Ministry of Health well on the way to delivering NZ's first social impact bond

The Ministry of Health is well down the track to pilot the country's first social impact bond, originally mooted 18 months ago, which would pay out on measurably improved social outcomes such as reductions in alcohol and drug use or recidivism.

The government gave approval in October 2013 for the ministry pilot to test the appetite of healthcare providers and investors for the bonds, which are already going mainstream in the US and in the UK where they started five years ago. With social impact bonds, typically a central or local government pays investors a return based on achieving agreed social outcomes.

The Ministry of Health didn't respond to BusinessDesk's request for comment but is understood to be at the stage of matching potential intermediaries and service providers, with a short-list due out later this month.

The New Zealand Initiative conservative think-tank is about to release a report on social bonds later this month which reviews overseas experiences and the potential application of the bonds in New Zealand.

Report co-author Jenesa Jeram said overseas experience shows these bonds can markedly improve social outcomes and accountability in the social service sector. However, there are a number of challenges. "These include: the relative immaturity of the social finance and investment market; the complexity of initiating social bonds; and political risks such as a change of government or policy, and overly bureaucratic processes."

Australia has so far launched two A$10 million social impact bonds, both involving the New South Wales state government and programmes working with at risk families to prevent child abuse and neglect. The first, with UnitingCare Burnside, funded the expansion of the NewPin programme, which restored 28 children in foster care to their families and prevented a further 10 families from entering the children protection system in the first year of the bond. Investors received a 7.5 percent return for the first year against a targeted 10 to 12 percent financial return over the bond's seven-year term.

The other bond was with social service provider The Benevolent Society, which partnered with the Westpac and Commonwealth Bank of Australia as pro bono advisers and investors. The society itself invested in the bond to promote confidence it would deliver on the required outcomes. The bond was unusual in that it had two tiers of investor risk - with 40 in the low-risk tranche and 17 in the higher-risk, which proved more attractive and sold out faster.

Nicki Ashton, head of strategic partnership for Russell Investments, told a philanthropy conference in Auckland she expected an upsurge in these bonds in Australasia in the next five years.

Impact investing - where investors get a social as well as financial return for their risk - has been gaining steady momentum in Australia and New Zealand with interest moving from the private wealth markets into institutional ones.

The 2014 Global Sustainable Investment Review said in Australia and New Zealand the depth of impact investing market was maturing, off a low level. From 2012 to 2014, assets used to finance community investment, loan portfolios dedicated to community benefit or microfinance, and impact investing funds, increased to US$2 billion from US$1.1 billion. The US is the largest market with an estimated $36.8 billion in such assets.

In New Zealand, overall responsibly managed assets now account for US$22 billion in assets, or a significant 40 percent of total assets, compared to just 2.3 percent in Australia. The figure is skewed here by the New Zealand Superannuation Fund's influence.

Investors are using a combination of approaches such as screening companies that don't align with their values such as gambling or tobacco companies, integrating environmental, social, and governance factors, sustainability-themed investing, and social impact investing.

Ashton said one of the drawbacks with impact investing has been concerns by not-for-profit trustees about whether their fiduciary duty allows them to include social factors in their investment criteria.

"That conversation is changing with a lot of work in the UK to redefine fiduciary duty to make it okay for trustees to consider financial and non-financial alignments when making decisions," she said.

Recommendations from the report of the Social Impact Investment Taskforce, established under the UK's presidency of the G8, included introducing regulatory and tax incentives for impact investing, reframing the fiduciary duty of trustees, and more specialist intermediaries to link supply and demand.

Justin Rockefeller, the great-great-grandson of Standard Oil founder John D. Rockefeller, has co-founded non-profit body, The Impact, which aims to increase the pace of solving social problems by improving capital flows to businesses creating a measurable social impact.

He told the conference that investors who pledge to make impact investments can use the new website to track their social impact and financial progress and share that data with others.

"Like in the early days of LinkedIn and Wikipedia, network effects are more useful the more people contribute and the more valuable the network becomes," he said.

Rockefeller said he expected impact investing to grow substantially as 'Millennials', people born around 1980, mature and accrue more wealth to invest.

"It's already the nature of Millennials to care about the moral consequences of what they do with their money. What is needed is more product in this space, better managers launching funds in this space, and better entrepreneurs launching companies in this space," he said.

(BusinessDesk)