Social Impact Bonds

INCREASING THE FLOW OF CAPITAL FOR GOOD - INVESTING AND GIVING

Magazine article

Social Impact Bonds (SIB) are a form of outcomes-based contract in which public sector commissioners commit to pay for significant improvement in social outcomes (such as a reduction in offending rates, or in the number of people being admitted to hospital) for a defined population.

It is a model that directly ties social impact to returns – if targets are not met, financial returns suffer.

It should be noted that In this way they are unlike conventional bonds that offer fixed rates of return over a specified period of time.  In terms of risk they are more similar to an equity investment.

A number of bonds are being considered and a small scheme on these lines is already operating in Peterborough Prison aimed at cutting re-offending. Social Finance in partnership with The Ministry of Justice has sold £5m worth of SIBs to charitable trusts and philanthropists. If re-offending is reduced significantly, the investors could get up to £8m back after six years - an annual return of 7.5%. If recidivism doesn't fall, they stand to lose their money. The return is paid from the savings made by society not having to pay for re-offenders to undergo a further prison term.

The majority of investors in the bond were foundations and charities including: Barrow Cadbury Trust, the Esmée Fairbairn Foundation, Friends Provident Foundation, the Henry Smith Charity, Johansson Family Foundation, Lankelly Chase Foundation, the Monument Trust, Panahpur, Paul Hamlyn Foundation and the Tudor Trust.

A just-published report[1]looking at the early successes of the bond reveal that it was the ‘mission-related’ aspect that was of interest to investors. Investors were “keen to fund innovation, that this investment was aligned with their charitable missions to do public good, and that the SIB investment allowed some investors to improve outcomes in an issue area of particular interest to them,” according to the report.

This research highlighted some potential barriers to investment, namely: tax rules that restrict charities’ ability to put money into a SIB and lack of clarification of trustees’ duty to maximise financial return, as well as a lack of tax incentives.

The report says future SIB development may benefit from this learning. “The government could consider whether any steps could be taken to offer tax incentives,” it says.

A number of charities are actively working with government officials on other schemes where SIBs might be used: cutting school truancy and exclusion; increasing youth employment; reducing acute hospital care by improving community support; improving provision of fostering to cut the cost of residential placements for children in care.

Footnotes