Are Social Impact Bonds really the magic bullet that we've been led to believe?

This blog post will examine the uphill battle that social impact bonds as a form of investment have faced and reflect on their capacity to fix the innumerable issues they have been tasked with including housing reform, education, and improving maternal health rates (among many others). They have been touted as the magic bullet of financing for social impact but is there data to back up those claims? Is this the holy grail of funding; the linkage of public and private sectors which come together to cure all of the world's woes?

I think not. Although I agree that social impact bonds have the potential to create a new market which will benefit society and investors, I'm extremely skeptical of their ability to provide long term results in these areas.

Despite my hesitation, I acknowledge that any progress made towards these identified social goals, is worth some type of investment. With a few key actions on behalf of governments and policy reformers, the risks can be mitigated while the potential rewards can be harnessed:

1. Quality Unbiased Academic Research in this field: Harvard has already begun this task but more diverse research will be needed for this funding to gain credibility and for societal results to be verified. To date, a majority of research is biased and completed by those with potential stakes in this new market.

2. Emphasis on long term results: The current structure of social impact bonds emphasizes quick and strong impacts at low costs which create strong financial returns for investors. This incentive structure may lead to favorable short term results and negative long term results. Since the field is so new, this aspect has yet to be determined but should remain a concern until further research and evaluation is completed.

3. Create universal, measurable evaluation tools which can easily be accessed by all stakeholders: Again this has already begun but it behooves us to continue with standardization to avoid to much inefficiency and overheard as the market continues to grow.

4. Create additional subsidies for the less profitable sectors by using a portion of the returns from the most profitable: As it currently stands, affordable housing investments are projected to provide the most return, while those in education and other areas have faced uphill battles when trying to tie in revenues with their impacts. This propensity of investors to shoot for the most profitable can be reduced not only by seeking a variety of investor types (including those whose primary concern is social impact), but by creating subsidy structures to improve returns to investors in less profitable areas.

5. Garner public support: Once more research is conducted and results are more conclusive, public support and education should be leveraged. This will generate even more funding opportunities.

Although social impact bonds have potential, much more research and evaluation is needed to determine the long term effects. The only way to conduct these evaluations is to give it a try. Only time will tell.