The Genesis of an investment for good
PAUL GOODWIN, MANAGING DIRECTOR, INSTITUTIONAL, ANZ | MAY 2019
Social impact bonds are changing the way groups finance their operations as borrowers move to align their sustainability goals with their funding.
In 2017, ANZ helped the Genesis Youth Trust pilot an innovative social impact bond, the first registered charity to receive this type of funding in New Zealand. This is their story.
“There is growing investor demand for investments which aim to achieve positive social and environmental impacts, as well as positive financial returns.”
PAUL GOODWIN, MANAGING DIRECTOR INSTITUTIONAL, ANZ
For almost twenty years the Genesis Youth Trust has been working in communities across Auckland, helping at-risk youth and their families.
The Trust works with first-time and repeat offenders, helping them into education, training and employment. As New Zealand’s largest police-affiliated youth development program, Genesis Youth combines social work, youth mentoring, family therapy and counselling services to promote positive lifestyle changes.
Those who have seen firsthand the work of the Trust speak highly of the dedication of the people who work there; it’s clear they will go the extra mile, including spending their own free time to help ‘their kids’.
But like many other charities, long-term funding can be a challenge. For Genesis Youth, that all changed in 2017 when the Trust was selected to pilot an innovative social impact bond.
The G-Fund Social Investment Bond (SIB) was arranged and brought to market by ANZ, culminating a four-year process involving the NZ Government, social service providers, and financial and other intermediaries.
The $NZ6 million bond gives the Trust six years of funding. Genesis Youth will work with up to 1,000 children and teenagers and their families for up to two years each, at least twice the time the staff would normally be able to spend with each young person.
For the taxpayer, the beauty is the government only has to pay when agreed targets are met, and setting those targets involves a clear process of identifying what the key outcome targets are that deliver measurable improvements in wellbeing.
Agreed targets ultimately take the form of percentage reductions in severity and frequency of re-offending and are set at between 10 per cent and 15 per cent to achieve full payment.
As a ‘lead indicator’, Genesis Youth Trust is also pioneering the use of a psychological assessment tool that quantifies criminogenic risk factors. Longitudinal assessments, independently verified, are undertaken on clients at regular intervals over a two-year period.
The early assessments help to customise the intervention and the latter ones track reductions in risk factors – for which Genesis also gets paid if reduction targets are achieved.
For investors there is the opportunity to earn a risk-adjusted return which is not correlated with capital markets. Instead the returns are correlated to the project’s outcomes; what everyone involved hopes will be a positive social impact.
The payments are made by the government to a special-purpose vehicle – G-Fund - which then makes payments to both the Trust and to investors as the agreed targets are met.
Social bonds are a way for private and not-for-profit organisations to partner to fund and deliver services to improve social or environmental outcomes.
ANZ’s commitment to innovation in its social lending practices has been recognised across the broader industry, with the bank picking up the Institutional Banking Innovation prize at the annual Institute of Finance Professionals New Zealand (INFINZ) awards.
The Genesis Youth Trust Social Bond was accepted by ANZ NZ Head of Capital Markets Dean Spicer and Director, ANZ NZ Investment Bank Christine Smith.
“I truly hope the award and resulting publicity help make the concept more scalable, allowing capital markets to work with different groups to deliver a broad range of social outcomes for NZ,” Paul Goodwin, Managing Director Institutional, ANZ NZ said.
Individuals, philanthropists, institutions and governments around the world see impact bonds as a way to provide funding for social and environmental projects or causes. As of January 1 the Brookings Global Impact Bond Database tracked 134 impact bonds as either completed or in implementation, up from 110 last year.
The report says most of these contracts are social impact bonds (SIBs), where the outcome funder is the government, while seven are development impact bonds (DIBs), with third-party funders paying for outcomes.
The total amount invested is small, around US$370 million, but the potential is large. Brookings’ report says analysis of early deals shows most have returned principal to the investors as well as positive returns.
In countries like the United Kingdom, the US and Australia, state or federal governments have helped the development of social bonds. They see them as a way to help fund the improved delivery of services that will achieve better social outcomes for the community.
Social bonds generally are not used as a replacement for government services - rather they are a way to allow not-for-profit organisations, charities and social enterprises, who are already involved in providing the relevant services to the government, to scale up a promising service innovation, or undertake a longer and more flexible programme of services than is possible under standard government contracting arrangements. This is the case with the Genesis Youth Trust.
The programs are often preventive in nature. The aim is to achieve benefits over the longer term through greater investment in the shorter term.
The bonds have the potential to establish a new market for financial innovation that brings together government, philanthropic organisations, investment funds and private sector companies to provide funding, know-how and governance support to drive more efficient and effective delivery of outcomes that benefit our communities.
The bonds are part of a wider movement known as impact investing. The sector also includes green bonds, strategic philanthropy, ethical funds, social enterprise and other investments or activities designed to achieve social or environmental benefits, as well as financial returns.
The Global Impact Investing Network has estimated more than 1,340 organisations currently manage around $US502 billion in impact investing assets globally. It’s a large number, but of course pales beside the wider investment industry, which The Boston Consulting Group estimated was worth $US76 trillion in 2018.
Although relatively small the potential for impact investing, and specifically impact bonds, is huge.
It is important to recognise impact bonds can be challenging to bring to market for a number of reasons.
First, they require collaboration across a range of different government departments, as well as the service provider, investors and other financial intermediaries who will be involved in the transactions.
Investors need to see a track record from a service provider in order to be comfortable with the performance risk they are taking. This is where the Genesis Youth Trust’s almost two-decade history was important in the progression of the G-Fund SIB.
Transactions involving smaller service providers can be particularly challenging. Investors prefer service providers with some financial strength and other sources of income who may be able to contribute financially to support service delivery where there are budget overruns.
There also needs to be a reliable method of measuring outcomes which can be validated by an independent third party.
Social bonds have also attracted controversy. There have been concerns and misconceptions that the private sector is potentially making a profit from a vulnerable client group.
Social bonds raise sums that are small by the standards of the capital markets, but they require as much, if not more, due diligence by investors than larger deals which can offer higher or less risky returns.
Despite the challenges, ANZ is keen to help develop this market. There is growing investor demand for investments which aim to achieve positive social and environmental impacts, as well as positive financial returns.
We see potential in the conservation, environmental and climate finance sector where there is a substantial funding gap and a need to bring in private investment. The characteristics of impact bonds also seem well suited to the task at hand; with upfront investment required to deliver what is hoped will be longer-term benefits.
The bonds can also help scale up innovative programmes which have already demonstrated a positive track record, while also allowing the service providers the time to adapt and improve their services in order to achieve better results.
Impact bonds are still a very small part of the financial markets but ANZ believes there is great potential for the private sector and government to work together to deliver better outcomes for everyone.
Paul Goodwin is Managing Director Institutional at ANZ
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