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Legal aspects to making an impact




With the size of Australia’s superannuation industry reaching over $2 trillion, and some of the larger funds exceeding $50 billion, the superannuation industry is showing a steadily growing interest in the benefits of social impact investing.

That is not to say that the interest in social impact investing is restricted to Australia. Rather, over the past 10 years, there has been a steadily growing interest in the benefits of social impact investing globally.

The origin of social impact investing can be traced back to 2007 when the Rockefeller Foundation first coined the term “social impact investing” at a conference in Bellagio, Italy. Three years later, in September 2010, Social Finance Ltd (UK) created the first social impact investment in the form of a social benefit bond.

In September 2011, the NSW government commissioned the Centre for Social Impact to determine the feasibility of social benefit bonds in NSW and, in March and August 2013, it issued its first two social benefit bonds – the Newpin Social Benefit Bond and the Benevolent Society Bond.

In a nutshell, social impact investing is an investment in a project aimed at addressing a social challenge but which also produces both a measurable social and financial return. It effectively brings together capital and expertise from the public, private and not-for-profit sectors. Social impact investing, therefore, has the potential to produce meaningful social outcomes in areas that have traditionally been underfunded.

To date many of the projects have been structured in the form of a social benefit bond. These bonds are issued by the government, and purchased by investors, at the start of the project – in effect funding the project with private sector capital. An investment return is paid on the bond during the life of the project based on the achievement of results against predefined and measurable social outcomes (e.g. a drug rehabilitation program measured by the reduction in relapse rates among drug users).

In addition to social impact bonds, there is also a range of other forms which social impact investing can take. For example, other options that have been piloted in other countries include social and affordable housing projects, restructuring government procurement contracts and the establishment of investment funds to back social opportunities.


Issues for consideration by superannuation fund trustees

Before investing in a social impact investment, however, there are a number of legal and regulatory issues that a trustee will need to overcome, as follow.

At general law, a trustee may only invest in authorised investments. At a minimum, the trustee will need to be satisfied that the investment is within the terms of its investment power and its stated investment strategy.

Assuming the trustee has the power to make the investment, in determining whether to proceed, the trustee will need to ensure that they only do so if it is in the best interests of the beneficiaries of the fund in accordance with s. 52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (Cwlth) (SIS Act). Prevailing case law in Australia has interpreted this requirement to mean the trustee must be motivated to make the investment because it believes it is in the best “financial” interests of the beneficiaries of the fund rather than because of a specific social objective.

At general law, a trustee must also use the investment power entrusted to it for the purpose for which it was given. In the context of a superannuation fund, this is the purpose of investing the assets of the fund to best secure retirement incomes. However, does this necessarily prohibit the trustee from investing in an investment that is supported by sound financial analysis if the investment also happens to have a social benefit?

Lastly, in determining whether to proceed with the investment, the trustee will also need to discharge the standard of care skill and diligence expected of it under s. 52(2)(b) of the SIS Act. This will require the trustee to apply rigour in objectively assessing the investment, which would include an assessment of the risks of the investment, the likely return, and whether the risk is justified by the return.


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    Further guidance

    The recent Financial Systems Inquiry dealt with, albeit briefly, the need to consider the future of the social impact investing framework in Australia. Indeed, recommendation 32 of the inquiry supports the fact that uncertainty surrounding the legal and practical hurdles associated with social impact investing persists.

    The government response to recommendation 32 of the inquiry was positive, stating that the government “agree(s) that impact investing has the potential to benefit government and taxpayers”. It also went on to say that it would prepare a discussion paper on ways to facilitate the growth of social impact investing in Australia, and that guidance to superannuation fund trustees on engaging in impact investing will be a matter for the Australian Prudential Regulation Authority (APRA) to consider. To date, APRA is yet to publish its findings.

    Despite the issues discussed in this article, social impact investing has nonetheless gained traction over the last few years. Indeed, as this traction turns to rapid momentum, with estimates suggesting that the Australian social impact investing sector will grow in size to roughly $32 billion within a decade, superannuation fund trustees need not sit on their hands waiting for the government or APRA to give further guidance.

    Rather, trustees can consider investing in social impact investments opportunities so long as they subject the investments to the same rigorous investment criteria applied to other, mainstream investments in their portfolio.


    Maged Girgis is a partner at Minter Ellison.