The name is Bond…Social Impact Bond

The social impact bond seems like such a great idea to me.

It reminds me of some of the energy efficiency work my organization (before Heinz) was engaged in. The program my coworkers were designing and implementing in the state of Michigan was called on-bill financing. The idea is that folks could take out low interest loans to cover the cost of new durable goods like refrigerators, air conditioners, washer/dryers, etc. Their energy bills would go down as a result of the new machines’ efficiency. The homeowners’ savings would go toward paying off their loan rather than going straight into their pockets. After a certain period of time, their loans would be repaid and they would have the benefit of lower bills.

I realize social impact bonds are different, but it has the same sort of “that just makes sense” ring to it for me. Not a lot of risk, but eventual potential for returns. Investors have a chance to recoup their money and even profit, but only if a project works.

Admittedly, I don’t know much about stocks and bonds and all that stuff. The Economist article entitled “Let’s Hear Those Ideas” mentioned a challenge to the potential for social impact bonds to have, well, big impacts: The true test is to attract for-profit capital, which involves regulators making it clear to trustees of foundations and pension funds that “social impact investments” are a legitimate asset class.

At my previous organization, under the prompting of our office manager, we were able to change our mutual funds over to more environmentally and socially responsible options. If a social impact bond were part of the diverse mix, I don’t see that we’d be taking on any extra risk. Again, I’m no expert, but it seems to make sense!

So, I have two questions:

1) What might be some unintended consequences?

2) What’s involved with regulators making it clear to trustees of foundations and pension funds that these types of investments are a legitimate asset class?