UBS foundation sees positive results from world’s first ‘development impact bond’

Initiative involved UBS’s Optimus body and Hohn’s Children’s Investment Fund Foundation

The first results from the world’s first development impact bond are out.

Development impact bonds (DIBs) are a nascent version of social impact bonds (SIBs), where private investment is used to tackle societal challenges.

Two years ago, the UBS Optimus Foundation invested $238,000 into the first DIB aimed at improving the quality of girls’ education in India. The foundation was set up in 1999 by the Swiss bank as an independent grant-making body committed to improving children’s wellbeing. It counts UBS CEO Sergio Ermotti among its board members.

The Children’s Investment Fund Foundation (CIFF), the philanthropic organisation set up by hedge fund executive Chris Hohn and his wife Jamie Cooper, will pay the foundation its principal and a return if the DIB achieves measured outcomes around educational attainment.

The goals are ambitious – to reach 18,000 children in the three years to get more girls in school and improving learning outcomes.

The results – launched last week – indicate the DIB is improving children’s learning and it is on track to meet its three-year target that could see the UBS Optimus Foundation earn up to 15% in interest. The NGO that is delivering the service, Educate Girls, will also share in any reward. There is an independent outcome evaluator, IDinsight.

Speaking to Responsible Investor, Phyllis Costanza, CEO of the UBS Optimus Foundation (and a former Director at CIFF), says it was attracted to backing the DIB as it is completely transparent. “At the UBS Optimus Foundation we are looking at more and better ways to address social challenges.

“In the US only 5% of Americans give philanthropy outside the US, as many don’t know how to source projects, and they are not confident the money they give will achieve the desired outcomes. DIBs open up new possibilities,” she says.The DIB is developing at an interesting time for wealth management and global coordination on social goals.

Investment firms are facing more questions from clients on impact investment and there is a trillion dollar gap in achieving the UN Sustainable Development Goals, which will need to be filled with private finance.

Costanza said it UBS, one of the world’s largest wealth managers, could play a role in DIBs development.

But speaking at the Overseas Development Institute (ODI) in London last week, Costanza indicated there is still a way to go in developing the product. “By testing DIBs you can demonstrate to investors on the cusp of giving internationally how private capital can generate results.

“DIBs provide rigour with performance and results which can be replicated. The focus on transparency means there is nowhere to hide.”

But she did note there were challenges around high transaction costs, frontline expertise with DIBs, and interest from large donors.

“It’s only financially realistic at $10m,” she said – way higher than its investment in the Educate Girls DIB.

So what is the future for DIBs? While there is a lot of talk, not much concrete has happened apart from the Educate Girls DIB, but some interesting organisations are looking into this area.

The UK government’s Department for International Development (DiFD), which also spoke at the ODI, said in 2014 that it would develop a DIB to prevent sleeping Sickness in Uganda, though not much has been publicly said since.

And the World Bank plans to launch a development impact bond to tackle young unemployment and skills development in Palestine. Find out more on how the Educate Girls DIB works here.