What is a Social Impact Bond?

A SIB is a type of financing mechanism. The word bond is a little misleading: rather than a financial bond, a SIB is a contract on future social outcomes. It is an arrangement involving at a minimum three parties:

  • A delivery organisation: an organisation delivering a programme which aims to achieve positive social outcomes; typically, a charity or social enterprise (also known as “service provider”)
  • A commissioner: an individual or organisation prepared to pay if specific positive social outcomes are achieved; historically, typically a government body, but could be any type of funder
  • An investor: an individual or organisation providing up-front financing to the delivery organisation to cover operating costs; typically, a social investment firm, trust, foundation or bank

If any of the outcomes agreed upfront are achieved, the commissioner makes the corresponding payments and the investor’s corresponding capital is given back, potentially with a return. The investor therefore carries the financial risk of non-performance: if the outcomes are not achieved, the investor has lost the capital that was invested upfront.

A SIB is, at its best, a set of partnerships between stakeholders who share a desire to see the social outcomes delivered. The benefits of SIBs to the different stakeholders include:

For delivery organisations (and the participants)…

…SIBs are a tool enabling the funding of programmes that otherwise might not have been funded, thereby enabling the delivery of positive social impact in a time where government resources are constrained. This might be for one three reasons:

  1. The impact is oriented around prevention, and cost savings are therefore delayed or difficult to ascribe
  2. The work requires cross-sector organisational collaboration, perhaps around a complicated social issue
  3. The intervention involves a new innovation, and is therefore difficult to fund in conventional ways

Reflect on your reasons for developing a SIB: a rock-solid rationale will get all potential partners on board.

For commissioners...

…SIBs enable payment to be restricted to successful outcomes that may reduce the need for future spending. This allows commissioners to pool funding for outcomes as they often share the social and financial benefits.

For investors...

…SIBs offer the potential to support delivery organisations to deliver social impact, and to generate a financial return.

For all...

…SIBs unlock the potential for preventative programmes that can address complex issues at their core.

Next: How does the money flow?