Published: 28/02/2013
It estimated that around three million Australians are either fully or severely excluded from mainstream financial services, such as the ability to obtain a loan. Whilst this statistic alone is material, financial exclusion extends beyond individuals. Non-profit organisations, social enterprises and small to medium sized enterprises also experience higher rates of financial exclusion. This exclusion leads to fewer opportunities for growth and development, and therefore fewer avenues out of marginality, dependence and poverty. It is increasingly recognised that to address poverty and marginalisation any financial response needs to not only focus on welfare and donations, but also on wealth creation and asset development.
The primary explanation for this exclusion is that commercial financial operations (eg banks) cannot justify the higher costs and risks associated with these underserved segments of society. This stems from their focus on financial returns alone, and their mandate to ‘maximise shareholder wealth’. This narrow focus fails to take into account that the provision of services to these segments generates significant positive social impacts.
To compound the exclusion there are often negative perceptions from these marginalised segments about accessing finance. Non-profit organisations frequently insist that only an increase in donations or government funding will increase their viability, whilst debt finance or equity capital is often overlooked. However, it is clear that a continual reliance on donations increases short term reactive actions and leads to longer term instability. An increasing willingness by marginalised segments to operate to commercial standards will assist in changing this perception. We have spoken to several non-profit organisations and social enterprises that have successfully accessed financial capital and each insisted that the extra responsibility that accompanies the finance has focused their operations in a positive way.
Analysis for providing capital to social investments requires a broader vision that incorporates both financial and social returns. Financially, transaction costs, risk assessment and expected returns are tangible and are relatively straight forward to calculate. On the other hand, social risks and returns are more difficult to measure, yet they can also be just as material. There is a higher moral obligation with social investing to see the outcome through, as a failed investment not only results in the loss of capital, but could also result in a teenager becoming homeless again and losing an opportunity to escape exclusion. This typically means social investments will have an initial period of low liquidity as projects get off the ground. In addition the market for social investments in Australia is relatively small, and there is not a long list of ready buyers as there is for normal shares traded on the Australian Stock Exchange.
The social investment space in Australia is under-developed compared to other countries such as England and the USA. Interestingly there is presently a greater supply of capital than there are investment ready enterprises able to accept the capital. It is therefore important that the suppliers of capital for social investments (such as Ethical Investment Services and our clients) work with aspiring enterprises to build their capacity to hold and manage capital.
We are currently engaging with social investments with the aim to match client funds with worthwhile projects. The placing of capital into social investments requires the capacity of an investor to meet the characteristics explained above, such as higher financial risks and lower liquidity, and high minimum investment amounts. However, these ‘financial concessions’ will be balanced with higher social returns, for example, though supporting homeless teenagers gaining hospitality training or by providing funding for specialised disability housing.