New Financing Emerges for Social Innovation

[eJP note: During the recent Jewish Funders Network Conference, Sir Ronald Cohen, the chairman of the Portland Trust, discussed his approach to combating social failure through new forms of investment (highlighting social impact bonds) and other financial instruments designed to make social impact.]

“Social impact bonds,” which raise private investment capital to fund prevention and early-intervention social programs, with government repaying investors only if the work improves social outcomes, represent a “promising new product” that could become a multi-billion-dollar source of growth capital to fund effective social programs, a new white paper says.

“Social impact bonds offer an innovative way to scale what works,” says the white paper, prepared by Social Finance Inc. and supported by the Rockefeller Foundation.

“If they work as hoped, proven innovations will no longer languish for years as service providers struggle to access the capital needed to complement the limited funds currently available from government and philanthropy,” says the white paper, A New Tool for Scaling Impact: How Social Impact Bonds Can Mobilize Private Capital to Advance Social Good.

The world’s first social impact bond was launched in September 2010 in Britain by Social Finance Ltd., sister organization of Social Finance Inc., and targeted at reducing prison recidivism, the white paper says.

In May 2011, it says, Massachusetts became the first state to take formal steps to create a program to use social impact bonds, targeting the expansion of support for chronically homeless adults and youth exiting the juvenile-justice system.

While the U.S. is home to nearly one million charities that “provide vital services to vulnerable individuals and communities” and use innovation to address “intractable social problems,” the white paper says, those groups “collectively serve only a small fraction of those in need.”

Limited funding, it says, particularly the lack of long-term funding, “constrains nonprofits’ growth and contributes to a high degree of fragmentation within the social sector.”

Even nonprofits with the “strongest track records,” it says, cannot “significantly expand their services and benefit a wider portion of the population.”

While they may not provide a solution, the paper says, social impact bonds “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 the bonds, it says, are nonprofits with “strong track records of improving outcomes for a well-defined population.”

Programs that would be funded would be “evidence-based,” with evidence showing that their prevention and intervention strategies work.

Those results “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.”

The paper says “dedicated intermediaries” will be critical to the success of social impact bonds.

Their role would be to originate deals, secure government contracts, structure the bond instruments, and issue the bonds.

And throughout the five-to-10-year life of the bonds, intermediaries would play a key role in managing complex projects, mitigating risks, and helping service providers achieve target outcomes.

If the bonds work and the market grows, the paper says, the bonds could “influence larger shifts within the nonprofit, government and investing communities.

The new source of capital, based on “demonstrated results,” would encourage nonprofits to “develop robust data-collection methods, create performance metrics, and measure social outcomes,” the paper says.

With “greater market discipline and transparency within the social sector,” it says, governments would have access to “better data that enable rigorous assessment of various program alternatives and inform responsible public investment.”

Government also might begin to “measure success using outcomes rather than outputs, driving greater accountability within the public sector.”

The bonds also will “promote the transition from siloed government programs to broader thinking” about how interventions on issues such as housing affect outcomes on other issues such as health care.

“Cross-agency collaboration will encourage better use of public resources and possibly advance new solutions to some of society’s most pervasive and intractable problems,” the paper says.

The bonds also might influence the creation of other “impact investing products and similarly monetize social outcomes to calculate investor repayment and returns,” it says.

Reprinted with permission of Philanthropy Journal.