Elevating the voice of social changemakers, OR, Highlighting the SOCIAL IMPACT in Social Impact Investing

We have an opportunity in Australia to maximise the impact of all our available charitable funds, so why aren’t we doing it? As we continue to see record levels of philanthropy and new generations of philanthropic leadership, let’s be proactive to use not just the earnings from our wealth, but invest the wealth itself to elevate the voice of social changemakers and social-purpose entrepreneurs.

The current Guidelines that govern both Public Ancillary Funds (PuAFs) and Private Ancillary Funds (PAFs) in Australia require foundations to deploy a minimum of 4% (for PuAFs) and 5% (for PAFs) of assets annually to charitable organisations. For many foundations, this model, where only a small portion of assets are distributed annually in the form of cash grants, is the main, or only form of practicing philanthropy.

For example, if you have $1 million in a PAF, you must distribute $50,000 to a charity each year. The long-term annual investment returns on these invested funds exceed these annual charitable distributions, growing the invested capital, often at rates much higher than the required 5% outflow for the PAF.

Mobilising ALL Social Capital

Is this current operating model, a model that primarily focuses on the annual grants distributed each year to charities, really all we can do? Does it put to work the full capital available to generate public benefit and impact for society, or the environment, or Australia’s health system? Is the current operating model effectively mobilising all the available financial resources to achieve positive social outcomes?

During my tenure as CEO of The Ian Potter Foundation, a Public Ancillary Fund, we, like many Foundations dedicated considerable time and energy to ensuring that the annual cash grants were deployed as meaningfully and impactfully as possible. In our mission to provide fewer, larger, longer grants, during my tenure we managed to increase the average duration of our grants from 13 months to approximately 40 months. We increased the average size of our grants six-fold, we increased the provision of unrestricted funding as a means of empowering our grantees and we provided a range of non-financial support consistent with the philosophy of trust-based philanthropy[1].

In retrospect, this is not enough. Extending the length of the grants and improving the quality of both grant funding and non-financial support of grantees has not fundamentally relieved changemakers from the burden of spending every waking moment worrying where the next dollar would come from to achieve their ambition. We did not develop a funding paradigm for outstanding changemakers to focus solely on impact. We did not listen to the voices of those changemakers, because we did not ask them the question – what do you need to thrive?

We might have instead asked; how can we mobilise the remaining 96% of the Foundation’s asset base not distributed in the form of philanthropic grants to empower grantees? Do the current raft of impact investments, in the form of discounted loans, social outcomes linked investment products, or any other engineered social impact investment that still seeks to reward investors investing in social or environmental outcomes, offer changemakers access to capital that may empower and enable them to achieve impact and outcomes?

Social Impact Over Investing

The opportunity to unlock available philanthropic investment capital must consider the incremental value of deploying substantial capital, in a manner that does not place undue financial burdens on charitable entities, and in a way that empowers those charities with the highest quality of deployed philanthropic capital, allowing their staff to “lift their eyes” and focus on impact and outcomes. Efforts should prioritise social impact.

The good news is that there are several Australian initiatives seeking to implement this dynamic, including Endowment for Impact and the Foundations Group for Impact Investing. These are two initiatives that seek to mobilise the bulk of philanthropic capital to grow impact investing in Australia, enable partnerships, and unlock the substantial potential of these invested funds to help tackle social and environmental challenges.

As some foundations seek to deploy their assets to ensure they are invested in a manner aligned to the social purpose of annual grant making or, at a minimum, that those invested assets “do no harm”, we are seeing an entire industry coalescing around social impact investing, or ESG frameworks, or similarly well-meaning investment approaches.

Generally, these investment approaches do not prioritise the needs of social change-makers, specifically for charities, at scale. New for-purpose-vehicles are being set up to enable this investment - from triple bottom line to social enterprises. However, traditional charity and non-governmental models, dependant on the traditional grant funding construct, are not yet positioned to access investment funds, specifically funds that are deployed in ways that empower those charities and facilitate greater flexibility for use.

What if charities were allowed to operate with the flexibility of private enterprise? What if charities could invest deployed capital to fully fund their charitable endeavours in a manner determined and prioritised by the charity itself? Philanthropic capital, deployed like this, may begin to change the power imbalance that exists under the traditional grant funding model. Charitable entities would be empowered to consider the question, what do we need to thrive? With this newly deployed philanthropic capital, the answer to that question will be determined with a focus on impact and outcomes that the charity prioritises.

Ask The Question

When I ask my friends and partners I work with, both from my time as CEO of The Ian Potter Foundation and in my current role as a Partner with Perpetual’s Community, Social & ESG Investment team, what do you need to thrive, the answers varied, but the general themes shared with me in those conversations were similar.

What they need is secure capital that can reliably fund critical aspects of their organisation’s operations, allowing these charities to develop a realistic operating strategy focused on impact, which is not subject to the vagaries of short-term, project-only, or specific outcome-based funding streams and which funds all aspects of the organisation’s operation. These charities seek access to substantial capital that supports them to achieve their mission, establish an informed and genuine partnership with funders grounded in trust and which provides a line of sight for the charity to sustainable income.

These social changemakers also shared the challenges they experience as grant seekers, including but not limited to:

• Frustration that funders are not leveraging all their available capital resources, with only 4% or 5% of endowments distributed as grants. Do we have any operating models to leverage the other 96% or 95% of these assets?
• The difficulty of accessing sufficient long-term and flexible funding commitments to support their ambition. Are there other ways to transfer capital?
• An inability to access secure, long-term capital, resulting in funding pressures which divert charitable organisations focus away from their mission and positively impacting their target cohort.
• The failure of many funders to “pay what it takes,” or to fund the full cost of a charity’s operations.
• The inability of many charities to establish genuine two-way partnerships that reshape the pre-existing power imbalance between funders and grant seekers.

A New Paradigm

Having thought about these challenges, I have developed a new concept, the Capital Impact Loan[2], the design of which has been informed by the above important observations.? It does not replace other fundraising mechanisms; it merely adds to the toolset.

The Capital Impact Loan raises loan funds from both PAFs and PuAFs, consistent with Australia’s Private Ancillary Fund (PAF) Guidelines and Public Ancillary Fund (PuAF) Guidelines. Clause 15(4) of those guidelines is clear. PAF’s and PuAF’s may achieve their annual distribution obligations by distributing cash, by providing property or by providing a benefit.

The Capital Impact Loan contemplates a substantial benefit being provided to eligible charities, in the form of 10-year to 25-year interest-free loans on terms that may be attractive to the lender (PAF or PuAF), and which provides long-term capital to the charity with no loan servicing obligation at all. Extensive due diligence, conducted by lenders on an eligible charity, will be necessary to ensure suitably capable charities are considered to receive capital impact loan funds.

The mechanics of the capital impact loan include:

• PAFs and PuAFs who lend money to eligible charities receive an annual grant credit equivalent to the value of the discounted interest rate, for each year the loan is outstanding.
• Loan funds are invested by the charity. The loan itself is not accessible to the charity, other than to establish a suitably structured investment portfolio.
• Those annual investment returns are distributed to the charity to fund core operating costs in a manner determined by the charity, with the sole focus of the charity being to deliver on its mission, particularly impact and outcomes.
• The invested assets are secured to protect lenders interests.
• An evaluation framework is developed and used to inform lenders of the impact and outcomes being achieved by the supported charity. These evaluations are used to inform formal 5-year funding gateways, at which time each lender decides whether to extend the loan for a further 5-year period or ask for repayment of the loan within an agreed period.
• At the end of the loan term, face value of loan funds is repaid to the PAFs and PuAFs out of the funds invested by the charity.
• Any investment value more than the loan funds repaid at the end of the loan term is retained by the charity to assist its organisational sustainability.

For the duration of the loan term, lenders are informed of the outcomes achieved by the charity, offering the chance for a true partnership to develop between funders and charities that demonstrates improved social or environmental outcomes consistent with both the charitable purpose of the funder and the mission of the supported charity. The power imbalance starts to dissipate, replaced by the shared experience of improved societal outcomes because of a new funding paradigm that supports the creation of a true partnership.

Supercharging Social Impact Investing

Australian Private Ancillary Funds and Public Ancillary Funds represent approximately A$18 billion of invested capital. Most of these assets are NOT currently invested to assist these social changemakers to achieve their mission. They are invested using traditional means to maximise returns, so that annual distributions grow as invested assets grow. Through this lens, most trustees of these foundations then consider how they will benefit society by distributing the annual grant funds to positively impact society.

Foundations, trustees, and their advisers can fundamentally change this operating model by implementing a new funding paradigm with products like the capital impact loan. In 5-years, my hope is that Australia has shifted between 5% and 10% of the existing $18 billion capital deployed through Public Ancillary Funds and Private Ancillary Funds, into capital impact loans. Between $900 million to $1.8 billion of capital deployed to empower charities to amplify their impact, taking a multi-decadal perspective, may transform the landscape for some Australian charities.

Under such a funding paradigm, the voices of those people who can genuinely change the world may be lifted. They may inform change, empower our most vulnerable, address pressing environmental, social and health issues and amplify the impact of that existing, multi-billion-dollar philanthropic capital base.

As a professional working with funders and charities in Australia as well as internationally, there is a consensus that to change the status quo in some intractable and complex social and environmental issue areas, philanthropic practices must continue to evolve and change.

Mobilising balance sheet capital to unlock sustainable funding that is potentially multi-decadal, using a capital impact loan, is one solution for Australian funders to seriously consider. If we want to develop such an innovative funding mechanism, here are the first few steps funders may consider taking on this journey:

1. Identify suitable people and/or organisations to support.
2. Ask those people and/or organisations what they need to thrive.
3. Provide them with enough balance sheet capital to make a difference and give them the freedom to deploy the annual income generated by that capital as they decide.
4. Give them enough time and runway to achieve meaningful change, supported by a mutually agreed reporting framework and a comprehensive monitoring and evaluation framework, and
5. Allow them to report on the outcomes they achieve.

Empowering people and/or organisations in this way may see them deploy your capital in a manner that changes people’s lives. Trust them and get out of the way.

The single biggest decision funders should make is – which changemakers to support in this way? Deploying a portion of your funds using a funding mechanism that truly empowers those you choose to support may elevate the voice of those social changemakers and may amplify their impact.

As funders, lets collectively do better and do more.

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Craig Connelly

Partner, Community, Social and ESG Investment

Perpetual Private

The views expressed in this article are the opinions of the author as at the time of writing and do not constitute a recommendation to act. Any views expressed are subject to change at any time.

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[1] Refer ianpotter.org.au, The Seahorse, Issue 45, December 2022

[2] A capital impact loan is yet to be launched with some eligible DGR charities currently exploring the opportunity.