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Is Financial Innovation in Social Investing providing further support for the chosen few?

November 8, 2017

I recently assisted in the research for OurHK Foundation's work on Financial Innovation within the social impact space, and have just come back from their presentation on the topic at the annual Social Enterprise Summit in HK.


The report attempts to push forward the development of a Pay-for-Success Scheme as a policy proposal to the HK government, offering a solid introduction to the mechanism of an outcome-based investment structure - a social impact bond is an example - and also highlights top-down benefits and pitfalls that are relevant for public consideration. It concludes with suggestions for infrastructure improvement, including government-driven establishment of Social Impact Assessment standards and intermediaries. 


Although I commend OurHK for a thorough analysis with actionable policy suggestions, my concern is that they are presenting this as a replacement solution to current government spending for areas such as Healthcare and Social Welfare. 


The issue with this is that outcome-based investing necessarily favours projects with more quantifiable metrics; the necessity of establishing rigourous metrics could also underappreciate intangible and indirect outcomes. 


As such, this should NOT serve as a replacement for existing government spending - pursuing this route would effectively be using government budget to sweeten necessary social infrastructure investment for private investors, whilst potentially deteriorating overall resource allocation and service provision for those most in need. 


Indeed, the potential benefits of social impact bonds or pay-for-success structures come from incentives alignment and funding diversification, enabling expansion of the overall funding potential of social ventures. 


It is for the same reason that impact investing has to be considered in conjunction with ongoing philanthropy - and in fact, the recent rise in impact investment globally has been funded by resource reallocation from for-profit investors, rather than from philanthropic organisations. 


It is therefore of utmost priority to push and expand awareness of impact investing amongst traditional investment managers and funds - it may also be a more profitable investment strategy than the more prevalent SRI (more to follow on this topic!).

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