In this deep dive we are discussing social impact bonds: what they are, how they work, and why they matter.
There are three players in the social impact bond game:
- Service Providers
- Impact Investors
In a social impact bond, impact investors provide the working capital for that service provider to be able to solve the problem.
For ideas to be considered feasible, they must meet three basic criteria:
- Can it produce measurable outcomes?
- Can it produce outcomes in a short timeframe?
- Is there previous evidence of success?
Four reasons why one would seek an impact bond versus a more traditional type of funding:
- It makes money more effective by tying funding to measurable results.
- It allows service providers to better adapt to change.
- It incentivizes better programs making it attractive and profitable for service providers to improve the programs they already have.
- It focuses the private sector on social issues by creating an investment opportunity that includes a financial return.
Currently there are 151 active social impact bonds in use by 29 countries.
Active social impact bonds mentioned:
- Multinational bank gives a girl’s education nonprofit from India enough funds to scale their program to three new villages.
- Large education philanthropy paying back the initial investment after three years based on the number of girls who’ve been enrolled in school and their learning gains.
- A set of impact investors invest in improving the services of diabetes management clinics to work with specific high-risk population.
Brookings Global Economy & Government:
- 48 social impact bonds in employment
- 52 social impact bonds in social welfare
- 21 social impact bonds in health
- 17 social impact bonds in education
- 10 social impact bonds in criminal justice
- 3 social impact bonds in environment
- 3 social impact bonds in agriculture
Average social impact bond duration = 50 months
Average upfront capital = $3.5m
Social impact capital outlay = $420m
N Kristock: Hey, this is Nick.
C Cecchini: And this is Cam.
N Kristock: And today our deep dive is about social impact bonds.
N Kristock: Welcome, welcome. You’re listening to The Science of Social Impact, a podcast from Crate of Good. We are on a mission to educate and inspire you to make social impact a key ingredient in your business and life. Thanks for joining. The time to make an impact is now.
N Kristock: All right. Getting into the deep dive Cameron how are we doing today?
C Cecchini: Wonderful. Thank you.
N Kristock: Awesome man. Do you know anything about social impact bonds?
C Cecchini: I do not, no.
N Kristock: All right, well we are going to deep dive into it today. Social impact bonds. Here we go. So first when we talk about what a, just a general bond is, right? We’ve heard about bonds you can buy a bond from the government and after a certain period of time you can get a return on that bond. So keeping that logic in play here, a social impact bond is an innovative financial tool that enables government agencies to pay for programs that deliver results. In a social impact bond agreement, the government sets a specific measurable outcome that it wants achieved in a population and promises to pay an extra organization, sometimes called an intermediary if and only if the organization accomplishes the outcome. This is before been called pay for success financing. So that was the by the book definition, but we’re gonna break this down right here. Cam. The social impact bond essentially works like this. There’s a couple of players in the game here, right? So player one is going to be the government, right? And every charity at its core is really just an extension of the government. The government is designed to do a public good for society, right? So that’s player one, the government. Player two is going to be service providers. These are charities, these are nonprofits. These are organizations that create some kind of social impact. They improve society as a whole or a specific population in society. Player one, the government player, two service providers, player three inside this game is impact investors. So we obviously know venture capitalists impacted by investors. A regular investors are people who find for profit companies up for profit opportunities. And they give their money to that for-profit opportunity in order to get some kind of return X amount of years later at X percent return. Impact investors are people who specifically find socially driven companies, mission-driven opportunities where their investment can both create a return as well as create additional impact to help society. Usually that return is going to be a little bit lower than a standard return. But the gap that gets made up there is you would ask, well why would an investor want less money on their return, the answer is that that investor wants their money to do good for the world. So they take a little bit of a lower return in exchange for some kind of social impact. So player three is impact investors, people who want to give their money, organizations want to give their money to perform a social good and generate a return. So those are the three big players that we’re going to be working with in this picture. Any questions on the players so far?
C Cecchini: All clear so far.
N Kristock: Cool. Awesome. So when you have a social impact bond, you have a problem that exists, right? And this problem is causing a strain of some kind on society. It’s, you know, affecting the wellbeing of a population. And,there is a service provider organization who comes along and says, we can fix or alleviate this problem and we’ve got the model to do it and we’ve got the business to do it. And so obviously to solve a problem, it’s going to take money. Now, an average charity could go out and raise funds. They could go seek donations. Ubut if it’s a huge chunk of money, it’s gonna take a long time to raise the right amount of money or capital to solve that problem.
C Cecchini: Right
N Kristock: So they can resort to something called the social impact bond. This can get originated from a service provider, or maybe it’s the government who comes along and says, this is a problem. Can someone fix it? If the government were to invest in to every charity trying to solve every problem, I don’t know the government can print money, but they might run out of money. Right? Cause there’s so many problems out there, so many great worthy nonprofits doing their best to fix problems that the government can’t possibly vet every single nonprofits, organizational structure, their business model, et cetera. The government can’t give funding to all these charities trying to solve all these problems if 90% of them aren’t gonna work. So they need to, if to put some skin in the game, they need to have some kind of hedge of their bet. That’s where the impact investors come in. So in a social impact bond, investors provide the working capital for that service provider to be able to solve a problem, right? The investors, impact investors, give capital to the service provider. And if the service provider is able to solve that problem within X amount of time and produce X amount of metrics, then that impact investor will get a return on their investment. So you might ask, well how do they get money if the charity is just solving a problem? And this is where the government comes into place. So the government says, we agree, if this service provider can solve this problem in X years, we will pay that service provider X amount of money and that amount of money is equal to what the impact investors put into the business plus that return. So we’ll do a very simple example. Let’s say that Cam is a charity, we’ll call it Cam’s kiddos, right? And Cam wants to give all five kids on his street shoes because they don’t have shoes, right? Cam does not have the funds to give those kids shoes, right? He’s, he knows who the kids are. He knows the size of their feet. He knows the socks that they’re going to need and knows exactly what shoes are going to be perfect for them. Some of those kids play basketball, some are classy, right? He knows exactly what kind of shoes those kids want. He doesn’t have the money to do it. The government says, Hey Cam, we believe you. We think you’re right. We think kids do need shoes, but what if you’re wrong? You know, we, we can’t just give you money to give these kids shoes. So Cam says, well let’s turn this into a social impact bond. So an impact investor comes along and says, all right Cam, I think that you can give these kids shoes. So let’s say it costs $1 for a pair of shoes, so you need $5 in fact, the investor says, I’ll give you $5 today and in a year from now I’ll get back $6 and the government says, okay, cool. So you’re telling me that in a year if all those kids have shoes, we’ll pay Cam $6 yes, we enter into that social impact bond impact investor gives cam $5 cam goes out, buys the exact size, shape, color and type of shoe for all five of those kids and at the end of the year, a third-party intermediary comes in and determines that these kids have gotten shoes, the results have been achieved. So the government pays those, that $6 to Cam the service provider…
C Cecchini: Like an approval or a certification.
N Kristock: Yep, you got it. There’s a third party independent party that is going to be reviewing the work being done and evaluating these metrics. The government pays Cam that $6 Cam’s able to give that $6 back to the impact investors generating their return and solving the social problem of kids not having shoes on his street. Right.
C Cecchini: Wonderful.
N Kristock: Any questions on that? Extremely simplified version.
C Cecchini: No, I’m right there with you.
N Kristock: Well quite obviously five kids on a street don’t need shoes. The problems in the world are a lot bigger than that. So let’s talk about like what are some of the best policy areas for social impact bonds? So they’re currently being designed and implemented in places like early childhood education, global health and workforce development including recidivism and employment. Do you know what recidivism is Cam?
C Cecchini: I believe I do.
N Kristock: Take a guess at it.
C Cecchini: So the, the number of people coming out of jail.
N Kristock: Yeah. it’s kind of, yes. So it’s the people that come out of jail that go back into jail to try to reduce that, that number. Yep. People come out of jail, go back into jail. So in order for an issue to be deemed as feasible for an impact bond, the theme and program need meet four basic criteria, right? So we’re talking about if five kids need shoes on the street, this needs to hit four basic criteria. One, can it produce measurable outcomes? We know how many kids need shoes, how many shoes we’re going to provide for those kids too. Can it produce outcomes in a short timeframe? Social impact bonds are not going to be lasting for 25 or 50 years.
C Cecchini: So no research studies then? Mostly stuff that can happen within a finite or a set amount of time.
N Kristock: Yep. You got it. It has to be a short time frame. Now short is an ambiguous word. So what does that mean? Not sure have to dig a little bit more into that. But I’m thinking it’s no shorter than probably 10, 10 to 15 years or less is what I’m thinking. And then four, is there previous evidence of success? So the social impact bond is not gonna work. Cam’s not going to be the service provider to get that social impact bond if Cam has never before provided shoes to kids. It would probably be a situation where Cam says, Hey, I used to live on this street over here and I gave three kids pairs of shoes cause there was three kids that needed shoes. I can do it again on this street but I need $5 to do it.
C Cecchini: Gotcha.
N Kristock: Um so the best social impact bonds are going to be in those areas where outcomes can be so clearly defined. And then there is that prior history of some kind of work, some data that supports that this is going to work, right. So we’re increasing the likelihood that this impact is going to hit the results that it says that it’s going to hit.
C Cecchini: For sure.
N Kristock: So one of the questions would be why use an impact bond rather than traditional funding seeking donations, grants, et cetera. The first reason would be it makes money more effective by tying the funding to measurable results. Impact bonds, reduce the risk of funding programs that don’t work. And again, this is risk that the government would be assuming by giving out those those monies, it’s a risk that foundation to be assuming by giving out funds to nonprofits that don’t actually make their programs work. That makes sense. Two, it allows service providers to adapt to change. So by shifting the focus from just activity to impact or reimbursing results rather than receipts, impact bonds give service providers more flexibility to do what they need to do to get results. And this is kind of like do the ends justify the means type question. And I really like this point because one of my beliefs is that it’s not good enough for an organization, service provider, charity, nonprofit, to just wake up in the morning and say, well, we want to help this area of people.
C Cecchini: Not very specific.
N Kristock: Correct. I think every problem we can, almost every problem we can get to some kind of number behind that problem. Like what is the number to solve that problem? And if we’re waking up every day chasing that number, then we’re moving closer to the goal line. We know what success looks like. And we know when we get to the goal line. Number three reason why impact bonds are better than traditional funding is that it incentivizes better programs. So by tying funding to results, impact bonds, make it attractive and profitable for service providers to improve the programs that they already have. This one is probably a mindset thing as far as having an incentive for a better program. Like let’s break this down. If I’m a charity and I just want to provide shoes to five kids on my street, then maybe I’m just going to go to Payless and buy the five cheapest pairs of shoes. Sure. But if I am incentivized and if I know if I give all five kids pairs of shoes that now I might have funding to go give the next street shoes and then next street, but these kids need to have the best shoes that they can have. Then I’m going to now go look at Nike, look at Under Armour, look at, you know, I don’t know, nice shoe stores. I buy one pair of shoes a year and I wear them all year. But wherever people are buying nice shoes, you’re going to be incentivized to go find the nicest shoes for these kids, thus solving the problem in a better way, and you’re going to get that return to be able to go and help the kids on the next street.
C Cecchini: Gotcha. Okay.
N Kristock: Number four reason why impact bonds are better than traditional funding is that it focuses the private sector on social issues by creating an investment opportunity that includes a financial return impact bonds, invite the private sector to participate in improving social programs. Now obviously this is great because for a long time charity and nonprofit was kind of on its own Island, right? And really the interaction only really came with government organizations or foundations as far as funding. Right. And what we’ve seen in the last decade, which has been huge and is only going to continue to rise, is this emergence this entry of for profit entities, impact investors, corporations that want to use their funds to make a difference.
C Cecchini: Socially conscious.
N Kristock: Yep, you got it. And really so much of what we’re learning is that so many minds, individuals and businesses are turning towards improving society and turning towards how can the work that they do, the employees that they employ, the people that they serve, the people that they sell to. How can their whole ecosystem help improve society in some way? So one of the questions I had was, well the social impact bond thing makes sense. I get it. It sounds great. How many of them are there in the world? Do you have a guess at how many there are in the world?
C Cecchini: I’d like to think over a couple of hundred. No idea though.
N Kristock: Yeah, I didn’t really know what to guess either. I was actually thinking that it was in the thousands. We know that recently the UK government announced almost 200 million Euro of funding for 22 programs backed by social impact bonds and to date there are 151 social impact bonds. How many countries do you think there are social impact bonds working in right now?
C Cecchini: Less than 10?
N Kristock: 29 countries? 151 social impact bonds in 29 countries. The problem though is that these are so new, we don’t really have enough evidence that they’re delivering on their promise. Right. So what are these bonds, these 151 bonds in 29 countries look like in action? So there’s just a couple of examples of social impact bond scenarios. So one would be a, a multinational bank gives a girl’s education, nonprofit and India, enough funds to scale their program to three new villages. We would probably be able to assume that this girl’s education nonprofit was probably already doing work in one village at least. And they said, we can take this program and bring it to three villages, thus increasing the literacy education level of these villages, which is better for society. So the bank gives the money for that to happen. And once they achieve three villages, which is the metric, then the government says, cool, you’re done. It will repay at X percent return investor gets their return charity hopefully continues to operate those programs and maybe goes on to the fourth and the fifth and the sixth villages.
C Cecchini: That’s great. How long have they been out? When was the first social impact bond issued?
N Kristock: Ooh, that’s a really, really good question. I don’t know the answer to that. Yeah, I’ve got to think that it’s been within the last decade though with if there’s only 151 in 29 countries, it’s gotta be a pretty new thing. If you’re listening and know when the first social impact bond was put out, implemented, created, whatever you want to call it send us a message, firstname.lastname@example.org. We’re here to learn as well. On these deep dives. We’re learning this together. A second example of a social impact bond in action would be a large education philanthropy, paying back the initial investment plus interest after three years, based on the number of girls who’ve been enrolled in school and their learning gains. So in this one, it stands to reason that maybe there was a school college university that said we can increase the graduation rate, we can increase X amount of metrics about females who graduate from our program. And so after three years, the numbers are checked by that third party. And it’s determined that the number of girls who’ve been enrolled has increased and the learning gains has increased.
C Cecchini: So it seems like there’s a huge importance on the measurable aspect of the positive impact, meaning that it needs to be measured in order to take part or be involved in a social impact bond. Is that right?
N Kristock: Yeah, you got it. And this is really all part of that greater call for transparency, that greater call for results. And I think transparency and results are two of the best words to use when talking about social impact bonds and really the social impact world as a whole today. The donor, the consumer, the impact investor, the government, everyone wants to see clearly behind the curtain. What are you doing to solve this problem and are you solving it? Show me, give me the numbers. Right. So I moved to a third definition or a third example of a social impact bond in action. This one’s really good because it’s gonna open up a whole ‘nother door. A set of impact investors invest in improving the services of diabetes management clinics to work with specific high risk population. Over a period of four years, the government of Mexico pays back the investors for each person who successfully controls his or her diabetes, preventing health complications, thus saving money for the government. This is a whole new facet because for the first part of this discussion, we’ve kind of kept the impact of this on the population being served. No doubt that is the most important part of all this. It’s a reason why we’ve creating things like this, but certainly a secondary motivation for the government to get involved in something like this, as if you think about how much it costs the government to, in this specific example, administer diabetes, preventing, you know, health services, medications, et cetera. And so the government has a vested interest in this type of situation because for them, they can look over the longterm and see we’re going to have X costs for those with diabetes, but if we pour into this social impact bond and back it and they can solve our problem in four years and we’re going to have X minus some huge number in costs just because we’re giving that return and a, and then we’re helping obviously people with diabetes. Does that scenario make sense? I can see how that would benefit the government.
C Cecchini: No doubt. Yeah, lower cost. No doubt.
N Kristock: You got it. So like you said, these bonds are, are so new. We don’t know the exact date right now, but they’re newer that we don’t really have a lot of evidence about if these things are working or are they actually doing more harm.
Speaker 4: When you say when you say work, do you mean producing the results that they’re expected to? Is that, is that what, when you say work that we were talking about?
N Kristock: Yeah. When we say work we mean are the service providers achieving the results, getting, you know, the pay out, the return to the investors, like is the loop being closed? So I would venture to guess that since a social impact bond is a short term turnaround, that probably a lot of the, those 151 that have are live right now. They’re not at the end of the road, so to speak. They don’t have the metrics yet because they’re not at the end of whatever that no time period…
C Cecchini: Predetermined time period is okay.
N Kristock: You got it. So when we look at are they working? One of the really interesting articles that we found was that instead of funding innovative programs, a lot of the private capital and social impact bonds are actually backing social programs with a proven track record, often evaluated by publicly funded studies. And the layman’s terms here, the breakdown here, the subtitle here is that a lot of these social impact bonds are funding really this is a simplistic way to say it, but programs that are super simple, super straightforward have just extremely well-defined metrics. And that’s something we’ve been talking about in this conversation is these metrics, right about having them be well defined is so important. Both the argument on the other side of that is, well, some of the most complicated problems have the most complex solutions and if you don’t make a social impact bond friendly to complex solutions, you only make it friendly to simple solutions. It may only ever solve simple problems.
C Cecchini: A lot of problems will be left out, no doubt.
N Kristock: Yep. Absolutely. So I thought that was a really interesting take on this for sure. When we look at the impact investment market, take a guess Cam on what you think this market is worth, how much money is out there and impact investment.
C Cecchini: So potential money, or are you saying current? $1 billion,
N Kristock: $502 billion in the impact investment market. That’s a huge amount. That’s a big number. I can’t, you can’t even wrap your head around that number. I know that as a country, the U.S. Donates about $400 billion a year as of last year. But what’s really interesting is that more than half of the world’s 151 social impact bonds are serving fewer than 480 people.
C Cecchini: Wow.
N Kristock: So when we talk about simple solutions for simple problems, that’s manifested in that statistic right there, over half of these bonds are serving such a small amount. What we’re seeing is that because this is a new thing, so you know, can’t really fault it so far because like anything, you got to kind of dip your toes into the water. They clearly did not jump in headfirst into the water.
N Kristock: They’re solving simple problems with simple solutions. And that is why that stat of half of the social impact bonds serve fewer than 480 people. If you had to guess, if you took, you know, the other half, what do you, what would you say is the average beneficiary count of a social impact bond? Like, and this question is for the social impact bonds that impact humans. There could be some that impact animals environment, not sure, but that impact humans. What does the average human impact count, if you will.
C Cecchini: Say 50 to a hundred people.
N Kristock: 14,059 people, right? So of all the bonds, the average is about 15,000 people that are affected, which is great, but half of those are served fewer than 500 people. Wow. A couple statistics to wrap up here about social impact bonds. This is from Brookings Global Economy and Development. So like we said, 151 impact bonds across 29 countries. When we look at sectors, we have 48 social impact bonds in employment. 52 are in social welfare, 21 are in health, 17 education, 10 criminal justice environment and agriculture. Three.
C Cecchini: Super surprising there. Well why only three?
N Kristock: Good question. Social welfare leading the way. I think that social welfare, there’s more numbers involved maybe. And so you can get to more concrete solutions quicker or if maybe in environment agriculture, the, the solutions are more abstract, the problems are more abstract. So there’s abstract solutions. Oh here we go. So the average contract duration, here we go. The average social impact bond duration, 50 months. What’s that? Four years ish. Four years and two months. Right over you. So there we go. The average upfront capital for a social impact bond. Take a guess here. What do you think the average impact investors putting into a social impact bond?
C Cecchini: Gosh, so if they’re, you know, given that the amount of people that they’re trying to impact, I would say 1.5 to 2 million.
N Kristock: 3.5 million, that’d be the average amount of capital. And if you add up all the upfront capital across those 151 social impact bonds out there, $420 million right now in social impact bonds. Wow. yeah, really interesting statistics. The numbers matter for sure. So Cam, we started talking about social impact bonds. This has been your first dip into social impact bonds. What’s your take so far?
C Cecchini: Yeah, awesome. I mean, anything to encourage you know, entrepreneurs to to go out and make a positive impact is a great thing and when you can put this in a, or package it in a way that makes it more palatable for the government you know, that’s always a good thing.
N Kristock: Put yourself in the shoes of the government. And explain to me how you could be persuaded to take part in a social impact bond with an innovative, complex solution that is really risky.
C Cecchini: Yeah. Well, from my understanding, the most important part from the government’s perspective is that they do not have to pay out on these bonds until the positive impact is made. You know, so obviously completely decreases well, not completely, butsubstantially decreases their risk. Given the amount of you know, given how much skin they have in the game.
N Kristock: That’s great. Yeah, that’s probably exactly it, right. For, for government. They’re essentially saying, we’ll put our necks on the line if it works. Right. And so there isn’t a lot of risk. So if the question is why are these impact bonds, social impact bonds, you know, serving so few people or solving simpler problems. And I say that extremely lightly, cause I’m sure they’re doing really, really awesome amounts of good. Then the, probably the bottleneck right now is in impact investors’ hesitancy to dive in.
C Cecchini: Well, just, well, just like the social entrepreneur, we, you know, that for the social impact bond, they should have experience in the, the problem that they’re trying to affect or solve. I bet that that may be the case with the financial institutions also, that they do not have much experience dealing with this kind of intangible aspect of an investment. Meaning the impact, you know, how is it affecting people, you know, but from the government’s perspective, you know, it’s really seems like a great idea. They are in the fortunate position of being able to play Monday morning quarterback on a program that you know, has positive, you know, that’s positively affecting people. It seems like a really great place to be for them.
N Kristock: 100% agree. What I’ve, what I think we’re gonna see social impact bonds trend towards is to, I think we’re gonna see two things increase first and foremost. And most important in my eyes, we’re going to see service providers being challenged to make better models, to make models that are more sustainable, to make models that can be reproduced, to make models that can grow. We’ll see models that are most importantly focused on results as opposed to activity. And secondly, on the impact investors side, as more investors start to open their eyes to the social impact world and learn about service providers and models, et cetera, I think we’re going to see more, more risk being taken on these social impact bonds. So I think that the momentum for more social impact bonds and more innovative problems being solved is going to come from the charities creating better models focused on results and the impact investors getting more comfortable with that risk.
C Cecchini: I may have missed this, but does the, the social entrepreneur or the kind of the middleman between the government and the financial institution, do they have to be a nonprofit, to be able to accept a social impact bond?
N Kristock: That’s another really good question. I do not know the answer to that. And that’s another thing that we’re going to look up. So that’d be two. So the first question we’re going to look up is what a, when was the first social impact bond? And the second question is does it have to be an nonprofit or can it be a different structure, organization all link to a, again, we’ll link to a couple of articles in the show notes and we will produce a blog post that is a kind of in response to the social impact bond breakdown. And we’ll have the answers to those two questions in that for sure.
C Cecchini: Sounds good.
N Kristock: So we’re going to wrap it up here. This is it Cam. That was the deep dive on social impact bonds. Any final thoughts?
C Cecchini: Thanks a lot for having me. This was fun.
N Kristock: Oh yeah, absolutely. We’re going to have some more good conversations and deep dives. For those of you listening, thanks for sticking around. If this was your cup of tea, then you’re probably still listening. That was what we know about social impact bonds. Hopefully we’ve taught you a little bit. We’re looking forward to some more great deep dives here on The Science of Social Impact. We’ll catch you next time. Thanks Cam.
C Cecchini: Have a good one.
N Kristock: Thanks so much for being with us on this episode of The Science of Social Impact a podcast from Crate of Good. Go make an impact in your world and we’ll see you next time.