Social Impact Bonds are investment instruments that seek to produce socially favorable outcomes while providing investors a return. In doing so, they hope to attract private funds to a social sphere normally dominated by philanthropic dollars.
”Philanthropy has a paradox in that it’s the first funding source to disappear from the causes that need it most when times are tough, and the last to come back. Social impact bonds bring in investors who seek a return by tackling social issues.”
Here’s how the bonds work: First, the group that wants to issue the social impact bond identifies an issue that incurs economic cost to society. Examples range from treating Asthma to improving child adoption to decreasing homelessness. The group then develops interventions or seeks out NGOs that have proven methods of tackling the issue, and channels money from the bond investors to the programs. The government (or another body that would shoulder the cost of the particular issue, such as Health Maintenance Organizations), agrees to pay a certain amount if the intervention produces a promised level of results. Those funds provide return to the investors.
If the intervention works, everybody wins in the end: the investors turn a profit, the NGO gets more funds to do its work, the subjects benefit from the NGO’s work, and the government pays out less money than the social ill would have cost in the first place.
“For governments it’s great, because if the intervention doesn't work they don’t pay anything, and if it does, they save tremendously”
In addition to laying out an intervention plan, definitions and metrics for tracking and quantifying every element of the intervention, from defining pre-diabetic to calculating the economic cost of the disease can be worked out.
The treatment will put pre-diabetics through an intensive program that includes free access to a fitness center, group exercise, lifestyle counseling advice, and technology to monitor their progress. It will continue to monitor the subjects for two years after the intervention and see how many developed diabetes in comparison to a control group.
“The interesting thing about the diabetes Social Impact Bond is that the clinical evidence is exactly the same whether you’re talking about people from Finland, the Netherlands, the US, China or Japan. That means we can build a bond that is very scalable.”
Since a 2010 bond to reduce criminal reconviction rates in the UK’s Peterborough prison launched, several Social Impact Bonds have been issued around the world, gaining support from notable investors and even investment giant Goldman Sachs.
“Social Impact Investment is a response to the urgent need to achieve innovation and scale in the way we tackle social issues. It seeks to harness entrepreneurship and capital markets in doing so.”