I’m a confessed newbie to the social enterprise world so like most members of the millennial generation (okay who are we kidding – most members of the 21st century world) I had a quick consultation with my main knowledge guru Mr. Google in an effort to familiarize myself with a topic I know relatively little about. Thank you guru for instantaneously upping my cred on the subject (and to echo the sentiments of my fellow shameless peers, how did our parents survive without you??).
I’m now adequately armed to share some thoughts on Social Impact Bonds (SIBs). Hit enter on such a query and a number of things become immediately clear. This is trendy terminology; SIB’s and impact investing are hot topics that are getting some serious attention. SIB’s are innovative and have serious potential to drive private capital toward funding social services, but as they are still a nascent financing mechanism, the jury remains out. In true fashion for what could be the “next big thing”, there are voiced critics for this type of investing as well as strong supporters.
Utilizing a pay for success (PFS) model, a social impact bond harnesses private capital to fund a social service and then engages the government to repay those investors if agreed-upon outcomes are achieved. In a typical SIB scenario, an agreement takes place amongst multiple stakeholders including government agencies, investors, service provider organizations and an intermediary that brokers the project (for example, a nonprofit with a goal to address recidivism or homelessness). The government identifies a target population and defines expected outcomes, while the service providers/intermediaries work toward meeting these goals and alleviating the social problem. If the defined outcomes are met, the government or intermediary acting for the government repays the initial capital, with the potential for positive returns if the defined outcomes are exceeded.
Social Impact Bonds as Financing Options for Social Enterprises
SIB’s are attractive financing options because they can provide large upfront payments, a steady source of capital, and more flexibility than traditional grants might offer. The public-private partnerships that form the cornerstone of SIBs also offer a solution to ineffective or underfunded government efforts to combat societal problems, and could save taxpayers from paying for failed government policies. Those critics of SIBs argue that this private-public approach puts too much power in the hands of big corporations and the wealthy, maintaining that the government should not outsource control and authority around social services.
For an organization looking at SIBs as financing options, clarity around social impact opportunity and defined outcomes will be particularly important (how do you truly measure social impact?). A recent Forbes article discussing SIBs cites a pertinent comment from Audrey Choi, CEO of Morgan Stanley’s Institute for Sustainable Investing: “If we want this market to really grow, we have to make sure we go into this in a ‘best in class’ way.” The writer goes on to explain that robust implementing agreements and comprehensive due diligence will be critical, and that while agreements must address allocation of commercial risk, it doesn’t mean that all risk can be allocated to investors and intermediaries.
Impact Investing is Going Mainstream
Impact investing is likely here to stay. On the one hand, you have major generational traction – Millennials are set to make up 50% of the workforce by 2020 and not only place high value on social responsibility, but believe that organizations can be extremely financially successful while also changing the world. On the other hand, you have drivers such as advancements in technology and our increasingly connected world. With the widespread availability of data today, socially minded investors can much more easily vet companies, where in the past proving an organizations claims of social impact might have been difficult and costly.
Where traditionally investing was for maximizing financial returns and charity was for doing good, today investors not only seek to invest with companies who have laudable business practices, but often move to invest with organizations whose products or services are aimed at creating positive social impact. There is now recognition that investment portfolios can align with social values, and that donating money is not the only way to make a difference.
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