Impact investing: A framework for policy design and analysis

By Ben Thornley et al, Insight at Pacific Community Ventures & The Initiative for Responsible Investment at Harvard University, January 2011

Despite the significant enabling role governments could play in social impact investing, the role of government has been largely under-represented in the literature on social impact investing to date. This report presents a useful framework for thinking about the role of government policy in creating an enabling environment for social impact investing. The key findings of the report draw heavily from 16 case studies of existing individual policies from 13 countries (including the National Rental Affordability Scheme (NRAS) in Australia) with influence on social impact investing across a diverse range of issues and utilising various policy methods.


The report identifies that the broad goal of policy is to change the underlying risk return tradeoff and address structural barriers, thereby motivating capital towards social impact investing. Policy can be aimed at either:


  • Supply – increasing the amount of capital for investment
  • Demand – increasing the availability or strengthening the capacity of capital recipients
  • Direction – adjusting the terms of trade, market norms or prices


In each of these areas government can participate directly in the market or influence impact investing through policy or regulation. Examples of direct government participation include: government may elect to co-invest to increase the supply of investment capital; support technical assistance and education for existing or potential capital recipients to strengthen demand for capital; or direct capital to the market through procurement of goods and services from social businesses. Alternatively, government may implement policy and regulation that adjusts the variables determining the market attractiveness for social impact investing, including mitigating risk, enhancing return or reducing transaction costs. Examples of policy and regulation include: tax credits or subsidies to enhance return; investment rules and requirements to mandate targets for investment into underserved markets; or introduction of new corporate legal forms to facilitate the development of and investment in social businesses.

In Australia, over the past 12-18 months we have begun to see direct participation by government across all three areas. Under the Social Enterprise Development and Investment Fund (SEDIF), the Commonwealth Government is increasing the supply of capital by offering co-investment of $20 million. The Social Impact Bonds pilot under consideration by the NSW Government will effectively direct capital.  Under the Community Development Financial Institution (CDFI) Pilot, the Commonwealth Government is building capacity of organisations.

The report concludes providing a framework of six practical criteria for designing and assessing potential policy aimed at enabling the environment for social impact investing:

  1. Targeting – policy must be matched to a specific objective (eg. social or environmental outcome, investor type, geography)
  2. Transparency – policy must be transparent to investors so informed decision making can occur
  3. Coordination – policy will be more effective if leveraging existing policy and markets
  4. Engagement – investors need to be engaged upfront to inform design of policy
  5. Commitment – policy must be of an appropriate duration, scale of resources and enforcement
  6. Implementation – bureaucracies must be able to provide effective implementation that gives confidence to investors in policy

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