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A Special Briefing by 3 Pillars Network Research WWW.3PILLARSNETWORK.COM.AU Social Returns In association with

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A special briefing by 3 Pillars Network Research looking the burgeoning field of social investment in Australia. We spoke to leaders in the field to assess where we are and how we face the challenge of striking the right balance between social, environmental and financial goals.

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Page 1: Social Returns

A Special Briefing by 3 Pillars Network Research

WWW.3PILLARSNETWORK.COM.AU

Social Returns

In association with

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SOCIAL RETURNS – A SPECIAL BRIEFING FROM 3 PILLARS NETWORK RESEARCH

EVENT

Morning keynoteAlex McDonald Executive Director of The Wise Foundation; and The Body Shop Australia Director.The Wise Foundation furthers community development and social commitments of The Body Shop Australia, the Adidem group of companies and the Wise family.

Reconciling fi nancial and social returnsWhat do grant-makers, charitable trusts and corporations need to gauge the impact of the social ventures they support? What methods are available to these organisations to measure the return on investment and effi ciently manage an expanding portfolio of social and environmental services they provide?Kevin Robbie Social Ventures Australia

Connecting the head and the heartA panel discussion featuring experts from foundations, not-for-profi ts and advisory groups on the challenges of measuring social return on investment. Is there a danger of overlooking the more intangible, harder-to-quantify social benefi ts – those that are often exactly the reason why charities exist in the fi rst place?

Social enterprise in action:measuring returns The Eaglehawk Recycle Shop is a community enterprise providing cheap secondhand materials to central Victoria and creates jobs by encouraging people to reuse and recycle.

Rebecca Dempsey CEO, Future Employment

Establishing the business casefor corporate investorsHow to move from the obligation of Corporate Social Responsibility to the opportunities of Corporate Social Exchange. How to map and measure the value exchange between companies and society.

Ross Wyatt Net Balance

Afternoon keynoteGlen Saunders Board member and Treasurer of theUnited Nations PRI, chair of Prometheus Finance, senior adviser to Triodos Bank, chair of the Sustainable Business Network and of Sustainalytics.

Social enterprise in action Four social enterprises that are making a diff erence discuss the challenges of fi nding sustainable funding.

Chaired by Jerry Marston JJCSR Consulting

Tapping the capital marketsWhat are the most appropriate fi nancial instrumentsto drive the development of social enterprise?

A panel discussion with Social Ventures Australia CEO Michael Traill, Unitus Capital MD Kylie Charltonand Foresters Community Finance fund manager Peter Ball.

Social enterprise in action: social investingFunding social enterprises through the community, featuring Hepburn Wind chairman Simon Holmesa Court and Embark’s Mary Dougherty

Inaugural 3 Pillars Network Social Returns Forum

MONDAY 25TH OCTOBER 2010WESTPAC AUDITORIUM, SYDNEY

Creating, measuring and investing in social changeA not-for-profi t event

In association with

Presented bywhen25 October 2010

8:30am – 6:00pm

whereWestpac Auditorium

275 Kent Street

Sydney 2000

contactAnne Cameron

Phone 02 9810 2164

[email protected]

www.3pillarsnetwork.com.au

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There are as many views on the best way to create change as there are people and organisations involved. Investors themselves also come in numerous shapes and sizes: private philanthropists, trusts and foundations, government departments, corporate investors,to name just a few.Some are seeking to alleviate human suff ering through aid. Some advocate economic empowerment through community enterprise. Some invest in capacity building. Some in education. Some in research. The means of investing in social challenges are many but the number of organisations that invest often signifi cant amounts of money and other resources without fi rst evaluating which means of investing is most appropriate and most eff ective for their particular needs is still too high. Which is best? Which creates the most social change per dollar invested? And most importantly, how do you measure and decide?This is the topic at the heart of the 3 Pillars Social Returns Forum.This forum is a must for anyone involved in investment for social wellbeing. Whether you represent a corporate community investment, social enterprise, a trust, foundation or private philanthropist, I urge you to attend. This event is all about driving the most benefi cial outcomes for society, both here and abroad. This event is about bringing a new level of understanding to the last bastion of unmeasured investment – social investment.

And it’s not just the social sector which seeks to articulate the benefi ts. Just concentrating on the corporate sector for the moment, each year, Australian companies invest several billion dollars in the social economy (mostly through the NFP sector) with only scant attention paid to the impact of the investment.

“We invest in communities because it is the right thing to do,” a well intentioned CEO might say. Yet only 4 per cent of the top 150 companies in Australia interviewed as part of the Centre for Public Aff airs’ Corporate Community Involvement Survey (September 2006), actually said they sought “no benefi t” from their community investment. Forty-four per cent seek a focused business case and the remainder seek some other generalised benefi t.So clearly, Australian companies have a desire to understand the benefi t they derive from making an investment in community. Philanthropists, foundations, trusts and government are joining the drive to better understand the most effi cient

and eff ective ways of applying their resources to the creation of social change.Like many outcomes that are diffi cult to quantify, organisations are quick to put measuring social returns in the ‘too hard’ basket. They shy away from evaluation frameworks that would be applied as a standard to other investments, for a variety of reasons. Sometimes there is a lack of knowledge or understanding about what tools or measures are available. Organisations can struggle with how to communicate less tangible outcomes, sometimes with long time-lags making direct attribution complicated, to diff erent parties. Some companies have not even identifi ed exactly what outcomes will signify success for their endeavour. But like every discipline, the measurement of social investment continues to evolve and we are seeing a wave of momentum for more robust measurement driving the issue up the agenda for both corporates and community partners. This is an age where transparency and accountability are regarded an essential pillars of risk management. And for good reason. Transparency and accountability for outcomes helps maintain reputational integrity and has the added benefi t of driving internal process improvement. Measuring the impact of any investment in social change is one of the greatest challenges and opportunities facing this sector.I look forward to seeing you at the Social Returns National Forum to see how the leaders are meeting this challenge and embracing this opportunity.Ross Wyatt is General Manager of theNet Balance Foundation and chair of the3 Pillars Social Returns Forum. SR

FOREWORD

Social Impact – Change for the Betterby Ross WyattInvestment in social causes takes many forms. But they all have one thing in common. The investments all look to create change. Positive change. Change for the better.

This forum is a must for anyone involved in investment for social wellbeing. Whether you represent a corporate community investment, social enterprise, a trust, foundation or private philanthropist, I urge you to attend.

Ross Wyatt Ross Wyatt Net BalanceNet Balance

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FEATURE

Putting a Number to itMeasuring social returns is becoming increasingly important to business-savvy social enterprises. But wider adoption does not come without signifi cant challenge.

“I don’t think it’s outrageous for there to be – depending on the size of the organisation – this kind of focus on being able to measure and value the impact an organisation has, be it through someone externally or within the organisation.”Alnoor Ebrahim, an associate professor in the general management unit at Harvard Business School, says initially measurement can be done inside the organisation, even if it’s a very small organisation. “And it can be done almost like a back-of-the-envelope kind of calculation.”The Fred Hollows Foundation has studied its impact along the same lines as SROI analysis, although the methodology wasn’t formally adopted.“What we’ve done is a number of studies that look at socio-economic benefi ts of cataract surgery, which is our main form of work,” Britton says.One study showed improvement in income and educational opportunities, among other things.“We tried to look at what was the level of benefi t for each person,” Britton says.

Transparency: SROI’s greatest assetMay Lam, research and policy manager at Social Traders, a Victorian government-funded company that supports the development of social enterprises, says seeing the monetary value created for each of the social enterprise’s inputs and outputs provides transparency, which is SROI’s greatest asset. But Lam thinks the SROI methodology hinders its use when seeking competitive funding.“Each of [the ventures] will defi ne their own forms of value and their own way of putting monetary value on that,” Lam says. “But it’s another process again to review them all, decide how comparable they are,” she says.

The push in recent years to measure the impact of non-profi ts has made many organisations consider using social return-on-investment (SROI) analysis. But some are uncomfortable about its use.David Britton, director of public aff airs at the Fred Hollows Foundation, says studying a program’s outcomes is naturally part of his organisation’s management plan.“I can say that it does improve opportunities for fundraising,” he says. “But that’s not its primary purpose. Its primary purpose is to look at whether we’re getting ‘bang for our buck’.”Peter Cox, of Future Employment Opportunities – a Melbourne-based non-profi t that operates several ventures – places value on the understanding that is generated by careful analysis.“Non-profi t organisations usually get bogged down in the day-to-day running of their operations,” he says. “We see [measuring impact] in a completely diff erent light.”This new perspective was valuable when discussing with potential investors plans for a new operation to be modelled on an established recycling centre (see profi le p.6). To gain it, Cox collected evidence of change that had been gathered a few years earlier via social return-on-investment (SROI) analysis. “The SROI certainly helps people to understand all of the benefi ts associated with the enterprise,” says Cox.

To complete the SROI analysis, which gave the venture a score of 3.9 – meaning that for every dollar invested, there was a return of $3.90 – a consultant engaged by sector advisory fi rm Social Ventures Australia (SVA) spent about a month talking with stakeholders to gather evidence of change.

All ventures great and smallSimon Faivel of SVA says small social ventures that think they might lack the time or skill set required for SROI analysis can measure impact during their regular planning process or when doing their budget.

“We’re talking about evaluating the impact of your organisation, which is pretty much the reason for your existence,” he says. “So it’s quite important.”

“For those who are hesitant about SROI, once they’ve identifi ed their two or three main benefi ts that they want to derive from their work, they can try quantifying it and see how they feel about it once they’ve tried it” – Alnoor Ebrahim, Harvard Business School

Peter CoxPeter CoxFuture Employment Opportuniti esFuture Employment Opportuniti es

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is OK, provided that you’re constantly paying attention to ‘Can I improve the data to help me get a better handle on this? Can I try diff erent kinds of assessment?’ “And for those that are hesitant about SROI, once they’ve identifi ed their two or three main benefi ts that they want to derive from their work, they can try quantifying it and see how they feel about it once they’ve tried it.”

Providing valueSVA’s Faivel says that SROI analysis begins the debate about creating value.“If someone is feeling better about themselves, should we be putting a dollar value on that?”he asks. “My argument is: Well, it’s helpful. It’s not the most important part. [But] it’s necessary that we begin to talk about that value.’“Because if we start to talk about the value with respect to the dollars for that, then you begin to be able to at least look at that outcome in comparison to other outcomes which are easy to put a dollar value on.”SROI is something the Fred Hollows Foundation is going to increasingly push towards, says Britton.“Unless you can tell the individual stories and the broader stories then we’re not communicating our work, and therefore it’s only really doing half the job,” he says. SR

Lam says the Victorian government has focused on purchasing employment services from the non-profi t sector in the past couple of years. “In its employment services system, the government currently has a completely standardised way of doing those things, in how it measures the performance of job services,” she says. “They take account of a variety of context variables, like labour markets and the characteristics of disadvantage that come with each jobseeker. SROI can’t match that in any sense.”

An engaging approachLike Lam, Artsupport Australia director Louise Walsh thinks performance measurement is critical. And she is also sceptical about the value of SROI analysis.“Moving forward, we’re very hooked into the philanthropic sector – to the foundations sector - and there is a new breed of philanthropist and foundation coming through,” Walsh says. “It isan engaged philanthropist. They’re morehands-on. They want to measure impact.”Three years ago, Artsupport – a division of the Australia Council for the Arts that works to develop philanthropy – acknowledged this curiosity by organising a master class for fundraisers by an impact consultant. But Walsh pulled the pin before the date because she wasn’t convinced there was a tool that was adequately developed, reliable and comprehensive.Last year Artsupport commissioned SVA to undertake SROI analysis on two non-profi ts – one a social venture, the other a theatre company. At a forum where results of the analyses were presented, fundraisers questioned the suitability of SROI analysis in their sector.

“There was lots of comment and discussion and debate. It was one of the liveliest discussions I’ve seen,” says Walsh.“After we’d done that, [SVA] said to me, ‘Look, we’re going to take some of this on board, defi nitely’,” she says. “We’ve had a debrief with them since. I said I’m not going to roll this out and promote this to the arts sector until I’m sure that it works.”

Missing the point?Some stakeholders think putting a monetary value on social outcomes is inappropriate.“Some of [the] foundations I talk to say, ‘We are not going to demand that. We just think that that’s also too onerous on the non-profi t sector,’” says Walsh.

Harvard’s Ebrahim says, “It would be useful, I think, for any organisation to take a step back and ask itself ‘What are the top two or three things that I want to change with the work that I’m doing?’“And in some instances you might fi nd that it helps to try and quantify that. In other instances you might fi nd that you have other ways of measuring it, that you’re satisfi ed with, that aren’t necessarily quantifi able. I think either

“There is a new breed of philanthropist and foundation coming through. It’s an engaged philanthropist. They’re more hands-on. They want to measure impact”– Louise Walsh, Artsupport AustraliaLouise WalshLouise Walsh

Director, Artsupport AustraliaDirector, Artsupport Australia

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CASE STUDY

Social Enterprise in Action:Eaglehawk Recycle ShopWith the help of sector consultancy Social Ventures Australia, this successful Victoria-based social enterprise managed to put a number to its social return on investment.

“You need to be able to tell the power of the story around how you are supporting them, and subsequently the savings to governmentand the value that’s created because of that,” Social Ventures Australia’s (SVA) Simon Faivel says.ERS contracted SVA to conduct the SROI analysis. At the time, FEO was part of the portfolio of enterprises that SVA supported.SVA contractor Caroline Cox judged that for every dollar invested, ERS produces $3.90 worth of value for the community. But that’s not the whole story, Faivel says.“It’s the equivalent, in the for-profi t space, if I was to tell you my ROI for my business is 9 per cent or 20 per cent. You’re going to go‘So what? Tell me more’. It needs to be partof that bigger picture.” SR

Analysing social return on investment (SROI) helped Eaglehawk Recycle Shop (ERS), in the Victorian town of Bendigo, articulate what it does and see the operation in a diff erent light, according to Future Employment Opportunities (FEO) projects manager Peter Cox.FEO operates a number of social enterprises in Victoria, including ERS, which started taking in domestic waste, sorting it and selling used items back to the public in 1994 after managers saw an opportunity in an article in the local paper about plans for a new waste landfi ll.“Future Employment Opportunities works witha lot of people out of work,” Cox says. “So people asked the question, ‘Why are we burying all this stuff in the fi rst place?’ ”With $15,000 of federal government money FEO did a feasibility study and, after getting advice from Revolve, a Canberra-based recycling organisation, started recycling. The SROI analysis, conducted in 2006, shows many positive impacts on the immediate – and larger - community. “I could list probably fi ve areas where the social return on investment is very pertinent,” says Cox. ERS turns over $550,000 annually and “made a lot of other people acknowledge that we needed to do better”, says Cox, a revelation that helped extend the life of the landfi ll by decades.

ERS also didn’t cost much to set up. “We started with a grant of about $20,000 and then we got some jobseekers to stay on their unemployment benefi t to see if they could run a business in the fi rst six months,” Cox says.

ERS now employs 14 people who had been long-term unemployed. Rather than the government paying unemployment benefi t, those jobseekers are given the opportunity to create work for themselves and therefore create wages for themselves, Cox says.Finally, the operation helps reduce greenhouse gas emissions as well as energy spent manufacturing new items, since it lets people in the community reuse things.FEO recently attracted seed funding to construct an industrial recycling centre. The SROI analysis, and the story it enables FEO to tell, helped attract $1.5 million from the federal government for a new shed and concrete apron.

“Rather than the government paying unemployment benefi t, those jobseekers are given the opportunity to create work for themselves and therefore create wages for themselves”

– Peter Cox, Future Employment OpportunitiesEaglehawk Recycle ShopEaglehawk Recycle Shop

Staff at workStaff at work

CASESTUDY

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Unitus Capital invests mostly in microfi nance.What other areas are you likely to invest in?The great thing about microfi nance is that it has provided investors the opportunity to see it’s possible to create something that’s scalable, has impact, and gives a fi nancial return. Now we’re able to look at other sectors that might not have been exposed to social impact investing before – health care, agriculture, education, water, renewable energy, aff ordable housing – and to introduce investors who have seen the success of microfi nance and have an appetite to go into some of these new areas.

‘Social enterprise’ is a newer concept in Australia than it is in the UK and US. Do you think it will gain traction here?Yes. It’s been starting to pick up here over the past few years with many people doing wonderful work to develop the sector. One of the challenges is we haven’t yet seen the development of a sustainable funding market for social enterprises. But fi nancial planners and their clients, including charitable foundations, are starting to ask if they can take a portion of their investable assets and make a diff erence, while also getting an acceptable fi nancial return ontheir investment. SR

Terry Alan Farris, CEO of the Asian fi nancial services company Unitus Capital, has been a key player in an ambitious movement to lift the underprivileged in the Asia-Pacifi c from poverty. Achieving this, he maintains, depends less on charity and more on the growing global phenomenon of “social impact investing”. To that end, Unitus Capital advises and arranges funding for microfi nance institutions and social businesses that strive for positive social outcomes in addition to fi nancial success. We interviewed Farris when he visited the company’s Sydney offi ce in June.

3 PILLARS: What’s the short history of your long career?TERRY FARRIS: I started off doing estate planning in the (San Francisco) Bay Area, mostly for Asian clients. Then I headed up the University of Hawaii Foundation before moving to Hong Kong to run several social enterprises. In 1998, I put together a consulting business to help Asian families move away from traditional philanthropy into more business-like, venture philanthropy and to include that in their wealth plan. Subsequently, as head of philanthropy services for Asia-Pacifi c at MeesPierson and UBS, I helped 225 family-owned companies and 150 non-profi t clients in 12 countries look at these issues.

You have an American accent. Are you from there and where do you live now?I grew up in Hawaii and California. I now live in Singapore with my wife and four kids and we’ve been there for seven years.

What inspired you to work for social changein Asia?Well, my dad ran hospitals and from a very young age it was ingrained in me that you could use business models for social good. In my early twenties I travelled to Micronesia and saw a lot of

philanthropic dollars had been spent there, but after 20 years they had made little social impact. I decided to devote my life to fi nding ways to help people at the bottom of the pyramid in Asia-Pacifi c. I believe one or two individuals can make an enormous impact.

SECTOR EXPERT

Terry Alan Farris, CEO Unitus Capital

“Financial planners and their clients, including charitable foundations, are starting to ask if they can take a portion of their investable assets and make a diff erence, while also getting an acceptable fi nancial return ontheir investment.”

Terry Alan FarrisTerry Alan FarrisUnitus CapitalUnitus Capital

SECTOREXPERT

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The Westpac Foundation’s focus on social enterprise began in 2006 when Dr Zappala was asked to review its focus. Since 2006, he notes a big increase in funding applications from social enterprises, while traditional charities and not-for-profi ts have started to move towards a similar organisational structure. “We have found this quite challenging because we are getting two types of applications: from established social enterprises that have been operating in that way for a number of years, with perhaps 98 per cent of their revenue coming from trading activities; to traditional not-for-profi ts, where perhaps 98 per cent of their income comes from fund-raising.”For instance, Mission Australia is a benefi ciary of Westpac Foundation funding – an example of a big national charity with a small internal unit that focuses on social enterprise; while small community-focused social enterprises, such as the Nundah Community Enterprise Co-operative that also benefi t from the foundation’s funding, are at the other end of the spectrum.Zappala says being a charitable foundation Westpac can only support not-for-profi t organisations.“Because we are a foundation we can onlyprovide funds to charitable or public benevolent institutions – so we can only fund social enterprises that are not-for-profi t legal entities.“Our preference is to support those organisations with social innovation and where any commercial activity is related to their mission. They are the ones that are likely to be both sustainable and have a greater social impact,” Zappala says.

Regulatory barriersThe government is under increasing pressure to reform laws and regulations governing the sector. A 2009 Productivity Commission report yielded

Australia’s not-for-profi t sector is changing. An increasing number of organisations are spurning traditional cheque-book philanthropy models in favour of fi nancially sustainable social enterprises, new types of ventures that not only deliver a social return but a potential profi t. But philanthropic investors such as family trusts and foundations are not stepping up to the plate in suffi cient numbers, hindered by a confusing and inconsistent regulatory framework, a shortage of fi nancial products designed to funnel much-needed cash into good causes and, perhapsmore worryingly, a reluctance to shift entrenched attitudes.Gina Anderson is CEO of Philanthropy Australia, Australia’s national peak body for philanthropy. Its members are trusts and foundations, families and individuals who want to make a diff erence through their own philanthropy. “Australia is lacking a shift in thinking; a shiftaway from grant-making into putting endowmentsto work. From a foundation’s point of view it should be about how they might use 10-15 per cent of their endowment to invest rather than make grants.”Peter Winneke, the head of philanthropic services at the Myer Family Offi ce, says grant-makers could do a lot more to make their dollar go further: “There’s lot of ‘feel good’ stuff going on, but there’s not much innovation. There should be far more monitoring and evaluation by grant-makers.”

“Don’t get me wrong. I’m very optimistic about the future of the sector: fi rstly in terms of growth, because it is tiny; and secondly being a bit smarter. The philanthropic dollar in this country is tiny.”Dr Gianni Zappala, an associate professor at the Centre for Social Impact, the University of New South Wales, and a co-executive offi cer of the Westpac Foundation, off ers an insider’s view.

“The big issues are harmonisation of legislation across diff erent states and the importance of creating regulations to enable new types of legal forms which can embrace commercial activities, such as capital-raising,” he says.

Westpac Foundation’ssocial enterprise supportThe Westpac Foundation invests directly in social enterprises that tackle problems in Australia’s disadvantaged communities. The charitable foundation operates independently to the commercial interests of Westpac Banking Corporation. Since providing grants to external organisations in 1999, over $19m has been awarded in grants to over 120 organisations.

FEATURE

Foundation Funding Falling ShortStymied by regulatory hurdles, a shortage of retail social investment products and unhelpful entrenched attitudes, foundation funding is falling short of what’s needed to kickstart the social enterprise sector.

“Australia is lacking a shift in thinking; a shift away from grant-making into putting endowments to work”

– Gina Anderson, Philanthropy AustraliaGina AndersonGina AndersonCEO, Philanthropy AustraliaCEO, Philanthropy Australia

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The American state of Maryland a new regulation defi ning a “benefi t corporation”, essentially to enable entrepreneurs to commit their for-profi t ventures to a specifi c public good, and requires them to report on contributions to that goal and submit to auditing of their impact.

Having offi cial “benefi t corporation” status allows entrepreneurs to consider stakeholders like employees, communities, or the environment in business decisions. Under existing US corporate law, company directors can face lawsuits if considering outside stakeholders is seen to damage the fi nancial interest of shareholders.A similar proposal is pending in Vermont. California lawmakers are considering related legislation to allow “fl exible purpose corporations” that would let companies protect their social missions, without the affi rmative requirements that the “benefi t corporation” law puts in place.Kylie Charlton, fellow at the Centre for Social Impact and managing director of Unitus Capital, says the introduction of new legal forms “could have signifi cant positive infl uence on how social enterprises think about their capital structure and to what sources they look to raise capital.” SR

little in the way of change, much to the sector’s chagrin. Philanthropy Australia’s Anderson says Australia is a long way behind both the US and UK. “We have a much too complex system: we have two tax endorsements – DGR (Deductible Gift Status) and TCC (Tax Concession Status), while other countries have just one. “We are made up of states – income tax is federal, but charity and state law is state-based – so it is highly complex, inconsistent and until we have one regulator or one registrar we will seelittle progress.”Westpac Foundation’s Zappala says: “If there was a wholesale review of that regulation, together with what legal forms foundations could support, I think that could provide much bigger impetus for social enterprise to grow.”

Overcoming risk Anderson of Philanthropy Australia says foundations have tended to invest in the top-performing charities.

“The fi rst issue is if you are starting up you are usually not incorporated. The second issue is the whole notion of equity and getting that capital back. It’s that which causes a disconnect between foundations/trusts with social enterprises.“This issue is especially pertinent to those foundations and trusts managed by trustee

companies and also those that are a generation or two removed from the founder, because they have to be guided by the prudent person principle. “Many will go by the letter of the law that says you must get maximum return for the benefi ciaries. A lot of those social investments may be low on return; the question then becomes ‘Is that what a prudent person would do? And that hasn’t really been tested under case law.”

Changing the terminologyPA’s Anderson dislikes the term ‘not-for-profi t’, since it creates a perception that profi t is unnecessary to these organisations and that profi t or lack of it is a defi ning factor. “While we do need these organisations to be sustainable, properly capitalised and funded, the term not-for-profi t is misleading as profi t is not the issue,” Anderson wrote in a 2009 Charter article.PA has recommended using the term community benefi t entity. “The community in this context can then be as large or as small as the various stakeholders require and would overcome the existing confusion in terminology and application to public or private sector entities,” she wrote. The same applies today, she tells 3Pillars.“We suggest that community benefi t entity would be a better term to describe these organisations whose primary objective is to provide goods or services for community or social benefi t and where any equity has been provided with a view to supporting that primary objective, rather than for a fi nancial return to equity holders.”Substantial progress towards defi ning ‘for purpose’ corporations is being made abroad.

Peter WinnekePeter WinnekeMyer Family Offi ceMyer Family Offi ce

“There is lot of feel-good stuff going on, but there’s not much innovation. There should be far more monitoring and evaluation by grant-makers”– Peter Winneke, Myer Family Offi ce

“The big issues are harmonisation of legislation across diff erent states and the importance of creating regulations to enable new types of legal forms, which can embrace commercial activities, such as capital-raising”– Dr Gianni Zappala, an associate professor at the

Centre for Social Impact

Dr Gianni ZappalaDr Gianni ZappalaWestpac Foundati onWestpac Foundati on

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FEATURE

Investing For GoodA rising class of investors is actively seeking to place capital in businesses and fundsthat can provide solutions at a scale that purely philanthropic interventions usually cannot reach.

But we have a long way to go, agree fi nancial advisers and social fund managers.“I think it’s at a very nascent state here,” says Kylie Charlton, a managing director at Unitus Capital and a social investment fellow at Australia’s Centre for Social Impact. “I do hold great hope, though, that we can catchup quickly. People across various stakeholder groups are starting to see that if we can really establish sustainable social enterprises across Australia, we can potentially drive social change and social inclusion better than if we just rely on the traditional non-profi t model.”Foresters Community Finance warns against a degree of hype it senses in the Australian landscape.“Social enterprise is not, in our opinion, a magic solution for addressing wicked social problems, nor is it an alternative pathway for social sector organisations wishing to fi nd ways to get off the funding treadmill,” writes author Ingrid Burkett in Foresters’ 2010 report, Financing Social Enterprises: Understanding Needs and Realities. “Rather, it is an addition to the stable of ways in which we can address the most pressing issues facing our society today. “Social enterprise is a hard road – it asks us to tread the slippery path between social objectives and commercial practices. It is neither for the faint-hearted nor for idealists. It calls for ‘practical visionaries’.”

The challengesSuccess here will require practical changes, too– particularly adjustments that off er structural support and attract a robust fl ow of capital.First, because social enterprises are a hybrid entity, they face certain legal impediments under current Australian regulations to accessing funds. Organisations with a social purpose often rely on foundations or philanthropies for their initial cash

Reeling from a global fi nancial crisis whose full size and shape is unknowable, organisations across the spectrum – from the purely philanthropic to the multinational – are being forced to reassess all aspects of their culture, product and conduct to ensure their survival. Paradoxically, the calling seems to be for businesses to behave with wider, genuine social and environmental concern, while traditional non-profi t organisations are being required toact with real business smarts.

Enter social enterprise.

Diffi cult to defi neWhile an exact defi nition is yet to be hammered out – even in the UK and US, where the concept is much more developed – social enterprises are loosely understood as new forms of organisation that aim to strike just the right balance between social, environmental and fi nancial goals.Alongside the concept, proponents often speak of “impact investing” – highly creative, collaborative funds and businesses where investors accept a below-commercial (but not absent) market return in exchange for social and environmental benefi ts.“These impact investors want to move beyond ‘socially responsible investment’, which focuses primarily on avoiding investments in ‘harmful’ companies or encouraging improved corporate practices related to the environment, social performance, or governance,” explained an

Investing for Social and Environmental Impact report by the Monitor Institute in 2009.“Instead, they actively seek to place capital in businesses and funds that can provide solutions at a scale that purely philanthropic interventions usually cannot reach.”Supported by specialist fi nancial vehicles and global philanthropies, such as the Rockefeller and

Bill and Melinda Gates Foundation, microfi nance in developing countries is considered the most mature arena for impact investing.In Australia, there is a growing buzz about the potential of social enterprises to deliver deep solutions for a range of problems, especially those that plague the most downtrodden. Correspondingly, eff orts are beginning inmultiple quarters – from entrepreneurs to lenders, government and others – to help cultivate its growth.

“People across various stakeholder groups are starting to see that if we can really establish sustainable social enterprises across Australia, we can potentially drive social change and social inclusion better than if we just rely on the traditional non-profi t model”– Kylie Charlton, Unitus Capital

Kylie CharltonKylie CharltonUnitus CapitalUnitus Capital

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Social Investments Australia, Foresters expects to raise at least $6 million for its new Social Impact Property Fund. Peter Ball, Foresters’ social investment business manager, says the fund will provide long-term property leases to about 30 community sector organisations and build their capacity to purchase the property at lease maturity, while providing a target return of 5.5 per cent to investors.GoodStart (see profi le p.12), a consortium of large Australian charities, recently acquired the childcare centres of ABC Learning through a competitive and inventive joint venture. Investors, who bought unsecured notes for an eight-year term, returning 12 per cent per annum, are focused on achieving a long list of social returns in the childcare sphere.In May, the Western Australian government announced a $10 million Community Development Investment Fund, which will off er low-interest loans to eligible groups.Such initiatives spell promising potential for a future social capital market in Australia, says Peter Ball, of Foresters.“I think we’re heading in that direction because there is progress,” he says. “The way to get there is to have more organisations and more product.”To really kick-start the market, government and philanthropies, which are often risk-averse, may need to take the plunge with some high-risk capital to “crowd in” private investment, adds Charlton.“Let’s not just over-analyse this and write another report,” she says. “Let’s be willing to take some risk, let’s acknowledge failure may occur, but we should achieve greater success and learn from those failures.” SR

injection, yet can’t accept grants unless they area bona fi de non-profi t entity.On the other hand, if they establish as a non-profi t, they will be unable to off er equity and distribute fi nancial returns to socially minded investors, who typically bring capital later in an organisation’s development.Next, traditional lenders, particularly banks, grapple to understand what “social purpose” is and how a “social enterprise” can turn a profi t and repay debt the way a conventional business can.“We don’t have in Australia any specifi c legal form where someone can go out and say I’m going to establish a social enterprise and that’s what I’m really going to be,” explains Charlton.Overcoming these and other hurdles will require intense educational dialogue and some signifi cant tax and regulatory modifi cations.There are examples to follow, however.

Learning from othersThe UK has been consciously and methodically nurturing the social investing phenomenon for the past decade, with a Social Investment Task Force (SITF) presiding.SITF was charged with illuminating how entrepreneurial practices could be applied in the UK for higher social and fi nancial returns,in addition to addressing economic regeneration and discovering ways to unleash private and public investment.In response to SITF recommendations, the British government has introduced various legislative and regulatory changes to allow and encourage charities and foundations to invest in community development fi nance, in addition to new Community Investment Tax Relief. Among other changes, it also matched fi nance to help set up the fi rst community

development venture capital fund and now requires additional disclosure by banks about their lending activities.“It’s not been enormous amounts of fl ow but at least it’s started the conversation and allowed a much more active engagement,” remarks Charlton about the UK experience.The driving force behind SITF was the serious and common acknowledgement of the need for sustainable investment among those who are economically disadvantaged, “if free market societies are to maintain cohesion”.

In April 2010, SITF’s fi nal and widely read report, Social Investment Ten Years On, states the recent recession has brought that need to a critical level.The report recommends the establishment of a dedicated organisation, a Social Impact Initiative, to take impact investing to the next level, and the creation of new fi nancial tools, such as Social Impact Bonds.

Where we’re headedFinancial intermediaries and more specialist funds will be essential to opening the gates of capital in Australia, too.Meanwhile, a handful of forward-thinkers are already paving the way. Through a subsidiary,

Peter BallPeter BallBusiness Manager, ForestersBusiness Manager, Foresters

“Social enterprise is a hard road – it asks us to tread the slippery path between social objectives and commercial practices. It is neither for the faint-hearted nor for idealists. It calls for ‘practical visionaries”– Ingrid Burkett, Foresters Community Finance

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In exchange for their below-commercial-market fi nancial return, investors are expecting the consortium to deliver on a host of social outcomes.Not least among these is moving Australia’s early childhood care, development and learning from a fragmented system to a sustainable one that is accessible and aff ordable.GoodStart also is charged with infl uencing related national policy and research.In a country where impact investing and social enterprises are yet to take hold, the acquisition is somewhat risky, yet it’s acknowledged also as a possible model for building other large-scale social businesses.Traill says he’s very confi dent GoodStart can deliver on its social goals in addition to meeting its fi nancial obligations to NAB and others. Social Ventures Australia is looking for similar investment opportunities, he says, but admits the for-purpose market is yet to be properly recognised here.“If social investment can ultimately be defi ned as a legitimate asset class, it will attract not just philanthropists but the mainstream superannuation industry, unlocking signifi cant capital which to-date has been diffi cult for social enterprises to access,” Traill says. SR

Three of the nation’s biggest charities – Mission Australia, the Benevolent Society and the Brotherhood of St Laurence – banded together with Social Ventures Australia, the National Australia Bank, the federal government and high-net-worth individuals to buy the centresof collapsed company ABC Learning. Known as GoodStart Childcare Ltd, the newly founded consortium beat out several private equity rivals to acquire 678 centres for about $100 million.Motivating GoodStart was the belief that, given the chance, tried and proven business principles could greatly improve social outcomes in the critical area of early childhood care and learning. “Entrepreneur Evan Thornley contacted me shortly after ABC Learning was placed in receivership in November 2008, asking if there’d been consideration given to the possibility of converting the business into a ‘for purpose’ operation,” explains Michael Traill, Social VenturesAustralia chief executive.“Evan, like myself and the other non-profi t sector leaders who I spoke to about the idea – some of which are now members of the GoodStart syndicate – recognised this as a once-in-a-generation opportunity to signifi cantly change Australia’s childcare sector for the better.”Raising the money to make the bold idea happen was arduous, requiring a type of focus and collaboration rarely seen.

It took a full 12 months to build the consortium. The initial commitment came from the charities themselves, with each investing $2.5 million for a 15 per cent return. Over time, about 40 individual investors came on board, bringing between $100,000 and $1 million in exchange for 12 per cent unsecured notes over an eight-year term.

Later, National Australia Bank approved $120 million in loans and guarantees, to be repaid over fi ve years. The federal government provided an additional $15 million loan over seven years.Now the acquisition has succeeded, GoodStart faces the challenge of meeting a complicated combination of promised returns.

CASE STUDY

Social Enterprise in Action:GoodStart ChildcareOne of the most impressive examples of attempting to advance a social agenda through creative business fi nancing occurred in Australia in May.

Michael TraillMichael TraillCEO, Social Venture AustraliaCEO, Social Venture Australia

“If social investment can ultimately be defi ned as a legitimate asset class, it will attract not just philanthropists but the mainstream superannuation industry, unlocking signifi cant capital which to-date has been diffi cult for social enterprises to access”– Michael Traill, Social Ventures Australia

CASESTUDY