|The Social Impact Bond: Potential and pitfalls|
|by Jonathan Wade|
|on February 02, 2014|
Shifting the risk of social value creation to private investors
There is currently much discussion about the Social Impact Bond as an innovative tool to generate financing for social enterprises. Anyone who has tried to start a social enterprise—a business that exists for the primary purpose of addressing a social need—knows that it is challenging to find the financial resources to start operations.
This financing challenge is even more acute in nonprofit organizations, where there may be little collateral, nobody to guarantee a loan, and little, if any, operational reserves.
What is it?
The Social Impact Bond mechanism originated in the UK, where the social enterprise sector is arguably 10 to 15 years ahead of the sector in Canada. A similar model has been replicated in the US (also referred to as a “pay for success” or “payment-by-results” bond) and now the Social Impact Bond is part of the Canadian discussion, particularly at policy and government circles.
Government is expected to address social concerns, but is challenged by the high cost and complexity of successful local or regional programming. Private investors are growing increasingly interested in responsible investing where they can get a financial return on their investment by supporting worthwhile causes. Social service delivery actors, typically nonprofits corporations and the subset of those which are registered charities, work diligently to address social concerns and social causes; yet they are frequently underfunded, in spite of often proven good work.
Traditionally, government has addressed their social service mandate, in part through direct funding to nonprofits and charities. This is a current expense for governments in a time of dwindling budgets, and there appears to be a concern that granted public funds may not be measurably changing the social landscape.
The Social Impact Bond, by comparison, invites private investors to provide the money for the social service agencies to do their work and the government then promises to pay the investors back, with interest accrued, if the service agencies are able to demonstrate measurable changes in a social problem.
The intermediary organization is an independent body that collects the money from investors, makes and tracks the investment in the community agencies, confirms (or denies) that the money is in fact making a measurable difference, and then documents the social change to allow the government to pay back the investor as appropriate.
What is good about Social Impact Bonds:
What is problematic about Social Impact Bonds:
For more on Social Impact Bonds, read:
Jonathan Wade is a social enterprise sector developer based in Ottawa, working with the Centre for Innovative Social Enterprise Development (CISED). He works directly with social entrepreneurs, co-ops, and nonprofits on social enterprise business development, from ideation to planning to design and launch, including advising on social finance options. All opinions in this article are his own, and are based upon his experience with a diverse client base of social entrepreneurs.