Everywhere we turn, whether we realize it or not, we are exposed to social issues which require immediate, adequate solutions. Over the years, troubling social issues have continued to swell, and as a consequence, so too has the burden on government and philanthropic resources to tackle them.
Yet, as budget allocations increase, social challenges magnify in tandem, as these budget allocations have not adequately matched the increase in requirements. Simply put, it is clear that the existing approach to solving social issues is not working. Thus, it is necessary to increase the pie and find new funding sources. This is where impact investments play a crucial role, as they provide a win-win solution for all parties involved.
We are in the midst of a global surge in impact investments, at the hands of a new generation of investors, “The Y generation,” who understand the need for innovation to solve current and imminent social challenges. They bring to the table a business acumen that is closely tied to the values in which they believe in, resulting in investments that yield not only financial returns, but are responsible and socially conscious. This class of investors range from those who are more concerned with social returns, or “impact-first,” to those more concerned with financial returns, or “financial-first,” who optimize financial returns with some requirement for positive social or environmental impact.
In the middle of the fray are social-financial intermediaries, who bring together both the demand and supply sides to enable socially and financially harmonious investments. These intermediaries specialize in researching social problems, defining indicators of their resolution, formulating a plan of intervention, executing it, and evaluating performance for reporting to impact investors.
Traditionally, standardized performance measurement is a corner stone of the financial sector, from which valuations are made to drive investor returns. Similarly, performance measurement tools are deployed in impact investments in order to quantify positive social outcomes and convey their economic value. Without accurate and effective measurement, it is impossible to quantify the value of impact investments in social and environmental sectors.
Thus, performance measurement is essential for generating returns to investors. The ability to attract new capital to the social sector must be based on regulated measurement practices, which will depend on much more than yields and tracking inputs, placing greater focus on the actual results of the social intervention. That said, traditional philanthropy still plays a significant role in this field, primarily in cases where performance evaluation results cannot be attributed in isolation to the intervention.
Recently, the Israeli parliament [the Knesset] had round-table to discuss social and responsible investments and social enterprise. This is further evidence of the increasing involvement of the Israeli government in the field of social investments. If we are to look at the United Kingdom, the primary reason the U.K became the global leader in the field, is due to advancements in regulation, stemming from the realization that greater focus should be placed on investments with a double bottom line — financial as well as social.
The global impact investment sector is galloping ahead and is becoming a hot topic that cannot be ignored. To verify whether impact investments yield positive returns and results, one needs only review their massive growth in recent years around the world. Our vision and ultimate objective is of the day when there will be a variety of diversified, tradable impact-driven financial products here, including impact mutual funds, ethical ETFs, community development bonds, social impact bonds and more.
In order for us to realize our vision, a regulatory shift is necessary in favor of uprooting existing processes and thought patterns in order to incentivize greater investment. It is time to remove barriers, implement innovative tax policies and share knowledge about best practices and outcomes of social services.
Yaron Neudorfer is the CEO of Social Finance Israel, Israel’s representative in the global forum for impact investments. He is also a member of the Israeli committee to develop the market for social investments.