Social Impact Bond

Social Impact Bond
Name	Social Impact Bond
Introduced	2010
Inventor	United Kingdom
Type	Financial instrument

Social Impact Bond

A Social Impact Bond is a financial arrangement linking private investment to measurable social outcomes, combining elements of bond (finance), venture capital, pay-for-success financing, public-private partnership, and outcomes-based contracting. It brings together actors such as philanthropy, private equity, social enterprise, nonprofit organization, and public sector purchasers to address social challenges through performance-linked payments. Proponents cite connections to models used in microfinance, development finance, social entrepreneurship, and impact investing.

Overview

Social Impact Bonds mobilize capital from institutional investors like Goldman Sachs, Big Society Capital, Barclays, JP Morgan, and Calvert Impact Capital to fund service delivery by charitable organizations such as Social Finance, The Young Foundation, Nesta, Acumen Fund, and BRAC. Contracts typically involve outcome payers including central agencies like HM Treasury, municipal entities like New York City Mayor's Office, regional bodies like Greater London Authority, and federal ministries such as United States Department of Justice. Intermediary roles are often filled by advisory firms like McKinsey & Company, Boston Consulting Group, Deloitte, and KPMG, while evaluation relies on randomized controlled trial, impact evaluation, cost-benefit analysis, and metrics aligned with standards from organizations like Social Value International and Global Impact Investing Network.

History and Development

The concept emerged from policy discussions in the late 2000s and was piloted in the United Kingdom with support from actors including Michael Gove, David Cameron, Gordon Brown, and institutions like Cabinet Office and Big Society Capital. Early pilots involved social investors such as Bridges Fund Management and Barclays Social Finance, with promoters including Social Finance UK and Nesta. International diffusion accelerated through events like the G8 Summit, reports by Organisation for Economic Co-operation and Development, publications from World Bank, and academic work at Harvard Kennedy School, London School of Economics, and Stanford Graduate School of Business.

Structure and Mechanism

A typical arrangement connects a payer such as Ministry of Justice (United Kingdom), United States Department of Housing and Urban Development, New South Wales Treasury, or City of Chicago with investors like Hedge funds, pension funds, or family offices. Service providers—examples include St Mungo's, Prison Fellowship, Homeboy Industries, YouthBuild USA, and LifeWorks—deliver interventions. An intermediary like Social Finance US or Nonprofit Finance Fund arranges contracts, while independent evaluators such as RAND Corporation, Mathematica Policy Research, Institute for Fiscal Studies, and Abt Associates measure outcomes via methods influenced by randomized control trials, quasi-experimental designs, and outcome mapping. Payment triggers can be reduction in indicators tied to legislation such as Public Services (Social Value) Act 2012 and standards set by International Organization for Standardization.

Outcomes and Evaluation

Evaluations have used mixed methods drawing on case studies from Peterborough Prison and Rikers Island, quantitative analysis by Urban Institute, Brookings Institution, Institute for Research on Poverty, and meta-analyses by What Works Network. Measured outcomes include recidivism reductions, employment gains, housing stability, and healthcare utilization, with payments tied to metrics vetted by bodies like National Audit Office and Government Accountability Office. Evidence quality varies: some projects reported statistically significant effects as in pilots supported by Goldman Sachs and Social Finance UK, while others—reviewed by New Economics Foundation and Joseph Rowntree Foundation—showed limited or uncertain impacts.

Advantages and Criticisms

Advocates—drawing on work by Geoff Mulgan, Sir Ronald Cohen, Mark Kramer, and Clara Miller—argue Social Impact Bonds promote innovation, transfer financial risk to private investors, and foster cross-sector collaboration seen in initiatives by Unilever, Google.org, and Bill & Melinda Gates Foundation. Critics represented by voices from Oxfam, Amnesty International, Trades Union Congress, and scholars at University of Oxford and University of Chicago warn of mission drift, perverse incentives, high transaction costs, and challenges with attribution emphasized in critiques from The Guardian, The New York Times, and policy analysts at International Monetary Fund. Debates involve ethical considerations raised by Amartya Sen-influenced frameworks and legal scholars from Yale Law School.

Global Implementation and Case Studies

Notable implementations include pilots at Peterborough Prison (United Kingdom), Rikers Island (United States), New South Wales mental health projects (Australia), Social Impact Bond-style programs in Canada provinces, schemes in Israel, initiatives in South Africa involving South African National Treasury, and projects coordinated by Inter-American Development Bank in Latin America. Other case studies involve partnerships with Corporation for National and Community Service, City of London Corporation, Massachusetts Department of Correction, King County (Washington), and São Paulo municipal programs.

Legal and Regulatory Issues

Legal frameworks intersect with statutes such as Public Services (Social Value) Act 2012, procurement rules like those enforced by the European Commission, contracting principles from Federal Acquisition Regulation, and regulatory oversight by bodies like Financial Conduct Authority, Securities and Exchange Commission, Office of Management and Budget, and national treasuries. Challenges include compliance with procurement law, disclosure requirements of Securities Act of 1933, taxation rules administered by Her Majesty's Revenue and Customs, and public accountability norms upheld by institutions such as Parliament of the United Kingdom and United States Congress.

Category:Finance