Social Impact Bonds – Investing Wisely

Government bonds have existed in one form or another for more than 400 years. Originally issued in 1693 by the Bank of England to finance its military campaigns against France and other European powers during the famous Nine Years’ War (1688-97), a bond was envisaged to act as a “debt instrument that helps the government raise capital when required.” Since that time, government bonds have been used to fund all forms of state-driven enterprise; other organizations also issue bonds such as “credit institutions, companies, and supranational institutions”.

Some notable benefits of purchasing bonds are that they help regulate nationwide cash-flow and they provide markets with stability, and that they are considered ultra-safe investments because they are typically issued by governments – amongst the most reliable debtors in terms of issuing repayments, in those nations with excellent credit ratings.

Bonds are an intriguing topic not only because of their role in regulating the economy and in assisting government projects, but also because they can be pooled as liquid capital in any project, no matter what its aims, scope, or duration. This is where socially responsible investors and business leaders have recently stepped in, introducing a new kind of bond that will allow other conscientious investors to purchase bonds which are particularly tailored to assisting with objectives aimed at social justice, ethical business practices, and sustainable development.

Fittingly known as “Social Impact Bonds” (SIBs), the acquisition of one of these financial instruments enters the investors into a “contract with a public sector commissioner in which it pays for improved social outcomes”. SIBs are typically used to pump money into socially responsible projects that connect government, private corporations, NGOs, and other interested parties, with a desired aim being to secure a “high probability of success” in the project.

There exist some clear differences between traditional bonds and SIBs, with two of the most notable distinctions being that SIBs are meant for the long-term, and are geared towards encouraging social change, typically through community investment projects. One excellent example of a venture that depended on SIBs for capital was a program introduced in Britain’s Peterborough Prison, funded through the contributions of socially responsible investors, and helmed by non-profit organizations which were tasked with the reintegration of prisoners into British society. The most important social aspect of this program was the focus on reducing the risk of recidivism through education courses, while the financial sustainability goal was achieved by the SIBs covering costs that the government would have had to otherwise incur through its prison services department.

Another example of a prominent foray into social investing through SIBs is found in the case of another prison, this time in the United States. Rikers Island is an infamous New York state prison that has been called home by some notorious criminals including the David Berkowitz – better known as the “Son of Sam” serial killer – and Mark David Chapman, the assassin of music legend John Lennon. Now, Rikers Island is in the spotlight for a pilot project funded by SIB contributions, which is meant to lower the risk of re-offending by young inmates serving time there.

Although SIBs are often times pooled together from smaller investments by a large number of private citizens, the Adolescent Behavioural Learning Experience (ABLE) at Rikers is kept afloat by money from Goldman Sachs, New York mayor and business mogul Michael Bloomberg, and other Wall Street-types. Clearly even “Big Business” investors see the value of investing in socially responsible ventures, with the ‘value’ drawn from both the magnanimous nature of the project as well as its promising financial character.

Indeed, profits are never far from the mind of any investor – no matter how socially responsible and morally virtuous. Business is business after all, and if you’re doing someone else a good deed by plunking your hard-earned dollars into a worthy venture, then why not reap some monetary rewards to support your ethical investment portfolio? SIBs present the potential for great returns. In the case of Peterborough Prison, if the SIB-funded social programs there succeed in delivering “a drop in re-offending beyond 7.5%, investors will receive an increasing return capped at a maximum of 13% over an eight-year period.” With the ABLE project at Rikers Island, a 10% drop in recidivism rates amongst adolescents will result in Goldman Sachs receiving a full return on its investment; another 10% drop would see the company make a “tidy profit”.

Clearly, Social Impact Bonds are a worthwhile investment in terms of social justice and corporate activism. National governments are overly stretched and financially drained by years of weathering global economic and political turmoil, and the support of private investors is a welcome coup that will serve to strengthen cooperation between private citizens, corporations, and the public sector. In the end, those choosing to invest in SIBs are at the very least almost certainly guaranteed a secure return on their investment; at the very worst however – if the investment falters – at least one will know that their dollars were still spent on an effort to stimulate social change rather than line the pockets of wealthy corporate bosses.

Related Resources:
SocialFinance.ca: Social Impact Bonds

McKinsey & Company’s Report, “From Potential to Action”: An intro video on SIBs