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Indigenous Disadvantage and Impact Investment

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I must commend the Australian governments, at both the Federal and State/Territory level for committing to reduce Indigenous disadvantage. As part of the governments’ efforts to reduce Indigenous disadvantage, they charged the Productivity Commission to produce a biennial progress report series – the Overcoming Indigenous Disadvantage (OID) series. The 2014 edition was released in November. I was interested to read this edition to see how efforts to reduce Indigenous disadvantage was faring, and if there was potential to for impact investment to make a difference.

What is impact investment and how does it relate to Indigenous disadvantage? Impact investment is a broad investment class that blends financial returns with social and/or environmental returns. Social Impact Bonds (SIBs) are a good example. The general idea is to develop financial instruments that could appeal to profit-seeking investors – i.e. to use financial markets to address social and environmental problems. Indigenous disadvantage could be a good candidate for impact investment because of the scale of the problem (disadvantaged Indigenous Australians are often said to live in conditions worse than many developing countries) and the disproportionate government expenditure: both levels of Australian government were estimated to spend $25.4 billion in 2010-11 on Indigenous Australian. This equates to over $44,000 per Indigenous Australian compared to nearly $20,000 for non-Indigenous (see the 2012 Indigenous Expenditure Report for more details. Impact investment instruments such as SIBs and pay for success are predicated on producing superior social outcomes for lower costs. If this is true, than there could be significant efficiencies in Indigenous social policy.

The 2014 OID report presents a mixed picture on Indigenous disadvantage. Life expectancy, child mortality, education attainment (secondary and tertiary) and paid employment outcomes all improved. Nevertheless, there are areas that require significant improvement: mental health, suicide rates, incarceration rates (both adult and juvenile) and access to clean water and electricity. Also, there are areas of significant data gaps that mask the extent of progress (or lack of) on the key indicators of disadvantage.

So can impact investment have an impact on Indigenous disadvantage? So far, there is little evidence to say either way. Until someone actually implements a program we don’t have enough data points to answer this question. It is true, that Indigenous disadvantage is a multi-causal ‘wicked problem‘, but that doesn’t mean impact investment is inappropriate. Questions may be raised on the quality of data that can be used to measure outcomes. The Productivity Commission is collecting some data as are the Australian Institute of Health and Welfare and the Australian Institute of Family Studies. Arguably, Indigenous social policy would have amongst the best datasets of the policy portfolio areas of Australian government.

What may appeal to investors is the possibility of tying in environmental and social outcomes. Indigenous Australians have a strong connection to the Australian ecosystem. Indigenous knowledge is being used by some scientists to better understand how agriculture, gardening and architecture can be adapted for the Australian landscape. Transferring the responsibility of high value and fragile ecosystems to Indigenous management could address both environmental and social outcomes. Environmental management could provide a new source of income through employment as park rangers and tourism. Potentially, environmental markets such as voluntary carbon markets and biodiversity offset markets could also provide additional sources of income. There is also the possibility of agricultural production (for bushfoods), fisheries management and renewable energy production as future sources of income on these lands.

So while Australian Indigenous disadvantage may look ‘too hard’, combining it with environmental and natural resources management may provide a way to kill two birds with one stone. Given that the most disadvantaged Indigenous Australians live in remote communities, combining social and environmental policy thinking could yield solutions to the persistent problem of Indigenous disadvantage and therefore a role for impact investors to make the solutions happen.