Innovative Partnerships: Social Impact Bonds

Recently, Echoing Green participated in a discussion about social impact bonds hosted by McKinsey & Company on the firm’s recent report From Potential to Action: Bringing Social Impact Bonds to the US.  The gathering was attended by investors, NGOs, think tanks and governments, leading to a lively discussion on driving financial innovation and unlocking capital through innovative partnerships.

Social Impact Bonds (SIB) are multi-stakeholder partnerships, not bonds in the traditional sense, that bring together non-profits, government, and impact investors to more effectively use resources and achieve better outcomes targeting preventive interventions. McKinsey’s site dedicated to social impact bonds has a great, short clip (featured above) on how the partnership works. The nascent model was first implemented in the UK in 2010, and has since caught the attention of governments and investors around the world. Most recently, Massachusetts has launched two SIBs focused on stemming chronic homelessness and better serving youth leaving the juvenile justice system.

For the entrepreneurs out there, an important point arose from the conversation on unlocking capital—understanding risk calculus. With different types of funding come different levels of risk taking. For example, foundations are usually more willing to take risks with their grant dollars, seeking to uncover new innovative models. Governments are less willing to take risks on new innovations, and often fund proven models that measure up against the counterfactual and are ready to scale. Private investors on the other hand, require rigorous analyses of the model, whether through randomized controlled trials or in-depth peer analyses, for underwriting purposes. In the SIB model, government pays a return to investors if the intervention they invest in actually produces the social outcomes government is seeking to achieve. It’s a pay for performance model. SIBs aims to leverage the best capacities of investors and government in order to support the service providers that are producing the best outcomes.

All of these players are essential in the social impact space. The question is how to access the right mix of resources to produce the most impact. SIBs are an important financial innovation that will help shift the focus from counting outputs to achieving outcomes. While its application may be specific to behavioral interventions, it is a new tool in our toolbox. But we cannot stop there. We must keep driving innovation and bringing more partners to the table so that we better solve the world’s biggest problems.

How do you think SIBs can apply to your community?