Analysis: As Social Impact Bonds reach six-years old, it’s now a question of scale

A new comprehensive overview looks at how the market can develop

Social Finance, progenitor of the world’s first social impact bond, has launched a comprehensive overview of SIBs, to mark the product’s sixth birthday.

The report, entitled Social Impact Bonds: The Early Years, finds globally there have been 60 social impact bonds so far launched in 15 countries, raising $216m in capital and touching 89,985 lives.

The paper gives an honest overview of an innovation that has had a warm welcome from many governments internationally, but also faced deep scepticism from some quarters.

Social impact bonds are where private investors fund the delivery of a social intervention, such as increasing educational attainment for teenagers, in the hope of a financial return if measured outcomes are met. The ‘outcome payer’ is typically a government department. The social intervention is typically delivered by charities and social enterprises with expertise but which lack capital.

Supporters say the benefit of the model is the value of partnership and collaboration; flexibility and responsiveness; and a focus on data, outcomes and measurement.

But, the field has also faced challenges, ranging from the ideological – an aversion to investors profiting from social need; to the practical – SIBs are still complex to structure and some believe directly funding social organisations is a simpler and cheaper system.

Senior sources within the sector have suggested to Responsible Investor that in the UK some government ministers do not trust civil servants to properly commission services to tackle societal challenges, and prefer evidence-based social programmes such as social impact bonds.

Another challenge of the market is scale. While the largest social impact bonds have been in the US – the largest private capital raise being $21m – most social impact bonds in mainland Europe have been pretty small – most in the order of €100,000 to €1.2m.

This is frustrating for supporters of social impact bonds who argue scale will lead to greater impact in supporting individuals, and provide the opportunity to attract large institutional investors.

Speaking to Responsible Investor, Tracy Palandjian, CEO of Social Finance US, says the issue of scale is down to both size and track record. “We can solve the latter by mitigating the risk profile of these deals. In the US there has been layered structure – institutional investors take the senior piece with higher return and less risk, and philanthropic investors have a riskier position. This is the only way we’ve seen institutional investors participate.”

In the UK, sustainability and impact investment manager Bridges Ventures has a pooled social impact bond fund, which has attracted £25m in capital from institutions including the Greater Manchester Pension Fund and the Merseyside Pension Fund.Palandjian says Bridges Ventures is expanding into the US and it could try and replicate something similar there. “Bridges Ventures’ plans could be for SIB funds for country specific projects or global SIB funds, that can help overcome the scale issue.”

Also speaking to RI, David Hutchinson, CEO of Social Finance UK, highlights Australian insurer QBE, which he says is far ahead in its willingness to look at social impact bonds as an asset class. It has earmarked around €76m to invest in social impact bonds globally over the next three years and recently launched Premimum4Good Insurance where insurance holders can ask QBE to invest 25% of the premium they pay into investments with an additional social objective, such as social impact bonds and green bonds.

Responsible Investor understands that another issue facing larger social impact bonds deals in the UK, which is home to more than 30 social impact bonds, is a lack of support from the country’s powerful Treasury Department.

Hutchinson agrees that the UK Treasury is a “big gatekeeper”, and says it is being more constructive than three years ago. “They are the counterparty most clearly aligned with social impact bonds,” he says.

One stated benefit of social impact bonds is that in effectively tackling social problems, such as lowering chronic reoffending, it saves government departments – and taxpayers – money (part of which can be used to pay back investors).

This has been an attractive proposition in the US, where a bill that would create a $300m federal fund to catalyse social impact bonds has cleared Congress. The sponsors of the bill, Republican Congressman Todd Young and Democratic Congressman John Delaney, have both focused on taxpayer savings. The legislation would shift much of the federal government’s work on pay-for-success (a common US term for social impact bonds) to the US Treasury department.

The Social Impact Partnerships bill now moves to the US Senate, where Senators Orrin Hatch and Michael Bennet are lead sponsors of similar companion legislation. It has a chance of success as its next step will be to pass the Senate Finance Committee, which Hatch chairs.

Palandjian says it is hoped the bill will pass through the legislative process and be signed off by the White House administration before the US Presidential election in November. “If we don’t get it done before Obama leaves it will be much harder. We have 200 days,” she says.

The European Commission is also looking at creating some sort of fund to support social impact bonds. Jane Newman, international director at Social Finance UK, says at first the Commission felt it was maybe “an extravagant Anglo-American product”, but since eight European countries have launched social impact bonds, it realized something more was going on.

“They are embracing the instrument. It’s a deep water trend,” she said.

She continued: “It was important to the EU to see that it was not working in just one market but was in different kinds of social economies.”

Newman is part of a group of EU experts working on the Social Business Initiative in an access to finance working stream. “We are focusing on policy recommendations around hybrid instruments like social impact bonds,” she said.She said part of this would be a recommendation for a fund to support social impact bonds and other types of payment for results type products.

Alongside the paper, Social Finance also launched its live global database of social impact bonds. The database can be sorted by country, issue area, investor, payer and service provider, providing a comprehensive overview of SIBs launched to date and a snapshot of the many in development.