The Start-Up Nation has something to learn about embracing social innovation

In 2018, there were $500 billion in impact assets, double from the previous year.

By YARON NEUDORFER
August 8, 2019 21:53
3 minute read.
Approximately 170,000 Americans live in Israel.

Approximately 170,000 Americans live in Israel. In total, more than one million U.S. citizens and green card holders – who both live overseas and own more than 10% of a foreign corporation – faced the prospect of paying the tax.. (photo credit: REUTERS)

On the first week of July, the G7 Summit published 10 financial principles for sustainable development. Two of them relate to impact investments and social impact bonds. Impact investments are investments bearing a measurable social value alongside a financial return to investors. The significance of this step is the acknowledgment in the increasing global need for impact investments bearing not only a financial return, but measurable social and environmental good.

In 2018, there were $500 billion in impact assets, double from the previous year. The business world is starting to discover the diverse benefits of impact investments, as a financial tool bearing a return, as a tool leading social change and improving people’s lives around the globe and as a policy enabling a better connection to employees, suppliers, customers and eventually shareholders. To a traditional investment analysis based on parameters of risk and return, there is now another variable – risk, return and social/environmental impact.

The declaration of the G7 illustrates that even the governments of the strongest nations in the world understand that in impact investments and social impact bonds, there is a potential to lead changes in developed and developing countries, and mobilization of capital to solve social and environmental problems. This is a real breakthrough, because to date, the implementation of the policy for social changes by the G7 nations have involved a lot of resources, but in the absence of mechanisms for defining goals and measuring results, investment efficiency cannot be verified, even in social terms.

One of the interesting models is Pay for Success, which provides a solution to this problem. In this model, payment to investors is a result of success in achieving the social goals, which is measured by a professional entity focusing on results. The model links the social return achieved from the investment to return, i.e. the financial return investors will receive is contingent on achieving the social results, and thus returns will increase the more social results are obtained, but the investors might lose if there is no significant change in the social indices that the program – financed this way – deals with. This is an innovative model that is now starting to be embedded and permeated into the public sector.

In Israel, impact investments are also drawing the attention of the business sector. Institutional investors have invested in projects to reduce social gaps, for example: preventing dropout from higher education and promoting the public health, like the social impact bond to reduce type 2 diabetes with populations at risk. We also see more financial entities turning toward financial tools that consider social value and are formulating various strategies for impact investments. Recently, we are witnessing the establishment of investment funds where all investments are only in projects with a social or environmental measured and managed impact.

In order to have a truly sophisticated impact market in Israel, the government and the public sector must adopt and assimilate these tools. First, regulatory reference is required to accurately define what data should companies publish in order to measure their impact. Aligning a regulatory line will increase trust among the various actors, avoid fraud and attract more parties to make social investments in a safe environment. Beyond that, as in countries like Japan and the UK, we need to create a wholesale fund financed with unclaimed assets [such as lost bank accounts] with the aim of investments in projects that have measurable social results.

These steps and others, like tax incentives for impact investors, are required in order to bring Israel in line with the world’s leading countries and financial organizations that understood the economic and social potential incorporated in impact investments. The innovative models ensure that the financial investment yields not only financial returns but also maximum social outcomes and generates knowledge in solving social problems that can be replicated in other cases and countries.

The writer is the CEO of Social Finance Israel.


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