Social Impact Investing

SOCIAL IMPACT INVESTMENT: BUILDING THE EVIDENCE BASE
Table 4.8. List of attributes for Risk Adjusted Return Expectation
CHARACTERISTICS Attributes of the Characteristic Eligibility *
7. Return expectation
Grants
Return of Capital
Profit =< market RR
Profit > market RR
* Eligibility used in the OECD definition for the purpose of this report.
Source: OECD.
4.54 At the other extreme, are expectations of profits above the market risk adjusted rate of return. On
the one hand, investments made with the purpose of exceeding risk adjusted market rates of return would
be no different from the mainstream for-profit market, thus not considered SII for the purpose of the
working definition. On the other hand, effective rates of return on SII may turn out to be as high, or in
some cases, higher than market rates of return. It is important to note, however, that investors expecting a
return above risk adjusted market rates indicate that they regard such an investment to be no different from
a mainstream for-profit investment and therefore it should fall outside the scope of SII. As noted earlier,
rates of return vary across social sectors, and would also be taken into consideration by investors. Of
course, the main issue is defining the “market rate of return” for social impact investment. To some degree,
this characteristic is therefore a matter of principle in terms of the intention of the investors.
4.55 The profit distribution policy of companies can be a determinant of whether a certain flow can be
considered as SII. The discussion of this characteristic has stirred significant debate — in particular, on the
extent to which social enterprises should be defined by reinvesting their profits (e.g. Galera & Borgaza,
2009). Some degree of profit distribution might be needed to guarantee that investments yield positive
returns. The extent to which social businesses are able to redistribute profits is also dependent upon their
legal structure. For example in Italy, the legislation on social enterprises is currently being reviewed to,
amongst other aspects, allow social enterprises to distribute profits (WGMA, 2014 and NAB-ITA, 2014).
4.3 OECD working definition of SII
4.56 For the purposes of this report, the OECD has sought to draw some initial eligibility boundaries
for each of the core characteristics of SII. A summary of these suggestions is listed in the table below and
in the draft OECD working definition of SII.
OECD Working Definition of SII:
OUT
IN
IN
OUT
Social Impact Investment is a transaction between an investor and investee in a social area, targeting
beneficiaries in need. Beneficiaries targeted should be at risk populations and the good provided
should have a mix of public and private good characteristics. These transactions are often made using
intermediaries. The investee in the transaction should, at least, inscribe a compulsory reporting clause
of its social activity in the statutes, as well as provide a formal evaluation of social impact. In parallel,
the investor should, at least, have a compulsory reporting clause for social impact investments and
have return expectations above or equal to zero, but not above the market rate of return (actual return
may be higher).
4.57 As discussed earlier, while all of the characteristics listed in the chart below are necessary, none
of them alone are sufficient to define SII. A transaction can be considered SII only if it meets the defined
eligibility boundaries for each of the seven characteristics.
© OECD 2015 55