Social Impact Bonds – Success is all what counts!

2.12.2019 9:00

Projects and initiatives that follow an ecological and/or societal purpose require financing. Reductions of carbon footprints, waste and consumption of natural resources and rising levels of education and decreased rates of sicknesses and crime rates are all noble objectives, but it requires not only plans and strategies, but implementation and activities as well.

This is hardly achievable without the input of capital.

In order to receive project funding one has to be creative and smart. While we perceive that social and ecological projects are funded by European Union funding schemes, state funds and rising amounts are provided by institutional investors, discourses of climate change, plastic littering, child poverty, and many other sustainable development challenges require a myriad of capital sources.

A novel solution are the so-called social impact bonds. By definition these are no classical bonds to access capital from the international capital markets. Social impact bonds involve various actors and they are bound to a complicated relationship that requires faith and trust in the common ideas and the way to approach them.

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In the beginning is often an NGO, that points out a societal or ecological problem. Let´s take for example the disappearance of small Arctic communities due to lack of employment in a specific area. This could be caused by closures of mines or factories in the area. The NGO activists develop plans that could strengthen and diversify the local economy in the community. These plans could include the establishment of an education center to improve qualifications for locals in order to do work in the future that to this date only external workers could do. The NGO´s estimate for example that the education center would drop the unemployment rate in the community by 20 % in the next seven years and the population remains stable, that would otherwise drop significantly.

The NGO presents these plans and estimated figures to the regional and state governments and inquires that they provide the necessary capital to build the education center and to run it in the initial phase. The governmental decision makers like the idea, but still have a certain scepticism that the estimated positive impacts really occur. They decide to utilize the social impact bonds approach and reaching out to private investors.

The investors are now the third party involved in this process. They conclude a contract with the governmental body that determines the investment, the purpose of the investment and very important the targeted social (or environmental) goals that should be quantifiable determined. For the example of an education center in the Arctic community, it would mean that the private investor(s) will finance the project in the first place. All parties agreed after seven years to scrutinize the outcome of the project whether the social goals of lower unemployment and stable population figures had been achieved. If the goals have been reached and the investment is a success the investors will get a return from the governmental body and an additional pre-determined bonus (e.g. interest rate). In case the effects do not occur as planned and predicted, the investor will not be compensated by the government. Thus the investors carry the majority of risks and the government is in the comfortable situation, to pay only for success stories with this approach. Despite the risks for investors, social impact bonds can be profitable for them as well, as they could utilize them for marketing purposes and it could strengthen their reputation on the markets, as growing demand for green and social investments is evident.

In Finland for example the innovation fund Sitra has put social and environmental impact bonds on the agenda and strives for practical implementation. Social impact bonds are a new financial tool and in the years to come it is interesting to follow how many of these agreements will put into place and how success rates will look like in Arctic municipalities/cities and elsewhere!

Text and picture:
Adrian Braun