Social Impact Bonds - Rethinking Finance for Social Outcomes
We all benefit when crime rates decrease or elderly health improves. We all benefit when minorities are empowered and when media is democratized. This is true to such an extent that Governments can actually see direct monetary benefits of solving social problems. For example, government spends less money when crime rates are down and there are fewer detainees in state-run prisons. What if investors in social ventures got a cut of the future governmental savings from the ventures’ social impacts?
That’s the idea behind Social Impact Bonds, a brand-new type of financial instrument initiated in the UK earlier this year. In this model, investors lend money to social entrepreneurs who are addressing a pressing social problem. If the innovative solution turns out to work, the government pays investors a share of the related reduction in spending. In other words, it’s a way of transferring public sector savings to private investors who are willing to put money into preventative initiatives early on.
The first UK Social Impact Bond is targeted at reducing criminal reoffending rates. Investors put money into organizations focused on helping recently released criminals adjust to the outside world. If reoffending is decreased by a certain percentage, investors receive a share of the long-term governmental savings. The more the reoffending rate decreases, the more the investors receive.
There is a catch for the investors. If reoffending rates don’t decrease enough, the investors won’t get any reward from the government. Investors, not governments, take the risk that the desired social outcome might not occur.
Social Impact Bonds serve as a novel way to pull private investors into early-stage social ventures by aligning the interests of investors, governments, and social organizations. They also provide an incentive to define and measure social impact reliably. Mission driven organizations and social entrepreneurs are faced with the challenge of delivering measurable. Will Social Impact Bonds incentivize this practice? Let's see what happens.
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