in a conversational setting rather than in the more formal quantitative survey:
95 per cent of the time, absolutely there’s a trade-off […] There’s a trade-off for [our fund] when we’re making those investment decisions. […] For our clients, if they’re going to take on the debt, they may have to cut back on some of their more impactful activities in order to be financially sustainable. So there is absolutely a trade-off, absolutely. [P1]
Institutional complexity and performance data
When interpreting both qualitative and quantitative results, it became evident that respondents were clear and consistent on their expectations, protocols and actual performance figures from a financial measurement perspective (the investment logic). However, they were much less clear and less consistent on the same for impact measurement (the impact logic). This signaled to the researchers that perhaps in an institutionally complex environment, such as impact investing, there is a risk that one logic (impact) is overshadowed by another logic (investment) given the differential in rigor and clarity of one set of practices (financial performance measurement) over another (impact measurement).
Financial performance measurement
Participants felt that financial performance figures could be easily aggregated, compared and analyzed in one framework. Both the quantitative and qualitative data revealed that participants were interested in knowing and reporting financial performance metrics such as number of assets held; number of investments exited or repaid; initial amount of investment; current financial market value of investment; financial return expectations (expressed as percentages per annum [%pa]); and actual financial returns (%pa) (Table VII). “In terms of the finances, exactly what you’d expect of any debt provider. So, cash flows, balance sheet, assets, security. We do a very standard analysis.” [P1]
In describing their financial performance measurement practices, participants illustrated that they were adopting practices from mainstream investment. This highlights the, perhaps unsurprisingly, strong presence of investment logics in the practices of impact investment.
In terms of financial, I feel like that’s a much more straight-forward conversation. [P2]
In terms of specific numbers on the financial- first and foremost, we’re looking for commercial returns. [We are] essentially commercial, and I would say that before our general manager came on board a few years ago, we were probably too commercial. [P5]
Participants expressed the importance of upholding the investment logic to either ensure that social enterprises are financial sustainable and can achieve impact or to ensure the sustainability of impact investing as a mainstream practice.
We’re looking at it with kind of a financial hat on […] these businesses need to succeed, the facts and the figures need to add up, and that it is going to be a sustainable business. The social impact is very important, but the business can’t do that unless it’s financially sustainable. [P17]
If you want to make impact investing mainstream you have to do the same rigorous financial data analysis as you do with any other investment. [P16]
One potential explanation for the strong presence of the investment logic in impact investment is the presence of managers and employees who have had lengthy careers with the mainstream finance and investment sector. These actors seem comfortable applying the same practices of mainstream investment in the emerging field of impact investment.
I actually have a background in banking. I came out of retail banking. I’ve been in retail banking for about 30 odd years. [P17]
My background is in financial services […] investment banking, corporate finance projects finance and then prior to this job I worked as an analyst for a financial wealth management type firm. [P13]
This expertise in mainstream investment dominates most asset management teams. Despite participants discussing diversity within the private sector, the commercial background dominates.
[We are] mostly investment background. Particularly, in the property teams, there are property experts, and in the tourism team there are tourism experts [….] definitely more in the investment space. [P5]
[We are from] very largely real estate and finance [backgrounds] […]. [P10]
So, we’ve got [our] executive director and we’ve then got [the director] who’s another banker […] beneath them we have [a manager], she’s new, she’s fresh out of the commercial world, […] and then we’ve got [another manager], who’s again, an ex-banker […]. [P12]
In contrast to the financial performance approaches and data, which were reported by respondents with consistency and according to mainstream finance conventions, impact performance was reported in many different ways. This indicates that there is less sophistication in impact measurement, e.g. “If it’s big, gray, big ears, big trunk, it’s an elephant, and I’m a bit like that about social impact.” [P1]
Interestingly, the larger deals (by market value) reported relatively simple impact metrics that tended to focus on outputs, such as greenhouse gas emission avoidance (e.g. tons of CO2 abated or number of properties acquired), typically with an indirect social and/or environmental benefit. Perhaps this is because many of these large investments were in outcome area of environment, where environmental metrics may be easier to count. In contrast, the private loan assets appeared to have more highly customized social and environmental metrics across social outcome areas, with slightly more activity supporting the outcome areas of employment and training, physical health, arts and culture and housing. Interview data reveal that these transactions involve borrowers who often require a significant amount of pre-investment support prior to becoming a commercially viable proposition.
We spend a lot more time structuring the deals […] Getting them to understand the risks they’re exposing themselves to by taking on debt, what it means for their existing equity investment that they’ve made […] Where a bank would just say, you don’t fit nicely into this box, so go away, we’ll spend time trying to create a box that they do fit in and I think that is our opportunity. [P1]
Both qualitative and quantitative data illustrated the absence of a clear framework for measuring impact data. All respondents used more than one approach to impact measurement:
There are about 42 [impact metrics] that we use, but we are looking at changing those with doing impact reporting for [another fund] because obviously their industries, they’re going to be very specific, whereas the others come from very broad background. [P17]
The majority of respondents reported using systems tailored to each underlying investment, creating bespoke metrics and measurement approaches to suit each individual enterprise. Only a small proportion of respondents had utilized standardized impact measurement frameworks. Four respondents used social return on investment approaches, one used impact reporting and investment standards metrics and one used the B Lab’s B analytics framework.
In light of the diversity of impact measurement approaches, the questionnaire was structured to include both open-ended and closed-ended questions about impact performance. The closed-ended questions were easier to aggregate, though drew a lower response rate, as only a few participants had collected the relevant data to report. For example, the questionnaire included a set of questions asking respondents to categorize and provide figures for the numbers of beneficiaries their investments had impacted, including groups such as vulnerable young people, homeless people, people living with physical disability and indigenous people. While ten participants reported these figures, resulting in a total population of 61,082 beneficiaries (Table VIII), it was noted by participants that there were many challenges with collecting, aggregating and interpreting beneficiary figures. One participant noted that beneficiaries cross-cut multiple groups, and so “answers were often not mutually exclusive and collectively exhaustive.” [P12] Although participants were required to avoid double counting and choose the most appropriate beneficiary groups to report, they also noted that it was like comparing “apples and pears” [P1], as the breadth or depth of the impact on these beneficiaries was not apparent nor comparable.
When you look at where we try to collate our impact, we have these daft numbers. Our loans have touched the lives of, I don’t know what it is, 35,000 people. So what? They may have just heard of us. Has that touched their lives? You’d need to do a much deeper analysis to really understand impact and I think that’s one of the big problems with the impact investing space. [P1]
The questionnaire also asked open-ended questions to allow respondents to use their own words to describe the impact they were tracking and had achieved through their investments in both quantity and quality. The disparity in the resulting performance data highlights the challenges of finding a cohesive reporting framework to aggregate, or even organize, impact data. Examples of reported impact metrics included 2,842 students supported; 319 jobs created and 224 jobs sustained; 62 per cent children in foster care program restored to families; 173,000 customers served; $389,000 increase in fair trade turnover; 8 per cent reduction in negative indicators for safety and risk for vulnerable children; 4,493 tons of e-waste diverted from landfill; and 3.9 tons of CO2 emission avoided.
The lack of clarity, sophistication and rigor in impact performance and associated measurement approaches that was observed in both qualitative and quantitative data raised questions about the legitimacy of the impact performance data. On the one hand, participants stated how unequivocally essential impact measurement is to impact investment, for example:
Our investors have invested in part because of the impact that we’re having both to communities and to the environment […] I mean, it’s called impact investing […] in order to get the scale, you’re really have to have rigorous measures impact alongside the rigorous financial measures. [P16]
On the other hand, participants acknowledge that the lack of rigor, sophistication and clarity affects the utility of the impact data and ultimately raises questions about the legitimacy of impact investing being able to uphold both the impact and investment logics.
But if the measurement is not very meaningful can I hand on heart say that every single one of these deals are impact investments when the only measurement we’re doing is how many people? [P1]
Some organizations (5/14 of those that disclosed performance data) did not disclose social impact data. In reviewing these participants’ annual reports and reported data, it appears that some organizations remain at the stage of reporting their activities and inputs rather than focusing on outputs, outcomes or impact. This seems, in part, to reflect different philosophical interpretations of boundaries and where impact can be attributable, that is, whether investors can claim or have the right to impose measurement of social outcomes on their clients who are creating the direct social benefits. Respondents who held the view that impact investment has a strong link to development finance indicated that the provision of capital and the screening of clients for social/environmental purpose and mission constituted measurable impact. Qualitative data reinforced the idea that certain individuals, more commonly associated with private wealth advisors and high-net-worth individuals, also felt that this was likely the most cost-efficient means of generating impact through social or ethical investment screens prior to investment where it could be “known” or “felt” that social benefits would result and the quantum of outputs, as well as the quality of outcomes actually produced, was less important to track and understand.
When comparing the perceived data needs of stakeholders (social and financial data being roughly equally important), to the actual performance data disclosed, there appears to be a differential in the type of data either being collected or shared. Although managers provided financial data on 16 funds/unit trusts, they only provided detailed social performance data for 10 of these funds/unit trusts. This provides further evidence that financial performance and the related investment logic appear to be more institutionalized than impact logic, as evidenced by less impact data and less rigorous and less consistent approaches to measurement.
This study set out to understand how the nature of institutional complexity in impact investing is shaping the social enterprise sector in Australia. By providing the first scholarly study characterizing Australia’s impact investment market, the researchers provide empirical evidence of the nature, size and characteristics of a novel form of finance that holds the potential to meet the capital requirements of the growing social enterprise sector. While impact investors do not uniquely target social enterprises for investment, the blended value orientations of both impact investors and social enterprises create the potential for mutual benefit and growth. The findings revealed a dominance of investment logics in both investment activity and performance measurement that are potentially contributing to a disconnect between the direction of Australian impact investment and the needs of the Australian social enterprise sector.
A dominance of investment logics
Mainstream investment logics are heavily influencing everyday actions within impact investment. There was clear evidence that impact investors in Australia are prioritizing the investment logic, upholding logics from mainstream investment both pre- and post-investment. These logics are potentially at odds with the focus on achieving blended value, as investment activity appears somewhat biased toward achieving financial returns. This echoes findings from D’Aunno et al. (1991), who suggest that conflicting prescriptions from competing logics can lead to the adoption of conflicted practices. Investment logics seem to be shaping decision-marking practices, with investment logics being transposed in the emerging field of impact investment. Drawing on Barth et al. (2015), the dominance of investment logics in impact investment may be countered by institutional social entrepreneurship adopting more hybrid logics that focus on blended value.
While there was acknowledgement that rigorous impact measurement was critical to the legitimacy and growth of impact investment as a field, the data revealed that impact measurement is far from the institutionalized rigors of financial analysis, measurement and reporting. Analysis of the amount, quality, consistency and meaningfulness of the performance data revealed, with little surprise, that financial data trump the impact data in each of these categories. Somewhat paradoxically, “social enterprises seeking impact investment or other forms of social finance […] appear to place greater importance on measuring or predicting their impacts” (Barraket et al., 2016, p. 31). Barraket et al. (2016) note that a majority of Australia’s social enterprises in their study (65 per cent) measure their impacts, while struggling with adequate resourcing and tools to be able to measure and communicate impact to meet the expectations of various stakeholders, including potential and current investors. Given the challenges with impact measurement for both investors, as demonstrated in this study, and investee social enterprise, it seems that both parties could benefit by a more coordinated approach of working together to progress their respective understanding of what is meaningful and useful in measuring impact.
Whilst some approaches to performance measurement may have changed to introduce an evaluation of impact, many practitioners appear to be making decisions in their traditional way, based on the familiar metrics from their backgrounds in finance, banking and venture capital. This approach to decision-making is potentially at odds with the experience of many social enterprises, which are often less embedded within the market-based investment logic (Maibom and Smith, 2016). A critical view could argue that impact measurement in impact investment mirrors the attempts of the corporate sustainability movement, whereby the introduction of sustainability reporting practices has been viewed as acts of obfuscation that simply promote business-as-usual (Milne and Gray, 2012; Norman and MacDonald, 2004). Extending these ideas to impact investment would suggest that impact measurement is merely part of the rhetoric that allows some investors to talk about themselves by using new and different terms, without truly challenging their underlying values, assumptions and investment decision-making practices.
It is important from the perspective of practitioners to ensure that impact investment does not succumb to the same fate as the microfinance industry. Kent and Dacin (2013) examined competing logics within microfinance, highlighting how banking logics eventually crowded out development logics, as the field grew and impact measurement activities failed to evidence the impact of the practice on development. The microfinance story should serve as an important caveat for the field of impact investment, as microfinance’s promise of poverty alleviation through access to capital (creating social impact by investing in individual entrepreneurs) is easily analogous to the promise of social impact through investing in social enterprises. Failure to evidence the social impact of impact investment, regardless of the growth in the numbers of deals or financial returns, will simply reveal that social enterprises and other social sector organizations are investible propositions. In the same way that microfinance illustrated that a profitable business model could be established by lending to the poor, impact investment could be potentially viewed as a profitable business model for extracting financial returns from the social enterprise sector.
Institutional theorists suggest that institutional logics serve as a helpful framework to first characterize hybrid organizations by providing a framework from which to understand the nature of organizations such as impact investors and social enterprise that straddle both financial and social objectives (Pinch and Sunley, 2015). Our research contributes to this work, illustrating how both impact investors and, by extension, social enterprises, in Australia are being shaped by both an investment logic and an impact logic. Our study also suggests that the existence of a distinct “hybrid logic” (Lehner and Nicholls, 2014; Nicholls, 2013; Tracey et al., 2011) has not yet manifested in the Australian impact investment context, where instead there prevails a dominance of the investment logic, where we find that impact investors appear to be decoupling logics (Meyer and Rowan, 1977). In this research context, Peter Drucker’s adage “what gets measured gets managed” leads us to conclude that impact investors in Australia are prioritizing financial performance outcomes above social outcomes.
A disconnect between impact investment and social enterprise
The majority of impact investors in the sample were seeking larger-scale investments and more mature investments than is characteristic of the majority of social enterprises in Australia. The market value of the sample at nearly $1.2bn comprised predominantly of green bonds, which constituted 75.8 per cent ($900m) of the sample, and are not aimed at social enterprise development. In fact, the majority of the remaining $288m is also not aimed at social enterprise development but has the ability to invest in social enterprise. The findings revealed that less than 2 per cent of the sample by amount invested ($16.9m) had made investments through private loans or equity to social enterprise. These investments were made exclusively by the SEDIF managers, who manage funds established with a mandate to target social enterprise. This suggests that the current state of impact investing is likely only capable of meeting a fraction of the financing requirements of Australia’s social enterprises. However, the large majority (92 per cent) of investments by number in FY15 were attributable to SEDIF managers investing in social enterprises, illustrating that they are some of the most active in the market, despite the smaller deal sizes.
The data also reveal that there may be incompatibility between impact investors and social enterprises with regard to financing instruments, investment time horizons and stage of investment. The sample reported a median tenor of five years with no managers targeting seed or early-stage investments and a majority of transactions by number described as private debt to social enterprises. A recent report evaluating the SEDIF funds recommends “future initiatives in impact investment explore impact investment products and approaches beyond debt finance to social enterprises” (Barraket et al., 2016, p. 3), including grant finance, early-stage capital and patient capital. The data in this study suggest that impact investors appear to be targeting companies at a later stage of investment and offering exclusively debt finance to social enterprise. This may be explained by the large majority of social enterprises legally incorporated as companies limited by guarantee (Barraket et al., 2016) and other non-profit structures that typically do not allow for equity finance, as well as the nascent state of the impact investment community that has yet to innovate with more complex financing structures. By nature, impact investment is not suited to grant finance, as by definition, it is seeking deliberate financial returns. It is possible for impact investors to play a more active role in providing early-stage and patient capital; however, they are likely to desire higher returns given the risk involved. Overall, the disconnect shows how the dominance of investment logics and expectations from mainstream investment are potentially drawing impact investment away from social enterprise development.
Contributions and conclusions
This study makes three primary contributions. First, this is the first known scholarly study to characterize the Australian impact investment landscape through documentation of key market participants and their related investment activity. This provides empirical evidence of an emergent field of interest and contributes to a growing global body of evidence about the nature, size and characteristics of impact investment, and practical insights for social entrepreneurs and the investment community who will surely be interested in the nature and size of the impact investment community in Australia.
Second, this study makes a theoretical and empirical contribution, detailing how Australian impact investors experience institutional complexity in their pursuit of blended value. As institutional theorists grapple with understanding how managers respond to conditions of complexity and whether institutions are able to sustain “arenas of contradiction” (Pache and Santos, 2013), this study details the nature and mix of institutional logics present in impact investing. We find that rather than reconciling divergent logics or forging a distinct hybrid logic, impact investors are decoupling and prioritizing the investment logic. This in turn provides a framework from which to analyze the potential fit or appropriateness of this group of tailored providers of capital with a large pool of potential recipients of capital, namely, social enterprises. Additionally, our findings imply that while institution theory may serve to characterize the nature of complexity in a hybrid context, such as impact investing, it may not be sufficient to help explain how multiple logics are sustained. Over time, it may become more evident whether the decoupling observed in this current environment leads to more commercial forms of investment and more commercially oriented enterprises thriving or whether an additional approach to managing divergent outcomes arises.
Finally, this paper concludes that providers of capital are significant stakeholders in the development of the social enterprise ecosystem. Findings suggest that the dominance of the investment logic may influence the types of social enterprises that are successful in achieving scale and ultimately shape the types of enterprises that emerge and endure in the Australian marketplace. As more impact investors enter the market, it is important to ask whether impact investment can meet the resourcing demands expressed by Australia’s social enterprise sector. Future research should consider the ways in which the motivations, interests, desired outcomes and characteristics of investors can be reoriented to match the motivations, outcomes and characteristics of this pool of investable enterprises.
This study is limited by focus on the Australian context and only one group of stakeholders within impact investment. Future research could engage additional stakeholders such as social entrepreneurs, government, underlying investors and beneficiaries to understand how institutional complexity is influencing the broader ecosystem of activity in impact investment. Further, future research could explore contexts where the social enterprise sector is less developed; this could shed light on whether impact investment is able to speed the development of social entrepreneurship.
Evolution of impact investment in Australia
|Policy initiatives||Year||Practitioner activity|
|2002||Social Ventures Australia founded|
|2008||Social Traders founded
Hepburn Community Wind Farm (deal)
|Jobs Fund and Innovation Fund with social enterprise target (Federal)||2009||Goodstart Early Learning (deal)|
|Community Development Finance Institutions (CDFIs) $6m pilot (Federal)
Social Enterprise Development and Investment Funds (SEDIF) $20m seed funding (Federal)
Social Benefit Bond pilot (NSW)
Social Enterprise Fund (Tas)
|2010||Chris O’Brien’s Lifehouse at RPA (deal)|
Social Enterprise Finance Australia (SEFA) founded
Foresters Community Finance Fund established
|Social Enterprise Grants Program (WA)||2012||Bank of Australia (previously named Bankmecu) formed as a cooperative bank|
|Newpin and Benevolent Society SBBs (NSW)
IMPACT-Australia report on field (Federal)
Australia joins G8 Social Impact Investment Taskforce (SIIT) (Federal)
|Australian Advisory Board on Impact Investing report to SIIT (Federal)
Financial System Inquiry recommendation to grow social impact investment (Federal)
|2014||Impact Investing Australia (IIA) founded|
|Social Impact Investment Strategy launched (NSW)
SIBs announced (SA, QLD)
Source: Timeline adapted from a study by Addis et al. (2015)
Sequential exploratory mixed methods process
|Mixed methods stage||Procedures||Products|
|QUAL data Collection||Purposeful sampling
|Intense sample (n = 18 asset managers)
|QUAL data analysis||Transcription, memos and coding
Constant comparative analysis
|QUAL findings||Interpretation of salient themes||Key qual findings
|Questionnaire development||Questionnaire development informed by qualitative findings
Pilot test questionnaire
|Questionnaire (n = 85-95 questions, depending on asset class of investment product|
|QUANT data collection||Select sample
|Representative sample (n = 11 asset managers; 15 funds)
Investment activity and performance data
|QUANT data analysis||Collate and analyze reported investment activity and performance data
Analyze attitude data
|Data summary tables
Quotes describing themes
|QUANT findings||Synthesize results into report||Investment and performance data
Tables and figures, summarizing data
|Interpretation of QUAL-QUANT results||Discuss and interpret results and implications
Validate and illustrate with supporting evidence
Source: Table adapted from a paper by Plano-Clark and Creswell (2008)
Details of research participants
|Participant role||Code||Qual data||Quant data|
Sample coding table
|Theme||Description||Sample categories and codes|
|Asymmetries||Evidence of tensions, trade-offs, dissonance, etc. that arise in the face of complexity||Conflict
|Data uses||Evidence of how performance data is used and the practices associated with collecting, analyzing, reporting data||Decision-making (investees)
|Institutional complexity||Evidence of institutional logics and the dynamics of the interplay of these logics||Impact logic
|Measurement practices||Evidence of what is being measured to demonstrate both impact returns and financial returns; why, by whom, how, etc.||Challenges
|Outcome areas||Evidence of investment themes or outcome areas to which investment is directed||Education
|Stakeholders||Evidence of key stakeholders, their interests in impact investing, performance data, etc.||Asset managers
Australian impact investment committed Capital at June 30, 2015
|Asset class||Definition||No. of products||Committed capital (million AUD dollars)|
|Fixed income||Loans to companies or not-for-profits with set repayment rates (coupons) and repayment schedules Examples: social investment notes or green bonds||3||914.0|
|Private equity and debta||Direct investments to buy ownership stakes (equity) or provide loans (debt) to private enterprises Examples: loans to or equity investments in social enterprises||7||160.9|
|Property and infrastructure||Equity investments into property or infrastructure where tenants or operators make scheduled payments based on rent or operating income Investors may also experience capital growth if the value of the asset (i.e. building) grows over time Examples: wind farms, schools||2||92.5|
|Other real assets||Equity investment into physical assets that are not classified as property or infrastructure. Examples: water rights or musical instruments||1||3.4|
|SIBs||Also known as social benefit bonds or ‘payment by outcome’; these investments are contracts whereby the government (or other party) makes payments to private investors for the social outcome successes of underlying investee social service delivery organizations, resulting in possible investment returns and public sector savings. Examples: restoring children in state custody to families through a ‘payment by outcome’ model||2||17.0|
Private equity and debt are grouped together as participant funds had mandates to invest in both debt (i.e. private loans) and equity
Investments by outcome area
|Social outcome area||Private debt $m [deals]||Private equity $m [deals]||Fixed income $m [deals]||Real assets $m [deals]||SIBs $m [deals]||Total $m [deals]||Total no. of deals|
|1. Early childhood and learning||1.1 ||–||0.0 (exited) ||–||–||1.1||7|
|2. Mental health||0.3 ||–||–||–||–||0.3||3|
|3. Physical health||2.5 ||–||14.0 ||–||–||16.5||10|
|4. Families, community||1.2 ||–||–||–||17.0 ||18.2||10|
|5. Housing, local amenity||2.7 ||–||–||–||–||2.7||10|
|6. Employment||1.5 ||–||–||–||–||1.5||11|
|7. Arts, culture, sport||0.09 ||–||–||4.6 ||–||5.5||10|
|8. Income, financial inclusion||1.2 ||–||–||82.5 ||–||83.7||18|
|9. Environment, agriculture||0.3 ||0.7  unk ||900.0 ||10.0 ||–||911.0 unk||13|
|TOTAL||11.7 ||0.7+ ||914.0 ||97.0 ||17.0 ||1,040.5+||92|
Financial performance data
|Private debt||Private equitya||Fixed income||Real assets||SIBs|
|Amount invested ($m)||9.5||–||936.6||99.1||17.0|
|Market value FY15 ($m)||8.0||–||914.0||97.0||17.0|
|Return expectations (%pa)||5.4-17||–||3.25-12||–||0-30|
|Actual return ranges FY15 (%pa)||5.4-17||–||3.25-12||0-12.6||0-8.9|
|Since inception return (%pa)||7.9||–||8.6||5.3||0-8.9|
undisclosed to protect anonymity
Mapping impact data by outcome areas and beneficiary groups
|Outcome area||People with learning disabilities||People with physical disabilities||Those living in poverty||Long-term unemployed||People living with addiction||Long-term health issues||Mental health issues||Vulnerable older people||Vulnerable young people||Refugees and asylum seekers||Indigenous people||Ecosystem and biodiversity||Social trade or business||Homelessness||Other||TOTAL|
|2. Mental health||232||100||100||100||532|
|3. Physical health||1,072||16||1,088|
|6. Arts, culture||11||10||3||142||5||12||20,012||96||41||20,332|
SIBs (also known as social benefit bonds and payment by outcome products) are risk-sharing impact investment instruments that allow private investors to provide up-front investment capital to social benefit programs that generate government payments (returns on investment) according to the social outcomes achieved.
This may be explained by the fact that grants were not included in this data set or it may reflect the relative immaturity of the market.
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