What would you think of a new investment class created to support the greater good of the planet and mankind? The social impact bond—or SIB—that I introduced you to in last week’s blog is just such an investment class. It is the purest expression of risk-return-impact at work.
As I have mentioned before, I have asked myself: If we were able to connect tech entrepreneurs to investment through venture capital, then why couldn’t we find a way to do the same for purpose-driven businesses and charitable organizations? Just as tech entrepreneurs were able to bring about change with the help of investment capital, impact entrepreneurs can make progress in overcoming the most pressing issues of our time. We just needed to connect them to investment.
In 2007, I created the UK’s first social investment advisory firm, Social Finance. Our core mission was to invent ways of connecting social entrepreneurs with investment capital.
Late in 2009, two members of the team, Toby Eccles and Emily Bolton, came to my office to talk about ways to reduce prisoner reoffending rates. Across the world, the statistics were jaw-dropping: as many as 60 percent of young prisoners returned to prison within 18 months of their release. This statistic had a ripple effect of negative consequences. Just imagine the human misery that could be avoided, the families reunited and the crime rates reduced, not to mention the savings for government, if we could somehow reduce that number.
Toby and Emily suggested that we tie the reduction in the reoffending rate to a financial return for investors, paying a return according to the social success that was achieved. In simple terms, investors would be paid for the increase in the number of prisoners who did not re-offend. This was a ground-breaking new idea.
Working together, we designed the social impact bond as an investment instrument that would be capable of bringing investment to charitable social delivery organizations. Armed with our proposal, which set out how the SIB worked, we went to meet Jack Straw, the Secretary of State for Justice. We offered to raise several million pounds from investors to fund charitable organizations that were already helping prisoners, if the Ministry of Justice would agree to pay investors back according to the increase in the number of prisoners that did not return to jail. The aim was to harness the profit-driven ingenuity of social entrepreneurs and the capital of investors in solving an unrelenting social problem. When Jack Straw heard the idea, he banged the table, smiled and said to his officials, “I know we’re not supposed to do anything for the first time, but we’re going to do this!”
But how could preventing crime be a good investment? Well, crime is extraordinarily costly—governments spend millions every year fighting it and putting people in jail, not to mention housing and feeding prisoners once they are inside. If our effort helped the government save money, both investors and the organizations they funded could pocket a fraction of the money saved.
Lives would improve, governments would save money and investors would make a reasonable profit. It was a win-win-win situation.
The Peterborough SIB – The First SIB
When we set out at Social Finance to reduce reoffending rates in the UK, we created the social impact bond described above. Our investors were 17 charitable foundations, including the Esmée Fairbairn Foundation in the UK and the Rockefeller Foundation in the US.
We met with officials from the British government and reached a deal: we would raise £5 million ($6.7 million) to finance charitable service providers that had been working with prisoners at the Peterborough jail. Our investors were 17 charitable foundations, including the Esmée Fairbairn Foundation in the UK and the Rockefeller Foundation in the US. If, after five to seven years, we had failed to reduce the reoffending rate by 7.5 percent relative to a control group of released prisoners, no money would return to the investors.
However, if the reoffending rate fell by 7.5 percent or more, the government would repay the initial investment, in addition to a rate of interest that would rise according to the reduction achieved. The crux of this initiative was that the government would be paying out only 30–50 percent of the money that would be saved on law courts and prisons: after paying back the investors, they would still come in under budget. Meanwhile, the investing foundations could reinvest their money in other impact-generating initiatives, and the charitable service providers would continue to receive funding to support their work.
The Peterborough SIB achieved a 9.7 percent reduction in the number of convictions and paid investors 3.1 percent a year on top of their capital. Lives were improved, government reduced the burden on law courts and prisons, and investors saw a return—the SIB represented a new way of thinking about the role of finance in social progress.
Some might suggest that philanthropists are already funding this kind of work. However, some of the charitable foundations we worked with were already financing prisoner rehabilitation. We grouped them together and pooled their capital into a single initiative that was focused on hitting a concrete and measurable goal, with more money going to service providers who were doing valuable work with prisoners but lacked the money to operate at scale.
Our work also united those service providers under one umbrella, coordinating their efforts.
The final thing we achieved was helping those charitable foundations, our investors, earn back the money they spent, with some extra on top, so they could reinvest it. If widely adopted, this model has enormous potential for anyone seeking to tackle social issues, whether in the non-profit sector, business or government.
The success of the first SIB 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.
Do you want to be a part of something that is cutting edge—something that will not only benefit you but benefit local communities and, yes, the world? Be a part of the Impact Revolution! Join us today! Find out more by reading my book, IMPACT: Reshaping Capitalism to Drive Real Change. No person or organization is too small when it comes to making an impact and the Impact Revolution is a chance for all of us to get involved and create the kind of world we want to live in.