SIBs are Great. Why Not Do More?

Most of this week’s readings focused on the financial mechanisms that Social Enterprises and non-profits organizations often use to generate funding for programs that yield societal impact. These mechanisms include more traditional pathways, such as loans, and more innovative approaches—the most frequently discussed of which was the financial tool known as social impact bonds or SIBs.

Social impact bonds, a relatively recent construct, allow organizations—that is, those that do work which benefits society—to tie their financing to their results. Effectively, they leverage their promise to deliver whatever it is that they hope to achieve (e.g., a reduction in homelessness) in the process of generating capital (often from a government or public entity). Technically, the name itself is a misnomer, as the McKinsey & Co. report articulately explains, but I actually think that conceptualizing the process as similar to that of a bond—wherein there is a pre-established return on investment—is useful. And perhaps it explains why SIBs have enjoyed so much bipartisan support in the US, as noted by Cohen, during a time of rigid partisan politics. And I’m not surprised to hear that many governments of various scale have found SIBs to be a useful financial tool, helping to generate preventative interventions in many areas that were previously handled with reactive (and thereby, highly-inefficient-in-the-long-run) triage programs, e.g., homeless shelters that do not help to actually reduce homelessness.

What seems to be lacking, however, is a robust arsenal of tools that help organizations to develop and test programs that have not yet been proven effective. This is touched on the Center for American Progress Report, which explains that most funding for early development of social impact projects still comes from large foundations. But this is not an efficient model for the organizations attempting to procure funding.

Bugg-Levine, Kogut, and Kulatilaka’s article in the Harvard Business review briefly contrasts the financial innovation that created the collateralized debt crisis that led to the 2008 recession with the financial innovation currently being deployed in the social impact realm. But the truth is, although the latter may be making gains in the last two decades, the profit-seeking financial sector is lightyears ahead in terms of the breadth of financial tools it has at its disposal. And it’s high time that the social impact sector started to catch up! Why can’t we pool risk in developing projects whose primary purpose is to benefit society in the same way that we do with projects whose primary purpose is to generate wealth? The current framework of the system, as the article points out, makes it doubly tough to invest in projects with a double bottom line. But does it have to be so?