Although still a miniscule sector, social-impact bonds are becoming a new way of financing public services and are gaining attention in the United States, Europe, and emerging markets.
What’s Inside?
A new instrument called “social-impact bonds” (SIBs) promises a return to investors if certain social objectives are met. The bonds are issued by government entities to private investors and entice investors with returns of 6.5% to 13% if targets are met.
How Is This Article Useful to Practitioners?
SIBs are turning out to be an interesting concept for investors with philanthropic objectives. Government agencies issue such bonds to private investors with the goal of funding work for social change, such as helping the homeless or rehabilitating prisoners. The success of the programs could reduce government expenditures—for example, on such services as hospital visits by those who are homeless. Investors get a return on capital if the social objectives are met, but there are also risks of investors losing everything. For example, in a prisoner rehabilitation SIB, there is no return if reoffending rates do not decrease by at least 7.5%, which adds an element of equity risk in the investment.
Some believe that SIBs should evolve to be more like debt instruments. One approach could be to blend them with the returns on other asset classes. For example, a recent SIB divided the investment between a fixed-rate loan to a social housing provider and a less risky social impact program, such as providing therapeutic support for children.
A potential downside to SIBs is that projects with a long duration to a discernible social impact might not be favored by investors (e.g., the impact of preschool education on university admission). Having accurate data to measure such social outcomes will be important but could be a problem in some emerging countries.
Abstractor’s Viewpoint
It is compelling to think that SIBs can make much-needed funding available to charities and non-profit organizations. But ensuring measurable principal payback is going to be critical to attract serious capital to the idea.