This article first appeared in Personal Wealth, The Edge Malaysia Weekly on June 7, 2017 - June 13, 2017

Governments have a crucial role to play in driving the growth of the impact investing ecosystem in order to mobilise more private capital for public good.

Impact Investing Australia chair Rosemary Addis says promoting this form of investing offers new opportunities to governments to drive the achievement of better outcomes for people and communities.

“Governments still have a critical role to play in how they commission services but they also have a role to play in pump-priming the ecosystem so that stakeholders can do more, whether in partnership with or without governments,” says Addis, who also chairs the Australian Advisory Board on Impact Investing.

“They have the role of market stewards, just like they do in any other markets. They have the duty to ensure the regulatory barriers aren’t creating an undue obstacle to participation and to help ensure the regulatory framework is not only conducive but also sets the appropriate boundaries for activities,” says Addis. Personal Wealth spoke to her on the sidelines of the Social Economy and Investment Conference 2017 in Kuala Lumpur in March.

Impact investing has been gaining momentum in the last decade, with entrepreneurs and philanthropists leveraging the power of capital markets to help find solutions to address social needs.

However, as the Rockefeller Foundation points out, global philanthropic funds combined with the development or aid budgets of governments add up to only billions of dollars — but the estimated funds required to solve the world’s most critical issues run into the trillions. According to the renowned private foundation, there is an estimated funding gap of US$2.5 trillion to achieve the Sustainable Development Goals (SDGs) in developing countries alone.

The SDGs are a global initiative spearheaded by the United Nations, with the aim of ending poverty and hunger, achieving gender equality, improving health and education, making cities more sustainable, combating climate change, and protecting oceans and forests, among others.

In order to spur the market and encourage more private investments, governments need to act as market champions to grow the existing market for impact investing by mobilising additional resources.

“They have the duty to create a dynamic market for investment that delivers measurable, improved outcomes for society, operating at scale, and demonstrating and promoting innovation and diversity in participants and products,” Addis says.

According to her, governments can support market growth by adding a number of channels to build the market. By supporting market growth, the state is able to increase its resources to impact-driven organisations, develop the investment ecosystem with a variety of participants, provide incentives for more participation and help scale early stages of market development.

Addis says governments can show leadership by signalling interest, inspiring confidence for stakeholders to participate, contributing to early infrastructure, and de-risking to encourage market development, incentivise innovation and efficacy.

“Market stewardship is important to remove barriers to investment and reduce the red tape that prevents greater participation by investors.”

She adds that governments could also participate in markets to leverage and encourage private capital in priority policy areas as well as to collaborate to develop greater outcomes. This way, she explains, government spending can be better targeted, allocated capital can be channelled to policy priorities, and the flow of investments into social objectives can be increased.

“Governments can use some of their precious funding, including grant funding, to encourage the private sector to come into specific areas in terms of capital and talent. For example, the Malaysian government says it places a priority on education, health and affordable housing, and it will provide the incentives to bring private capital in and to encourage more talent and enterprises in that area,” says Addis.

“Governments can also shine the light on fantastic practice with things such as awards and encouragement in specific areas. When governments introduce awards highlighting leading social enterprises, they are saying this area is important and these guys are performing a great practice.

“They also have an important role in funding some of the research and evidence piece. We need the data but often it is the piece that is not funded.”

By doing all of the above, Addis says the state not only creates a thriving ecosystem but also encourages innovation for sustainable solutions.

“Individuals, communities and the economy benefit from impact investing through: making more resources available for social purposes; new approaches to solving old problems; and greater accountability for the outcomes achieved.

“A flourishing impact investing ecosystem will see additional resources mobilised, catalysing new markets and encouraging entrepreneurship and innovation for sustainable solutions to social and environmental issues,” says Addis.

“Complementary to government action, additional capital could be used to address complex issues including health, aged care, disability, education and housing, and to create jobs.”

In turn, it unlocks new opportunities for investors and they benefit from more investment choices, alignment with values and opportunities to diversify their portfolios.

“Investors’ benefit may vary depending on where they sit in the ecosystem. In addition to financial returns relative to the type of asset and investment involved, investors can make a positive social contribution to people’s lives or the environment.

“They may see their money at work in the communities in which they live,” Addis points out.

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