The potential for superannuation funds to make investments with a social impact M Scott Donald, Jarrod Ormiston and Kylie Charlton * The trustees of Australia’s superannuation funds oversee the administration of pools of investible moneys of unprecedented size. They are required both by statute and by the general law to exercise their powers in pursuit of the best interests of their members. At the same time, there is a strong demand for capital from what have come to be called “social impact” projects. These are projects which expressly seek to address social or environmental issues while providing competitive financial return to investors. This article finds that superannuation fund trustees may be able to provide finance to such projects if they are careful in their attention to the specific issues arising from these types of investment and they remain focused on how the drivers of expected returns and risk contribute positively to the investment strategy they have designed for their funds. INTRODUCTION The trustees of Australia’s superannuation funds have to find over $30 billion of new investment opportunities each year. 1 Much of this money will flow into traditional equity and fixed income markets. Some will flow into property markets and some into investment vehicles designed to facilitate investment into infrastructure projects. However, the inflow is unrelenting. It will not be for many decades before payments out of the system to retirees start to exceed member contributions. At the same time, there is a strong demand for capital in what have come to be called “social impact” projects. These include projects directed towards alleviating poverty, providing access to education, clean water, affordable housing and other resources, and protecting human rights, as well as projects directed towards improvements in the physical environment. Traditionally, financing for such projects has come from government and charitable sources. However, in a recent report, the Department of Education, Employment and Workplace Relations cited Cohen and Sahlman to the effect that: During the past century, governments and charitable organizations have mounted massive efforts to address social problems such as poverty, lack of education, and disease. Governments around the world are straining to fund their commitments to solve these problems and are limited by old ways of doing things. Social entrepreneurs are stultified by traditional forms of financing. Donations and grants don’t allow them to innovate and grow. They have virtually no access to capital markets and little flexibility to experiment at various stages of growth. The biggest obstacle to scale for the social sector is this lack of effective funding models. 2 The question that many in the social impact domain are asking is whether there is any way to apply some of the $30 billion (or indeed the $1,803 billion already in the superannuation system) 3 to * MS Donald BEc, LLB, LLM, PhD, CFA; Deputy Director, Centre for Law Markets and Regulation, UNSW Law; External Consultant, Herbert Smith Freehills. Jarrod Ormiston BCom (Liberal Studies); Researcher and Sessional Lecturer, Entrepreneurship and Innovation Program, The University of Sydney Business School. Kylie Charlton BCom, MBA; Managing Director, Unitus Capital. The authors would like to acknowledge the input and encouragement of Michael Vrisakis and David Cooper of Herbert Smith Freehills, David Rickards of Social Enterprise Finance Australia (SEFA), and Richard Seymour of the University of Sydney. All errors and omissions remain the authors’ own. 1 APRA, Quarterly Superannuation Performance (Interim Edition, December 2013) p 6. 2 Cohn R and Shalman WA, Social Impact Investing will be the New Venture Capital (17 January 2013), cited in Addis R, McLeod J and Raine A, IMPACT – Australia: Investment for Social and Economic Benefit (DEEWR, March 2013) p 8. 3 APRA, n 1, p 6. (2014) 32 C&SLJ 540 540 © 2014 Thomson Reuters (Professional) Australia Limited for further information visit www.thomsonreuters.com.au or send an email to LTA.service@thomsonreuters.com Please note that this article is being provided for research purposes and is not to be reproduced in any way. If you refer to the article, please ensure you acknowl- edge both the publication and publisher appropriately. The citation for the journal is available in the footline of each page. Should you wish to reproduce this article, either in part or in its entirety, in any medium, please ensure you seek permission from our permissions officer. Please email any queries to LTA.permissions@thomsonreuters.com