"Impact investing" could help solve some of society's most pressing issues
LONDON (Thomson Reuters Foundation) - Governments can unleash billions of dollars to tackle social problems more effectively if they take bold steps to reduce barriers to investing for both profit and social good, a task force set up by the world's richest nations said on Monday.
In its first report, the G8 Social Impact Investment Task Force calls on governments to make tax and regulatory reforms to catalyse the market in investments that generate social or environmental benefits alongside financial returns.
"This is not about increasing or reducing public expenditure, but helping government to benefit from innovation and private sector capital in order to achieve more impact with the money it has," Ronald Cohen, the chair of the year-old task force, said in a statement.
The report highlights the potential of so-called "impact investing" to help solve some of society's most pressing issues, such as caring for children and the elderly, community regeneration, financial inclusion, housing and prisoner reoffending.
Already, some $46 billion in impact investments are under management globally, according to estimates. While this figure is growing, it is only a tiny fraction of the $210 trillion invested in financial markets around the world.
U.S. investment bank J.P. Morgan estimates that capital flows into impact investing could reach $1 trillion by the end of the decade.
The report sets out eight recommendations to governments and financial service providers in the Group of Eight countries.
They include allowing charitable foundations to consider social as well as financial returns on their investments and boosting the use of social businesses in public services.
The task force also said pension funds and providers of tax-advantaged savings schemes and products should do more to include impact investments as part of their offering.
The concept of impact investing has gathered momentum as cash-strapped governments struggle to cope with poverty, broken health care systems, crime and poor education and increasingly look for money from the private sector.
In Britain, for example, a youth offender costs the state £21,268 ($34,600) per year, while a successful programme to prevent reoffending could cost as little as £7,000 ($11,400), the report said.
"Social impact investment harnesses the forces of entrepreneurship and capital and the power of markets to do good," Cohen said.
Britain has been among the leaders in efforts to boost impact investing. In 2010 it pioneered a social impact bond, a £5 million ($8 million) investment by 17 foundations and charitable trusts to reduce reoffending by prisoners.
Investors only receive a return if agreed targets are met, and early indications suggest they will get their money back with a positive return, the report said.
Similar bonds have since been launched in Canada, Japan, Australia, Germany, India and the United States.
Impact investment can also play a role in the delivery of the new sustainable development goals to succeed the U.N. Millennium Development goals after 2015 by increasing the flow of capital to tackle climate change, water scarcity, food shortages and lack of access to health care, the report said.
"Impact investing can transform development finance because it can add momentum to existing private sector development efforts, " Cohen told the Thomson Reuters Foundation. "If we're going to bring this to a significant level, we need international development organisations (such as the World Bank) to play a leading role in this."
This can be done through innovative finance tools, such as development impact bonds, Cohen said.
The first development impact bond - to improve the quality of girls' primary education in India's Rajasthan state where 3.7 million girls are out of school - was launched in June 2014 in partnership between two foundations and a non-profit organisation.
Efforts are also under way to fight malaria in Mozambique and sleeping sickness in Uganda, as well as to improve education in Rwanda through development impact bonds, the report said.
($1 = 0.6147 British Pounds) (Editing by Ros Russell)
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