Social Impact Investing

SOCIAL IMPACT INVESTMENT: BUILDING THE EVIDENCE BASE
7. POLICY ACTIONS AND IMPLICATIONS
This chapter provides an overview of different types of policy actions to support the
Social Impact Investment market taken to date. It reviews the challenges for
policymakers planning to take actions to support this nascent field and makes
recommendations focusing on the steps required to build the evidence base. These
including developing common definitions, building the necessary data infrastructure
and primary impact measurement as well as evaluation of broader social outcomes.
7.1. Policy Actions and Implications
7.1 There are a number of market failures in social impact investment. The most fundamental failure
relates to the very nature of social impact investment. The social returns generated from social impact
investments are primarily external to both the investor and the investee, with the primary beneficiaries
being those groups whose needs are being targeted, or accrue to society as a whole. Given market
inefficiencies, these externalities are not priced into social impact investment transactions (HM
Government, 2011).
7.2 However, in addition to this there are failures which relate to the functioning of the market itself.
As in the mainstream financial markets, there are information asymmetries between investors and
investees. These asymmetries are further compounded by the lack of commonly accepted standards for
measuring social impact investment, confusion of terminology and lack of information about both existing
investment provision as well as related government policy (HM Government, 2011). There is also
imperfect competition in the market due to high transaction costs as well as the lack of intermediaries in
the form of brokers, advisors, exchanges and other market mechanisms.
7.3 The public sector can play a catalytic role in the social impact investment market in terms of
creating a conducive regulatory environment, encouraging greater transparency and taking concrete steps
to help develop the market. Actions can be taken at the international, national or local level. However,
actions initiated in one country or region may not be appropriate for another – policy objectives,
experience and local context must be taken into account.
7.4 New and\or inefficient markets may benefit from government involvement. Certainly, the social
impact investment market is in its early days and needs to find scalable models. As policy makers seek to
facilitate the development of the market, they should keep in mind that public support should be a catalyst
and avoid “crowding out” of the private sector in order to ensure the creation of a sustainable market.
Government intervention, while well-meaning, can have unintended consequences.
7.2. Policy actions to date
7.5 There are various actions that governments could take to support SII, ranging from indirect to
direct. Indirect actions can include ensuring that the necessary legal frameworks and structures are in place
including the streamlining of regulations and requirements for investment (Thornley et al, 2011). Direct
actions can include various forms of support to social ventures and facilitating the developement of
112 © OECD 2015