Social Impact Bonds are a relatively recent innovation, circa 2007. They are financial instruments designed to use private, public, philanthropic funds or a combination of these to finance work to help solve complex social problems. It is important to note that SIBs are rather misnamed as they are not strictly speaking bonds, i.e. debt instruments. They are in fact a form of Outcomes Based Commissioning (OBC) contract where the finance needed to make the contract work comes, in principle at least, not from government or the service provider, but from third party investors (Albertson, Fox, O’Leary and Painter 2020). In practice, this has tended to not be the case and in the UK, home to approximately 50% of the world’s SIBs, this investment is often subsidised by central government (Huckfield 2020). In this sense SIB-funded provision of public services is analogous to the UK’s Private Finance Initiative (PFI) funded provision of public infrastructure.
Proponents of SIBs distinguished them from other forms of outcome-based payment by emphasising:
their alignment of social and financial returns on investment;
that service provider costs are covered by investors up-front – in theory minimising risk transfer to smaller, third sector providers; and
the potential for SIBs to bring together groups of social investors and portfolios of interventions.
However, to date, it is not clear the potential of SIBs to facilitate social innovation has been realised and there is considerable evidence that their ability to serve as a catalyst for innovation has been oversold (Fox, Olson and Armitage 2020).
At their core, Social Impact Bonds are proposed to have three key constituent elements:
a commissioner, for example a government department or public agency directly responsible for a specific public policy area), that is willing to pay initial investors a specific amount for a contracted social outcome once it has been achieved;
a service provider, for example a social enterprise or civil society organisation, that develops a social intervention, directly addressing the contracted social outcome;
a social investor that are willing to make the initial investment to provide service providers the working capital for that intervention, assuming the financial risk.
The underpinning logic is that the commissioner transfers the financial risk of failure of a SIB to the initial social investors, without reducing the overall level of social or welfare services performed (European Commission 2020). Focusing on outcomes, rather than on outputs or the cost of services alone, service providers are supposed to be incentivised to innovate and collaborate on service provisioning. Longer-term SIBs contracts provide them extra investment for service delivery, as well as the stability and time necessary to gain the trust of service beneficiaries. In addition, it is argued that the service provider is immediately provided with a large amount of funding to deliver a social service or intervention. This financial boost affords them the flexibility and means to provide their service according to what achieves the best outcome while also promoting experimentation and innovation. The social investors are meant to be paid by the commissioner if (and only if) the contracted social outcomes are achieved.
To date there is limited evidence that SIBs meet the standards of success proponents set (Huckfield 2020). A critical gap is the absence of social investors and in many cases the state assumes both the role of commissioner and social investor and many reviews have highlighted the lack of a market for such financial instruments (IGEES 2016). As a result many SIBs represent a more convoluted form of Outcomes Based Commissioning contract. In addition, the capacity of many social enterprises or civil society organisations to actively manage their involvement in such complex contractual arrangements is questionable.
On Thursday 2nd June 2022, leaders of social enterprises and support organisations, government representatives and social finance experts all met in Buswell’s Hotel, Dublin, to discuss the future of Social Finance in Ireland.
As part of the ‘Financing Social Enterprise in Ireland: Models of Impact Investing and Readiness’ EU Funded project, social finance instruments were discussed amongst the delegation. The event, co-organised by Community Finance Ireland, Dublin City University and Rethink Ireland, seeks to find new financial instruments that can assist social enterprises in the near future.
The project which commenced in January 2021 has opened a series of round table workshops and events to explore the existing social finance landscape and to explore new products that can make a meaningful difference to the social enterprise sector.
Speaking about the event, Donal Traynor, CEO of Community Finance Ireland said, ‘It is important to listen to the lived reality on the ground of social enterprises in Ireland. Getting the correct timely finance solutions to social enterprises so that we might promote sustainability and grow the wider social economy sector is crucial. Today allows expertise and experience challenge our work and offer new hope for financial instruments in the sector.’
Social impact bonds are an innovative financial instrument that puts private funds to work to help solve social problems. It represents a monetary influx for social projects and gives investors an opportunity to support social issues and turn a profit all at the same time. In effect, social impact bonds are proof that social progress can also be financially rewarding.
At its core, social impact bonds have three interest groups: outcome payers, social service providers (usually not-for-profit organisations but can also include purpose-driven businesses), and investors. Social impact bonds are ultimately outcome-based contracts between an “outcome payer” and a purpose-driven organisation that aims to achieve a desired social outcome. A socially motivated investor will then provide the financial capital needed to deliver the service.
The mechanics of a social impact bond at a basic level are quite simple. The investor which is usually a financial institution will provide upfront capital to the chosen service provider who will then deliver services focused on the outcome payer’s chosen social outcome goal. Targets will be agreed between the outcome payer and investor, if these targets are met the investor will be returned their initial investment with a return that increases as the outcome achieved increases. If the targets are not met the investor will not receive the investment back and will essentially make a philanthropic donation. Outcome payers are often government bodies but can also include aid organisations and philanthropic foundations. They work with investors and service providers to set objectives, timelines, and payment levels and will only release funds when specified targets are met.
The design of a social impact bond as outlined above offers the involved interest groups several advantages. In the case of the service provider, they are immediately provided with a large amount of funding to deliver a social service or intervention. This financial boost affords them the flexibility and means to provide their service according to what will achieve the best outcome while also promoting experimentation and innovation. In the case where a philanthropist is involved, they can act as either an investor or outcome payer and benefit in both cases. A philanthropist that acts as an investor has the potential to earn a significant return on investment if outcomes are met which will, in turn, afford them more money for future grant-making ventures. In the instance where a philanthropist assumes the role of an outcome payer, their funding is directly related to targeted outcomes generating focus and dynamism amongst delivery organizations.
Social impact bonds represent a new wave of impact philanthropy tools that have the innovative potential to turn traditional philanthropy and grantmaking on its head. Social impact bonds and their impact to date have proven to have the potential to act as a catalyst for the attraction of private capital to scale the efforts of not-for-profit organizations and purpose-driven businesses.
We are delighted to invite you to participate in a short workshop and follow up on Thursday 5th May from 16:00 until 17:15.
We have been working hard on our Social Finance project and believe we have something that might be of interest to you. This ‘model social finance product’ requires your input and expertise. If you are able to come along to find out more there are two ways you can sign up.
In conjunction with SocialFinance.ie, Community Finance Ireland will host three information workshops to equip your organisation with all the tips necessary to make a successful application for Social Finance with us.
These 45 minute sessions will be hosted virtually on Zoom by our Social Finance experts on the following dates:
We are busy lining up some workshops in the coming weeks starting this Friday 5th November with a packed out ‘Organisational structure, form status and potential relationships with group structure’
We still have two workshops coming up on the 12th and 26th November: ‘Nature and extent of relationships with social finance providers and credit unions’ & ‘Social impact reporting and investment readiness’
If you are a social enterprise and interested in giving us your views, don’t hesitate to reach out to firstname.lastname@example.org