Social Impact Bonds (SIBS): Impact in Action


Are you ready to discover more about the Impact Revolution and what it means for our world? Previously, I shared with you what impact means, and introduced you to the new thinking of risk-return-impact. Now I would like to show you risk-return-impact thinking in action! And one of the best ways to do this is through social impact bonds (SIBs)—the purest expression of risk-return-impact at work.


Social Impact Bonds


One way to achieve the societal shift we are working towards is through social impact bonds. What is a SIB exactly? Social impact bonds (SIBs) involve three key players: outcome payers, social service providers (these are generally non-profit organizations, but they can also be purpose-driven businesses) and investors. A financial advisor like Social Finance may help design and implement SIB transactions, and an independent evaluator verifies the outcomes achieved, rather as an auditor would.


The SIB, which is known as a PFS (Pay for Success) in the United States, an SBB (Social Benefit Bond) in Australia and a Social Impact Contract in France, is not a “bond” in the traditional sense.

In essence, it is an outcome-based contract for services between an “outcome payer” who commissions a purpose-driven delivery organization to achieve a particular social outcome. A socially motivated investor then provides the funding to deliver the services, which eliminates the commissioner’s financial risk.


If results do not meet the targets set in the contract, the investor loses their money, having effectively made a philanthropic donation. If, on the other hand, the targets are met, the investor receives their investment back, with a return that rises with the extent of the outcomes achieved.


The outcome funder is the party that pays back the investors, having achieved the social improvement it seeks from the program. They will work with the financial intermediary or the delivery organization directly to set objectives, timelines and payment levels, and they will only pay investors when the predetermined positive outcomes are achieved.


This system has several advantages for the service provider. It fortifies them with large amounts of funding upfront and gives them the flexibility to run their interventions according to what will achieve the best outcomes. This, in turn, allows them to experiment and innovate.


Historically, service providers that get their funding from philanthropy are evaluated on measures that center around their activities. To gauge success, philanthropists might look at activities, such as the number of prisoners they enroll in a rehabilitation program, or inputs such as the hours spent educating prisoners.

In contrast, a focus on outcomes would look at the reduction in the reoffending rate, which is, at the end of the day, more important than how many prisoners were enrolled in the program.

This shift in evaluation motivates service providers to focus on core objectives and collaborate in new and efficient ways to achieve them.


Success of SIBs Go Global

The success of the first SIB— the Peterborough SIB, which I will share in detail in my next blog—demonstrated that private investment could be mobilized to tackle even the most persistent social problems. As former British prime minister Gordon Brown said, the Peterborough SIB became, “The guiding light for hundreds of millions of dollars in investment in social reform.” And it has indeed led to the development of SIBs all around the world.


In the USA, my close colleague Tracy Palandjian, a Harvard Business School graduate, spearheaded the SIB movement. Under Tracy’s leadership, the USA has become the market where SIBs have scaled the most, attracting more investment than anywhere else in the world.


Confidence in the SIB has continued to grow, and in 2016 the UK government demonstrated its commitment by launching the first-ever public fund to pay for the outcomes of SIB programs.

Known as an Outcome Fund, the £80 million ($106.4 million) Life Chances Fund (LCF) seeks to help society’s most disadvantaged.

Philanthropists can either create them or participate in independent Outcome Funds, which are set up by others, to increase the capability of the organizations they support to achieve a specific mission.


SIBs and DIBs – The Purest Expression of Risk–Return–Impact


There are now more than 190 social and development impact bonds (DIBs) across 32 countries, which between them tackle a dozen different social issues. DIBs, which focus on emerging countries, have the same structure as SIBs, but their outcome payers are usually made up of a combination of governments, aid organizations and philanthropists.

SIBs and DIBs are powerful because they reframe social and environmental challenges as investment opportunities.

They represent a compelling new asset category for investors, as their returns do not fluctuate with stock markets or interest rates.


For outcome payers, they represent an outcomes-based contract that delivers better results and provides greater transparency on what works and what doesn’t than a conventional contract that pays for activities.


SIBs and DIBs are part of a general shift, which is already under way, to a system whose model of decision-making introduces this new mindset of risk–return–impact, rather than risk–return. They also make us realize that the impact of social interventions can be measured.


This realization is now spreading to the broader understanding that impact can be measured and compared across companies, transforming all decision making that relates to them. Such comparison will motivate every decision we make regarding consumption, employment and investment, guiding companies to deliver positive impact. That is what the Impact Revolution is about.


Whether public or private, all organizations make an impact; it is time to measure this reliably, value it explicitly and demand better of decision-makers across the globe. In other words, we see a need for change and an avenue to drive it. Are you ready to be part of that change? If so, I urge implore you to continue this journey with us by reading my book, IMPACT: Reshaping Capitalism to Drive Real Change.No one is too small when it comes to making an impact.

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