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Social Impact Bonds (SIBs) have been around for a while now. First set up in the UK in 2010, the new social public-private partnership was meant to reduce the recidivism rate in a prison in Peterborough. The strategy is simple: the government wants to tackle a pressing social issue, but is afraid to remain stuck with the costs in the case of failure. This is why it issues a bond, which is bought by an investor, who will only be repaid if the social target of the bond has been met. This trick shifts the risk from the public to the private sector.

Eight years later, around 100 bonds have been issued and the geographical range is slowly transcending the purely Western context. The first results are measurable, the first investors have been paid, and the outlook gives reason for hope, though tentatively. But one question remains: what is in there for private companies, seeking to boost their CSR activity?


Looking at the investors so far, most of them have been philanthropic institutions, charitable trusts or funds. But also names like Deloitte or Google can be found. Google.org, alongside six other investors, invested in the first SIB project in California in 2015, aiming to reduce chronic homelessness in Santa Clara County. In summer 2017, Deloitte joined a project in Porto that hopes to reduce unemployment.


What is their benefit from taking part in such a risky endeavour like SIB? Why should the private sector voluntarily provide money for a rather untested social finance model?


The answer is visibility. The contracts are outcome-based, meaning that the social impact can directly be measured. This seems obvious, but often donations are given almost blindly to charities or other social causes – which surely has a high moral value and the advantage of tax benefits, but leaves the actual impact of the donation invisible. This simple aspect of measurability gives corporations a tool at hand with which they can invest in a social cause that lies at the heart of its product or company philosophy, while being able to take pride in the social impact.


The pay-for-success market offers a second rather systematic benefit for firms, it can almost be called a defining moment. Big Society Capital correctly analysed that traditional CSR programs are often viewed as an add-on to the firm’s core business strategy. The business must be profitable, whereas the CSR activity must be the opposite: an altruistic donation to charities, awareness and compliance programs, or the promotion of ethical values. These are all important activities of corporations’ CSR activities.

But if decision-makers opened up to the opportunity that CSR funds are allowed to generate profit, then SIBs can build a bridge between the companies’ business and their (sometimes burdensome) CSR activities. The isolation of CSR has equally been subject to criticism by the public just like no CSR activities at all. SIBs can prevent the drifting apart of these two spheres by changing the mind-set about the role of CSR within the firm.


Major banks have long understood the value of impact investment. SIBs can be specifically targeted and open up a wide range of projects and opportunities for portfolio diversification. The Social Impact Fund of Goldman Sachs, for example, has been a leading investor in four SIBs so far; BNP Paribas invested in two bonds in Connecticut and France within the past two years, responding to increased client demands to align financial returns with social purposes.


To sum up: there are two clearly positive points about social impact bonds. The first is the undoubtedly great benefit of visibility – the social impact is measurable and the activities can be better targeted depending on the firm’s concerns. The second point is a systematic one with the potential to shape the future of CSR. Instead of being a detached department within the firm that is in itself unprofitable, SIBs link business activity with CSR activity if CSR funds are to be utilized for social impact investments.


But doubting voices remain. They are mainly concerned with SIB’s effectiveness: many projects have not yet been evaluated and thus risks and uncertainty still seem high. Apart from that, contract setups and performance measurement are complex and entail administrative work not to be underestimated. Especially in developing countries, where social issues are most pressing and social innovations much needed, these still appear to be impeding factors, not least because trust in governments’ willingness and ability to repay is a crucial component to attract investments.


The future of social impact bonds as CSR tools are facing a key moment. As the first bonds mature, it needs to be awaited whether the yield of the investments provides a big enough incentive for more companies to step in the pay-for-success market. The benefits and risks are clear. If ongoing projects prove to be effective, SIBs have the potential to redefine the traditional approach to corporate social responsibility.


Juliane Markscheffel

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