By Editor of SocialBusiness.org
Social Business has attended two of SocialFinance.ca’s major conferences, the Social Finance Forum. In 2011, when I attended, the theme was significantly centered around impact investing. One piece of literature that was given out in conjunction with the conference was called “A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital to Advance Social Good,” created by Social Finance, Inc. The summary stated:
Today nonprofits have a new source of capital to scale evidence-based interventions: Social Impact Bonds (SIBs). Aligning the interests of nonprofit service providers, private investors, and governments, SIBs raise private investment capital to fund prevention and early intervention programs that reduce the need for expensive crisis responses and safety-net services. The government repays investors only if the interventions improve social outcomes, such as reducing homelessness or the number of repeat offenders in the criminal justice system. If improved outcomes are not achieved, the government is not required to repay the investors, thereby transferring the risk of funding prevention services to the private sector and ensuring accountability for taxpayer money.
While SIBs are not a panacea, they might provide a unique way to make effective interventions available to far more people in need than the number that can be reached through traditional state contracts and philanthropy. The best candidates for SIB funding are nonprofits with strong track records of improving outcomes for a well-defined target population. These outcomes translate into government savings that can be achieved within a relatively short time frame and are large enough to cover the program’s cost and a reasonable return to investors.
Social impact bonds (SIBs) are also known as “pay-for-success” bonds and contain characteristics similar to equity and debt, despite the name bond. The problem to be solved, if you will, is that charities and registered non-profits don’t receive the necessary long-term funding in order to be able to increase and innovate their services. In the Winter 2013 issue, Sasha Dichter, Robert Katz, Harvey Koh and Ashish Karamchandani wrote a piece for the Stanford Social Innovation Review (SSIR) on impact investing called “Closing the Pioneer Gap.” Here, the problem is the following: “More money than ever is flowing into impact investing, yet many entrepreneurs creating companies that serve the poor still find it difficult to raise capital, particularly at the early stages of their company’s growth.” Money from philanthropy and prizes can only get most social entrepreneurs so far, maybe through the seed stage of business development but the long-term and ongoing part is left by the wayside. “A broad definition of impact investing is in many ways appropriate because nearly all of this capital has the potential to create positive impacts on society,” Dichter, Katz, Koh and Karamchandani wrote. “But a broad definition also masks the fact that most funds—even those that talk about fighting poverty—bypass the more difficult, longer-term, and less financially lucrative investments that directly benefit the poor, and instead gravitate toward the easier, quicker, and more financially lucrative opportunities that target broader segments of society.” According to the article, only a few impact investing funds actually invest in “high risks and low- to mid-single digit annual returns,” which is essentially what defines these types of markets. Amidst it all, however, there seems to be a notion that as long as we recognize that there’s a long way to go, then we can develop impact investing, and thus, the strength of social businesses, through focusing on talent, infrastructure and solid business models. Dichter, Katz, Koh and Karamchandani close with a touch of optimism:
Impact investing has come far as a sector. Just a decade ago, the notion that philanthropy could be used for investment was unheard of. The idea that direct grants to a for-profit company could be a mainstream strategy to fight poverty would have seemed absurd. The idea that pursuing social impact could be incorporated in an investing strategy—whether in public or private markets—was seen as a fringe notion. So much has become mainstream, so much more is possible, but only if we realize that we are just at the beginning.