This is the Title Page - DTPR Homedtpr.lib.athabascau.ca/action/download.php?filename=mba-13/open/sugars... · such as providing housing and support for homeless Aboriginal women

Preparing for the Arrival of Social Impact Bonds in the Non-Profit Sector

Diane Sugars

Applied Project

Word count: 14,658

Date: Dec 6, 2013

Supervisor: Dr. Lee Ann Keple

Applied Project Coordinator: Dr. Teresa Rose

Diane Sugars December 6, 2013

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Abstract

Research findings in this paper identify Social Impact Bonds (SIBs) as an outcomes-based method of funding and delivering social services. Data regarding SIBs is limited and new. The first SIB was introduced in March 2010 by Social Finance and the Ministry of Justice in Peterborough, UK, which reaches maturity in 2014. With strained Government budgets and lowered charitable donations, poor returns on traditional investments, and some areas of the capital markets still dealing with decreased reputation there continues to be a growing need for social services – and governments are struggling to meet the demands. By connecting financial returns to needed social programs, Social Impact Bonds, could be used to finance everything from a reduction in obesity to community development initiatives resulting in improved outcomes for each dollar spent. There is limited literature that has been published about the first-hand experiences of service organizations or about impact investing from the service provider’s perspective. The non-profit sector and service providers appear to be generally absent from discussions regarding the social investment market, with other non-charity intermediaries in the industry actively participating in them. With these considerations in mind, and as impact investing markets grow there is a requirement for an increased number of informed participants who are able to adapt their existing systems to meet the needs of investors who are wanting to generate social return while pursuing financial returns. This paper outlines the fundamental aspects of the Social Impact Bond model—including benefits and challenges, structure, stages of development, what investors prefer in an organization and descriptions of impact measurement —with a focus on providing a greater understanding of this impact investment opportunity for non-profit organizations in the Social Service sector.


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Executive Summary

This research paper outlines the fundamental aspects of the Social Impact Bond model—including benefits and challenges, structure, stages of development, what investors prefer in an organization and descriptions of impact measurement —with a focus on providing a greater understanding of this impact investment opportunity for non-profit organizations in the Social Service sector.

Research findings identify Social Impact Bonds (SIBs) as an outcomes-based method of funding and delivering social services. With SIBs the public sector commits to an agreement to pay for improvement in social outcomes for a specific population for a defined period of time. Private investors are sourced, and their funds are used for supporting social interventions delivered by service providers. If there are improved social outcomes then investors ‘cash in’ their bonds and receive reimbursement of their costs plus a rate of return (Deloitte,n.d.).

SIBs are best suited for specific organizations that:

have a strong focus on outcomes based assessment for determining success or failure of intervention programs,

have a track record of success,

and are adaptable and have the ability to scale up when opportunities are presented.

The types of programs that are more suitable for SIBs are preventative in nature such as providing housing and support for homeless Aboriginal women thereby preventing their children from going into foster care (Symons, 2013).

Of the many innovative methods for measuring social impact the preferred approach is dependent on a number of factors including: investor risk tolerance, desired return, area where investors prefer to invest, and reporting structure. There are several measurement methodologies available for organizations that will assist with tracking and monitoring outputs. These include: process methods that track productivity and outputs, impact methods that relate outputs and outcomes, and monetization methods that covert outcomes (impact) by assigning a dollar value to them (Best, & Harji, 2012).

There is limited literature that has been published about the first-hand

experiences of service organizations or about impact investing from the service provider’s perspective. The non-profit sector and service providers appear to be generally absent from discussions regarding the social investment market, while other non-charity intermediaries in the industry are actively participating in them.


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Social finance is relatively new in Canada, trailing behind the U.K. by approximately ten years. However, momentum is growing and there are currently high-profile advocates for this new form of financing, including former Prime Minister Paul Martin and Stanley Hartt, chairman of Macquarie Capital Markets Canada.

With strained Government budgets and lowered charitable donations, poor returns on traditional investments, and some areas of the capital markets still dealing with decreased reputation there continues to be a growing need for social services – and governments are struggling to meet the demands.

By connecting financial returns to needed social programs, Social Impact Bonds, could be used to finance everything from a reduction in obesity to community development initiatives resulting in improved outcomes for each dollar spent(Perkins, 2011).

Increased research would play an integral part of assisting SIBs to move from its current state of early adoption to nationwide acceptance and implementation. Based on these findings, a recommendation for future study is suggested so that information and knowledge around impact investing may advance (instead of continually repeating the same old questions/answers).

http://www.rockefellerfoundation.org/blog/state-local-governments-receive


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Contents

ABSTRACT ................................................................................................................................... 2

EXECUTIVE SUMMARY .......................................................................................................... 3

INTRODUCTION......................................................................................................................... 6

BACKGROUND ................................................................................................................ 6 SCOPE OF STUDY ........................................................................................................... 7

PURPOSE OF PROJECT ................................................................................................. 10

SIGNIFICANCE OF THE PROJECT .................................................................................... 10 RESEARCH PROCESS ................................................................................................... 10

IMPACT INVESTING & SOCIAL IMPACT BONDS .......................................................... 11

What is Impact Investing ................................................................................................... 11

What are Social Impact Bonds ......................................................................................... 15

THE FIRST SIB AND ITS OUTCOMES ............................................................................... 18 WHAT IMPACT INVESTORS PREFER IN A NON-PROFIT ........................................................ 24 PROGRAMS THAT FIT SOCIAL IMPACT BONDS .................................................................. 29

IMPACT MEASUREMENT ................................................................................................ 31 Measuring Social Return ................................................................................................... 32

SUMMARY ................................................................................................................................. 36

STATEMENT OF FINDINGS ............................................................................................. 41

SIGNIFICANCE AND LIMITATIONS .................................................................................... 43

FUTURE STUDY........................................................................................................................ 43

APPENDIX: DEFINITION OF TERMS.................................................................................. 46

REFERENCES ............................................................................................................................ 47


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Introduction

Background

For decades, governments and charitable organizations have invested considerable time and effort towards addressing social problems such as homelessness, disease and child poverty. Limited by outdated methods for resolving these issues governments around the world have struggled to meet their promises.

Traditional ways (e.g. donations and grants) of funding social endeavours have

tended to create barriers to innovation and growth for organizations. Social entrepreneurs have had no access to capital markets. In fact, the biggest hurdle in the social sector has been a lack of effective funding models (Cohen and Sahlman, 2013).

According to Imagine Canada (2010), Canada’s non-profit sector is the second

largest in the world with an estimated 165,000 charities distributed throughout the country. Funding for these charities is derived from:

sales of goods and services account for 45.6% of total income overall government funding at 19.7% membership fees 15.9% donations from households 12.0 investment income 4.9% donations from businesses 1.9%

Typically governments provide funding to non-profit organizations so they may address social issues. This expenditure of government dollars cultivates a self-perpetuating pattern that results in a constant and many times increased dependency of organizations on government funds.

Ethically responsible foundations, private donors and corporations also donate to charities for many reasons including their desire to address community issues and, hopefully, reduce social problems.

With the economic downturn donations to charities declined by 6% in 2009 and

saw a slight increase in 2010. The overall donor base decreased between 2008 and 2010. This provides a clear message that the global economic downturn has substantially impacted charitable giving in Canada (Lasby, 2011). The decrease in donations may be indicating a dangerous trend of a declining donor base; the long-term implications are yet to be determined.

Traditionally, donors, grantees, foundations and trusts endeavour to prevent and/or address social issues by funding charities who deliver interventions that improve social outcomes and reduce the number of people needing crisis interventions. But


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available funds are limited. Plus, not all social causes can be addressed. And without increased funding for prevention and early intervention programs/services donors are reduced to small scale funding (Lasby, 2011).

Scope of Study

With the financial crisis of 2008 still affecting society today, there is increased interest in mutually agreeable public-private partnerships. The term ‘public-private partnership’, from the Canadian perspective, relates to the provision of public services or public infrastructure and requires the transfer of risk between partners. The formal definition by The Canadian Council for Public-Private Partnerships (2013) is as follows:

A cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.

Public-private partnerships include a range of models that progressively employ the expertise or capital of the private sector.

Social issues such as limited accessible housing or climate change cannot be addressed solely by government nor can private markets singularly address these issues. To sufficiently provide solutions public and private capital are required to work together. Some examples of successful partnerships include: a) in microfinance where opportunities are being brought to small businesses in Cambodia so they may access small credit loans through a multibillion dollar microfinance industry; b) private investors funding low-income housing developers to provide families in North America with access to affordable housing; c) private equity investments where stakeholders are investing directly into the expansion of hospitals in Kenya (Bugg-Levine & Emerson, 2011).

The emergence of impact investing into the market has the potential to direct significant amounts of investments towards social challenges including, but not limited to, healthcare, education, and homelessness. Impact investing strives to finance solutions to social or environmental issues while yielding financial returns. For an investment to be considered an impact investment profit must be an objective as well there must be a correlation between the projected social impact and the financial return of investment.

It’s important to keep in mind that impact investing is not limited to social services for the poor. In places like Canada, social safety nets are being decreased or completely withdrawn resulting in a need for other funding solutions.

One of these possible solutions is a new funding mechanism emerging in

Canada called Social Impact Bonds (SIBs). Social Impact Bonds are an outcomes-based method of funding and delivering social services. With SIBs the public sector


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commits to an agreement to pay for improvement in social outcomes (a bond) for a specific population (such as a reduction in the number Aboriginal children in foster care, or in the number of homeless Aboriginal women) for a defined period of time. With SIBs, private investors are sourced, and their funds are used for supporting social interventions delivered by service providers. If there are improved social outcomes then investors ‘cash in’ their bonds and receive reimbursement of their costs plus a rate of return by the public sector. Investors do not recover their investment if outcomes do not improve (Deloitte,n.d.).

SIBs are not traditional bonds. They don’t have a fixed lifetime or a fixed interest return; they are designed as a public-private partnership where risk is transferred from the public sector to the private sector. The public sector pays only when the intervention is successful. In this way, Social Impact Bonds enable a re-allocation of risk between the two sectors (Social Finance, 2012).

Social Impact Bonds strive to increase public/private partnerships and significantly increase investment in early prevention programs resulting in improved social outcomes and taxpayer savings. There are several companies in Canada investigating the viability of SIBs. And they are looking at various non-profits as candidates for investment.

Since 2011, government agencies in the U.K., U.S., Australia, Canada and Israel

have all begun exploring the potential of Social Impact Bonds (Cohen and Sahlman, 2013). While impact investing is relatively new and the success of this industry is uncertain, we do know that leaders in sectors such as community development, microfinance, education and health care finance, joining their individual capabilities in cross-sector collaboration, have more possibilities than working independently (Bugg-Levine &Goldstein, 2009).

There is a long list of issues in Canada that can’t be handled by non-profits and governments alone; there are also several social causes that won’t generate a financial return for investors even though they produce a social benefit. However, there exists many possibilities for new and sophisticated partnerships where investing plays an important role in supporting and scaling solutions for effective and measureable social and environmental outcomes (Bugg-Levine, & Emerson, 2011).

The Social Impact Bond (SIB) is a promising funding model that is bringing

together the interests of non-profit, public and private sector stakeholders with a focus on accomplishing positive social outcomes.

With the growing interest for the SIB, exploring, and in particular identifying, its main elements will assist non-profit organizations within the Social Service sector, be better prepared for the arrival of Social Impact Bonds (SIBs) and be successfully considered by investors as candidates for bonds.

http://www.socialfinanceus.org/sites/socialfinanceus.org/files/small.SocialFinanceWPSingleFINAL.pdf


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The main objectives necessary for distinguishing these elements is: to outline the description of SIBs and their use; to provide an overall description of impact investing; to outline what impact investors prefer in an investee; to list programs that best fit SIBs and to offer information on impact measurement.

The ‘Impact investing & Social Impact Bond’ section of this paper outlines the origins, general framework and steps required for implementation of the SIB. The potential benefits and challenges of SIBs are investigated plus an outline of the SIB framework from inception to completion is provided. This section concludes with an overview of investor’s preferences, proposed programs that are preventative in nature and thus best fit SIBs, and an outline of several examples of impact measurement tools.

The ‘Conclusion’ section of this paper consists of results derived from the collection

and review of data. Several suggestions are offered including the need for non-profit service providers to be included more in discussions regarding the social investment market. Plus, a requirement for SIBs to move forward is a need for Canadian governments, at all levels, to stop thinking about impact bonds and to start supporting and implementing them.

It is now known that philanthropy has the ability to play a critical role in new funding models like the Social Impact Bond plus there is increasing interest in and around SIBs. Stakeholders from varying sectors – philanthropy, private, government, and non-profit, – are motivated by the potential of SIBs and interested in testing them.

Innovations like SIBs are able to finance everything from a reduction in obesity to community development initiatives resulting increased outcomes for each dollar spent (Perkins, 2011). But, despite increasing interest in social investment there remain few non-profit organizations in Canada that have actually participated in impact investing opportunities. As well, literature searches indicate that very little has been published about the first-hand experiences of organizations or about impact investing from the service provider’s perspective.

So how does Canada move towards creating a market for impact investing? How can new people be encouraged to join the movement? How do we advance our knowledge (and not continually repeat the same old questions/answers)? And, worse yet, what if we don’t? “Impact investing has gathered enough momentum that it is unlikely to go away. But that does not mean the vision of a healthy and sustainable ecosystem will come to pass. A less optimistic vision could also come to pass” (Bugg-Levine & Emerson, 2011, p. 257).

This paper concludes with recommendations for future study regarding the need for creating a stronger market for Impact investing in Canada. Canada has an immediate requirement to find alternate means of funding and addressing social and environmental issues – and the country is currently ten years behind the UK when considering the implementation of innovative solutions such as Social Impact Bonds.

http://www.rockefellerfoundation.org/blog/transformative-power-philanthropy


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Purpose of Project

The objective of this paper is to explore, and in particular identify, the main elements that will assist non-profit organizations within the Social Service sector, be better prepared for the arrival of Social Impact Bonds (SIBs) and to be successfully considered by investors as candidates for bonds.

To achieve the objectives of this study a description of SIBs and their use from 2010 (when the first bond was implemented in the UK) forward are outlined in order to answer the following research questions:

1) What is impact investing and, more specifically, Social Impact Bonds (SIBs)?

2) What are impact investors looking for in a non-profit? What are the organization resource and capacity requirements for impact investments?

3) What programs best fit SIBs?

4) What is impact measurement? How do you develop and track metrics that demonstrate, to stakeholders, a program’s effectiveness (transparency and accountability).

Significance of the Project

The significance of the project is to:

1. Improve non-profit management understanding of Impact Investments and more specifically, Social Impact Bonds;

2. Improve available literature as it relates to non-profits (the service provider) and Impact Investments.

Research Process

The research process used for this study employs a comprehensive review of a significant body of relevant literature relating to impact investing and, more specifically, Social Impact Bonds. The study was conducted primarily online. There are numerous online documents, articles and websites available containing information relevant to the project allowing a thorough study of the research topic. In addition to analysis of online data, a review of a SIB funded project, currently underway in the UK, was conducted. Research focused on secondary sources from 2010 (when the first bond was implemented in the UK) forward and concentrated on implementation of Social Impact Bonds from the service provider’s perspective.


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Impact Investing & Social Impact Bonds

Though impact investing and Social Impact Bonds are not total solutions, they do provide unique options for corporations to invest in social causes. They have the potential to reach a larger number of people and deliver increased social impact as compared to more traditional forms of philanthropy.

The best candidates for SIB funding are non-profits that have the capacity to

fulfill SIB requirements, who deliver specific preventative programs and who are able to demonstrate clear outcomes in a particular market. These outcomes should translate into government savings that can be achieved within a specified time, are significant enough to cover costs of the program it’s intended for, and that provide a reasonable return to investors (Loxley, 2013).

This section is informed by a review of key publications regarding the use of

impact investment and what investors are looking for in a non-profit, what programs best fit Social Impact Bonds (SIBs), and concludes with a discussion on outcomes measurement and how it relates to demonstrating and valuing social impact.

What is Impact Investing

Foundations, private donors and corporations donate to charities for many reasons including their desire to address community issues and, hopefully, reduce social causes. According to Robert Sexty (2011) donating funds directly to community issues is the traditional form of corporate giving. However, many corporations are beginning to view this approach as lacking and not representative of their philosophy, “doing well by doing good”.

Advancements in the corporate giving industry, driven by various reasons and

factors, have created a tapestry that is increasingly being recognized as the impact-investing industry (Bugg-Levine, & Goldstein, 2009). There are two key players in impact investing: investors who are putting their capital to work and organizations that take these funds and apply them to create social benefit (Bugg-Levine & Emerson, 2011).

According to Grabenwarter and Liechtenstein (n.d., p. 10) the definition of impact investing is “any profit-seeking investment activity that intentionally generates measurable benefits for society.” For an investment to be considered an impact investment profit must be an objective as well there must be a correlation between the projected social impact and the financial return of investment. The five key characteristics of impact investing are:

1. profit as an objective; 2. a positive correlation between the intended social impact and the financial return

of that investment;


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3. an intentional, pre-determined social impact; 4. a measurable social impact; 5. a result that produces a net positive change to society.

(Grabenwarter, & Liechtenstein, n.d.)

In order to use the term impact investment correctly there has to be a positive connection between financial return (investors must be pursuing financial profit) and social impact (with measurable outcomes). These characteristics clearly differentiate impact investing from philanthropy.

There are many terms used when referring to investing in the non-profit sector. Some of these include: philanthropy, socially responsible investing, and impact investing.

Philanthropy, or ‘one-way granting’, does not provide the investor with a financial return; however, investments are applied to create social change. With socially responsible investing (SRI), investors choose the social issue they wish to invest in with the main benefit being a financial return. “Impact investing recognizes that investments can pursue financial returns while also intentionally addressing social and environmental challenges” (Bugg-Levine & Emerson, 2011, p. 5). This form of investing offers a more proactive approach where investors actively strive to identify effective projects that produce positive social impact while delivering satisfactory financial return (Vogel, & Shackleton, 2012).

There is a long-standing debate regarding philanthropic donations being blended with financial incentives. This ‘making money on the back of the poor' is a common criticism of the impact investment model. According to Niggemann, & Brägger, (2011) there are valid reasons for integrating financial rewards with social benefits. The social capital market has traditionally been inefficient; philanthropic fundraising is time-consuming and extremely costly.

The 2007 McKinsey & Company study (as cited by Niggemann, & Brägger, 2011), outlined the cost of capital in philanthropy at 22-44%. By utilizing the conventional financial markets, impact investing has the potential to provide a more cost-efficient model for channeling capital to areas of social need and potentially producing more sustainable long-term impact.

Socially responsible investing can be a way of investing in financing activities that

fit a company’s or person’s beliefs. If performed correctly, the results should provide the same results as if investments were done without concern for social issues (Logue, 2009).

In the past few years impact investing has grown as communities have begun to understand the implications of changing economies, demographics, cultural and social issues. Impact investments in local communities represent approximately 0.8% (or $4.5 billion) of the total. This group includes the Quebec’s social finance sector, as well as

http://www.usnews.com/topics/author/john_vogel

http://www.usnews.com/topics/author/megan_shackleton


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forms of financing/lending to non-profits, social enterprises, and businesses with a social purpose in Canada (Boshyk, et al., 2011). The category making up the largest share of socially responsible investments in Canada ($453.4 billion) are Pension Funds (Boshyk, Bragg, Britto, Obaid, & Runnalls, 2011).

Impact Investment Assets, in Canada, by Category

Category Assets (millions)

Aboriginal Funds 285.7

Community Futures Development Corporations 910.6

Community Loan Funds and Social Venture Capital 348.8

Credit Unions 951.5

Foundations 32

International Impact Investments 5.6

Quebec Development Capital 1,049.1

Quebec Solidarity Finance 850.5

Total 4,447.8

(Boshyk, et al., 2011)

Separate categories in the investment market are prepared to carry various levels of risk plus seek different rates of return (Philipson, 2011). Due to high risk and low returns Foundations are more likely to invest in SIBs.

A strong impact investing industry requires 3 things: interested investors, capable intermediaries, and organization’s seeking investments (these are social enterprises and/or organizations running social programs that are looking for funds for operations) (Bouri, 2013).

Impact investment is ‘thinking and practice’ integrated together to create a different system built on past history and theory. It is a system of change where groups who are not familiar with working together collaborate to create new opportunities (Bugg-Levine & Emerson, 2011).


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While the concept of impact investing has been around for centuries today’s model is seeing more optimistic investors who are coming to understand the role businesses can play in addressing social issues through profit-seeking investments. Often, though, organizations addressing social issues and impact investors seeking profit have to ‘force fit’ their goals and objectives into a government regulated system that dictates they either “make a difference or make a profit – not both” (Bugg-Levine, & Emerson, 2011, p. 113). Regardless, there is a driving force of impact investors and social entrepreneurs who are moving forward and creating exemptions to the law that allow them to meet their desired aspirations.

The Social Sector

Impact investing

________ _________ _________________ _______________

(Haubenreisser, 2011)

Non-profit operating

with grants

Non-profit generating revenue

Co-op enterprise

Social enterprise

Social purpose business

Traditional Corporation

Social and Public Impact

Financial Return

Investments intended to create positive impact beyond financial return

Provide Capital - Transactions tend to be private debt or equity investments; More publicly traded investment opportunities may arise as market matures

Business designed with intent - The organization where the investment is made should be designed to make an impact This differentiates impact investments from investments that result in unintentional social/environmental benefit

Expect financial returns - The investment should be expected to deliver at least a nominal return; Donations are excluded; Market rates returns are within scope;

…to generate positive social and/or environmental impact - Positive impact should be part of the stated organization strategy and should be measured as part of the success of the investment


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The billions of charitable dollars donated by private philanthropists are small in comparison to the vast capital available worldwide. Increasingly more investors are attracted to impact investing as a means to increase their capital while addressing social issues (Bugg-Levine, Emerson, 2011).

Impact investing has the ability to open up and reveal sizeable capital that could

be used to supplement and reduce the strain on struggling governments and charities and solve increased social problems (Bugg-Levine & Emerson, 2011). It can target varying social issues including: productivity growth, food security, education, sanitation, etc. Impact investing can also take different forms: traditional equity, debt, loan guarantees, private equity capital (where the investor receives shares in an unlisted organization) or other innovative arrangements (Niggemann, & Brägger, 2011).

“Impact investing is poised to expand rapidly through the launch of creative finance structures that enable impact investors to work directly with government to bring private capital into basic service provision. One such innovation is the social impact (or pay-for-success) bond” (Bugg-Levine & Emerson, 2011, p. 103).

What are Social Impact Bonds

Canadians rely on government to provide direction and control regarding society issues including, but not limited to, crime reduction, improving of health/wellness, and the education system. Tax dollars are invested in social causes with government typically assuming the entire risk of investment. However, many times tangible outcomes do not result leaving taxpayers frustrated (Deloitte, n.d.).

An innovative way to address some of these concerns has been created. In the

United States it’s being called ‘Pay for Success Bond’ and in Canada it has been titled ‘Social Impact Bond’.

The Social Impact Bond lowers risk for government and provides innovation

incentive for organizations. Plus it provides strong opportunities for collaboration between service providers essentially shifting how some social service programs are implemented and designed (Deloitte, n.d.).

Social Impact Bonds require a partnership with public/private investors and non-profits where they agree to an established system of ‘checks and balances’ inhibiting any self-interest and where they agree to shared objectives (Social Finance, 2012).

The government and/or non-profit initially decide together what social services

will be addressed. They then enter into a contract specifying the social outcomes that will be delivered, their cost, and the rate of return to be paid if outcomes are met.


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Benchmarks for measuring success are stated at the beginning of the social contract and are kept high thereby encouraging non-profits to meet expectations. Government only pays investors for real value creation, encouraging investors to conduct due diligence and follow the investment closely, contributing to the achievement of a successful SIB program. This mutually dependant relationship encourages productive collaboration, inspiring all parties to focus on tangible long-term development (Social Finance, 2012).

Once the agreement with government and the non-profit has been established

the organization then recruits investors from foundations and the private sector. The organization can act as intermediary or be the social service agency that actually delivers the services as outlined in the contact with the government. If and when outcomes are accomplished the government then honours the agreement and repays the bond, with the additional rate of return, as outlined in the contract, to investors.

Government is required to pay only if the organization achieves success. If

successful, the public cost savings “will outweigh any payments made to investors. In this investment model, government payments are delayed until after cost savings are made” (Bolton, 2010).

How SIBs are structured

(Deloitte, 2012) SIBs enable government to address social issues, gain increased value for their

investments, and transfer the risk to other investors. Investors are provided ‘the opportunity to receive aligned social and financial return” (Bolton, 2010).


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According to Disley, et al. (May, 2011) SIBs are, overall, a form of “payment by results” potentially benefiting a range of diverse stakeholders:

Government - removing the financial risk that government pays or services that prove to be ineffective at addressing social needs and improving outcomes. Also, with SIBs a delivery agency or intermediary commissions service providers instead of the government.

Investors - offers a ‘mission-aligned’ investment opportunity, as well as potential return on investment.

Service providers- provides upfront funding for the delivery of services ensuring payment is readily available and time is not spent locating funds.

Public and service users – services are provided filling an existing gap in communities. SIBs may present as a standard pay-for-performance agreement, but in reality

they are an innovative financial method for expanding the impact investment market. SIBs provide upfront funding to service providers thereby enabling all levels of organizations to participate in providing community services – not just organizations that are able to fund their own working capital (Bugg-Levine & Emerson, 2011).

Though SIBs can be applied to many social problems they aren’t something that will work for all issues. For SIBs to be successful there must be a way to quantify the savings to government; the savings based on the outcomes must be higher than the costs of having the social issues addressed in a different way. There must be clearly defined outcomes with a strong method in place for assessing the achieved results. The identified outcomes must be due to the SIB funded program (Deloitte, n.d.).

Is a social impact bond actually a bond?

Social Impact Bonds are not technically a bond. This ‘pay for service’ type of financing generally has a conditional and unguaranteed rate of return, contingent to performance and outcomes. Plus rates of return may vary. Traditional bonds are financial instruments that can be bought and sold, with an unconditional secured rate of return. SIBs tend to have a higher risk than traditional bonds as investors are in jeopardy of losing up to 100 percent of their capital should projected outcomes not be met. Overall SIBs are a contractual agreement between external investors, government and the organization (Costa, Shah, & Ungar, 2012).


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The First SIB and its Outcomes

SIBs were first introduced in March 2010 by Social Finance and the Ministry of Justice in Peterborough, UK, to fund support services and attempt to break the re-offending cycle by short-sentence prisoners. The goal was to lower re-offending by 7.5%. If that outcome was accomplished investors would be paid their investment plus a return. The more re-offending rates fell, the greater the payment - up to a maximum of £8m (Bolton, 2010).

A group of charitable organizations and philanthropists provided the financing and acted as intermediaries selecting a group of four non-profit organizations to provide services to inmates and ex-inmates with a goal of reducing re-offending. If the organizations achieved their outcomes within a six-year period (reducing re-offending to 7.5% or more) then a £5 million bond would be paid to investors with a return of between 7.5% and 13.0%, depending on performance (Deloitte, n.d.).

This social investment bond pilot project was directed at HM Prison Peterborough. Investors providing funds for organizations to operate the intervention programs aimed at reducing re-offending among 3,000 prisoners serving sentences of less than one year were the Big Lottery Fund and the Ministry of Justice.

The Big Lottery Fund pledged £5m and the Ministry of Justice £3m to pay back investors from 2014 onwards. There would be no payout if re-offending rates didn’t decline (Bolton, 2010).

The funds raised were to be used to pay for interventions aimed at offenders serving short prison sentences at HMP Peterborough. At the time of implementing the project short-sentenced adult offenders were not given any legislated supervision by the Probation Service following their release from prison.

To assist with quantifying the project, the Ministry of Justice appointed independent assessors from QinetiQ and the University of Leicester to analyze data with the intent of establishing whether or not offenders who received interventions on release from Peterborough were reconvicted less than similar ‘matched’ offenders from other prisons who didn’t receive interventions. If they were reconvicted less than offenders in the comparison group within one year following their release from prison, then it would be determined that SIBs did cause benefits in the form of less crime. Plus, the overall benefits to society and the government through reduced costs of policing, court cases, prison placements, etc.

If the independent assessors calculated that reoffending was reduced by at least 10% for each cohort, or 7.5% overall, contrasted to the matched comparison group, the Ministry of Justice and the Big Lottery Fund would pay a return on investment to investors for the positive outcome.


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According to Civil Society Finance (2013) “early figures suggest that the Peterborough Social Impact Bond has led to a 6 per cent reduction in recidivism over two corresponding two-year periods, against a 16 per cent increase nationally”.

The Peterborough SIB will meet its maturity by 2014 with preliminary indicators pointing to the success of the programs funded by the bond in deterring offenders from being reconvicted.

In North America, the overall investment market is becoming aware of impact bonds with banks tending to show more interest towards SIBs than foundations or individual donors.

Goldman Saks entered into the impact investment market by helping orchestrate the International Finance Facility for Immunization which is a multibillion dollar bond issue (debt security) providing start up or early financing for promising vaccine campaigns. Shortly after that, Morgan Stanley joined forces with a microfinance boutique bank, BlueOrchard, in introducing a microfinance bond offering with European institutional investors and raising more than $100 million for microfinance banks in twelve countries from Nicaragua to Cambodia (Bugg-Levine & Emerson, 2011).

In 2012 Goldman Saks in partnership with New York City entered into a Social

Impact Bond agreement with a $10 million bond to help fund a program focused at reducing the recidivism rate for adolescent offenders at the Rikers Island correctional facility (Goldman Saks, n.d.)

On October 30, 2013, Premier Kathleen Wynne, on behalf of the Ontario Government, announced they will be launching ‘green bonds’ in 2014 to fund major environmentally friendly projects such as transit across the Province (Martin, 2013). The World Bank initially created ‘green bonds’ in 2008 as a vehicle for partnering private and public sectors to fund environmental outcomes.

Up to October, 2013, Canada had not entered into any confirmed Social Impact

Bond agreements and is currently trailing behind the UK by 10 years. Some provinces such as BC are investigating Impact Bonds and have started discussions with various intermediaries and stakeholders.

While poor economic health has influenced considerable growth in the impact

investing industry during these past few years it still remains in the ‘marketplace-building’ phase or developing stage. However, evidence indicates “that if leaders can sustain and further scale this growth, the industry could evolve to the next phase—capturing the value of the marketplace and benefiting from the entrance and energy of new, mainstream players” (Jackson, & Harji, 2012). The below figure demonstrates this progression, though, a relevant question needs to be considered: how long will it take for Canada to get to the next phase?


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(Freireich & Fulton,2009, as cited by Jackson, et al., 2012)

Benefits and Challenges of SIBs

SIBs should not be viewed as a solution for every non-profit’s funding challenges. They are a model that is best suited for a specific subset of non-profit organizations and they come with specific benefits and challenges. Benefits of SIBs

An important benefit of SIBs is in the shifting of financial risk from government to private industries. SIBs allow for the transfer of risk while delivering public benefits. This model operates by helping the progress of social causes without incurring risk to the taxpayer.

Organizations tend to operate in silos. Aligning the interests and goals of non-profit service providers with investors and governments encourages cross-sectorial partnerships where each party is focused on prevention or early intervention programs. This results in the reduction for subsequent and potentially more costly remediation and provides a more efficient use of government funds.

Evidenced based results are what differentiate SIBs from traditional funding agreements. Many investors including governments fund social service programs with limited attention to how effective the programs actually are in achieving outcomes (Social Finance, 2012). Typically social service providers are ‘rewarded’ with funds based on the number of people who, for example, they have fed. In comparison, SIBs require service providers to report on outcomes such as the number of people who continue to have improved health due to the enhanced provision of nutritional foods.


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Expectations for deliverables targeted by the SIB are kept high inspiring non-profits to deliver innovative quality services. Plus, the government only pays investors for tangible outcomes encouraging all stakeholders to follow the investment closely thereby promoting collaboration with a focus on positive results. Benefits of SIBs

1. Shift financial risk from government to private investors. 2. Impose market discipline and encourage cross sector collaborations. 3. Encourage efficient use of government funds. 4. Attract a range of investors including foundations, trusts and individual donors. 5. Improve delivery and outcomes from social programs without increasing taxes

due to reduced demand for social services. 6. Deliver evidence-based results whereby results must be verified before payment

is made to investors. 7. Change and revolutionize the way social issues are funded; has potential for

long-term systemic change. 8. Allow for creatively and innovation in addressing social issues.

With stable funding through the provision of SIBs organizations are able to focus on

what they do best: addressing social change. Very often non-profit organizations spend much of their time sourcing funds, writing applications, writing reports, and being restricted to spending due to the guidelines set out in grant agreements. Very often the designated funds don’t meet the greatest community need. With SIBs organizations will be freed from the constant annual funding search and their corresponding constraints. And once the SIB successfully reaches maturity there is strong likelihood that funders and government will finance it again. Challenges of SIBs

Social Impact Bonds are a relatively new funding model that is currently in a ‘trial and error’ phase. With the first bond reaching its maturity in 2014 investors may be handicapped in their abilities of evaluating any long-term track records of success. With the financial risk being carried by investors the limited available information increases their gamble.

If the SIB selected intervention is not carefully evaluated prior to investment, it may

fail to produce the expected social outcomes resulting in a loss to investors. Also, changes in government could result in a failure of repayment of bonds regardless of the success of intervention programs. Because of this investors should request a secured agreement from government to pay the agreed-upon returns (Social Finance, 2012).

The non-profit organization receiving a SIB may endure reputational harm should the intervention program be unsuccessful. Failure to achieve projected outcomes can cause lowered stakeholder involvement resulting in reduced future funding. Similarly,


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investors providing capital for a failed project can experience reputational harm and reduced shareholder satisfaction.

For SIBs to demonstrate measurable societal impact the overall savings must

exceed the cost of service delivery. With objective methods in place for evaluation of outcomes the program must show clear improvement in social outcomes that are directly related to the SIB funded program. However, outcomes can be difficult to measure due to investors and service delivery organizations wanting to prove success; organizations strive for sustainable funding and stakeholders want to show the value of their investments. Plus, and perhaps more importantly, cost savings is multi-dimensional and social issues are complex which can prove to be difficult to measure (Loxley, 2013).

Successful intervention programs may result in an overall reduction of social

programs with employment opportunities for workers in service delivery positions being reduced. This may spur employees to jeopardize the success of projects. As well, competition between social service organizations may arise due to the promise of stable funding through SIBs causing an increase in organizations operating in silos.

SIB investors may prefer to fund low-risk, existing, and proven programs thereby defeating the goal of fostering innovative new intervention programs. Programs addressing pressing social issues with less established outcomes may have a more critical need for financing.

Challenges of SIB

1. New investment model – few know about it resulting in a limited pool of investors. 2. Investors are unable to review the track record of SIBS and evaluate any

potential risks associated with them (Bolton, 2010). 3. Negatively impacted reputations of both investors and social service

organizations. 4. Difficult to measure outcomes due to investors and service delivery organizations

wanting to prove success. 5. Cost savings is multi-dimensional and may be difficult to measure. 6. Social issues are complex and can prove to be difficult to measure (how many

years are measured, what areas are measured). 7. Investors may prefer to only finance low risk social issues. 8. Competition between social service organizations may arise due to promise of

stable funding. 9. Social issues may be diminished which may then negatively impact employment

of workers in service delivery positions. 10. Governments will need to set aside funds and plan for repayment to investors

should deliverables be met. Governments may have to increase borrowing to pay the debt.


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11. Initial costs of investigating and establishing a SIB may be significant and will need to be built into the initial overall investment.

(Loxley, 2013)

From review of readings for this paper an unidentified challenge not mentioned is

the difficulty in pulling stakeholders together, including governments, and getting them to consider SIBs; basically, the challenge is in creating a market for impact investing. Introducing the concept to stakeholders takes considerable time as they must be educated first on what SIBs are before any proposals can be presented. Getting them to even consider the possibilities takes finesse and patience. Likely a team or group approach would have the most success in convincing stakeholders to view SIBs as an opportunity. And orchestrating the entire process takes time, commitment and perseverance.

Stages of Social Impact Bond Development

Because Social Impact Bonds do not apply to all services and programs various factors of the development process should be considered. These stages of development can assist in determining if SIBs or traditional funding models are the correct approach to take. Assess the Service Area that Needs Reshaping Output

Discussion as to whether an outcomes contract (which could be a SIB) or other option is the best way to assign services.

Agreement to explore social investment options as part of the service redesign.

Define the Social Issue(s) Output

Data analysis to understand population trends and cost pressures. Stakeholder engagement to understand strategic objectives.

Defined target population. Engaged stakeholder(s)

Output Define Outcome Metric(s) Define Intervention(s)

Output

Indicative outcome metrics to ensure success of intervention(s)

Research on desired outcomes for target population. Assessment of measurement attribution options.

Needs assessment of target population. Research on interventions to meet these needs

Intervention(s) to be funded by SIB.

Stakeholder Engagement

Value for Money Case Output

Service Provider(s) and Investor(s) satisfied with project and eventual outcome.

Financial model to assess potential savings as a result of the intervention(s)

Outline business case

Program Design Output


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Detailed operating plan and due diligence on potential service providers for SIB-funded service. Finalization of outcomes measurement and payment framework

Term(s) sheet to form the basis of a SIB contract. Final business case

Procurement Output

For the SIB-funded service

Provider for the SIB funded service

Contracting Output

Develop SIB contract Government arrangements with SIB counterparty. Marketing to investors and securing commitments for investment required to pay for services. Service providers commissioned to deliver services to target group

Fully-funded services. Move forward to implementation and delivery of services.

(Symons, 2013)

Overall, when considering a SIB there are several questions to ask while moving through the process in determining if this funding model is the approach to take. Questions such as is the cost of savings higher than the cost of investor return. Plus, as mentioned prior, part of the process for a SIB is securing commitments from investors who are willing to pay for outcomes if the service is successful (Symons, 2013).

What impact investors prefer in a non-profit

During the past few years, growth in the impact investing industry has been productive and creative. Enlistment of investors and leaders in the industry has seen vital gains. Plus available capital has risen steadily, more intermediaries have emerged, and there has been considerable growth in investor related products and platforms. “However, while there is also evidence of gains on the demand side of the sector, there are still too few investment-ready projects and enterprises to enable the optimum placement of this new capital ” (Jackson, et al., 2012).

The impact investing industry has focused mainly on mobilizing capital with little attention paid towards actively developing the capacity of organizations to better prepare them for receiving investment. This lack of investment-ready opportunities has resulted in stunted growth in the impact industry (Jackson, et al., 2012). One important issue for investors is identifying organizations that have acquired attributes that they feel are important.

There are considerable theories regarding what investors prefer to see in a non-profit which may cause confusion for organizations striving to be recognized as viable investees. While there doesn’t appear to be set standards around what investors prefer several key qualities do stand out as outlined in the table below. By reviewing available data individual organizations are better able to determine which requirements they are able to deliver and which ones best address their stakeholder’s preferences.


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Suppliers of impact investing provide funds in various ways that may include: financial loans, equity investment, long-term capital, and in some cases, grants. Grants are typically provided if they have the potential to attract new capital or enable a social enterprise to become sustainable and/or profitable. Plus, social finance investors tend to gravitate towards investments that corroborate with their personal investment goals (Social Finance, n.d.).

The social sector is thought to be undercapitalized due to certain barriers such as:

Perceptions by stakeholders that investing in non-profits is risky;

Low levels of earned income (most organizations have high levels of grants/donations)

Poor management capabilities.

(Baker, & Goggin, 2013)

A key issue that influences investors’ attitudes is the capabilities of non-profits – do they have the resources necessary to implement successful outcomes. Strong resources and capabilities can influence and increase corporate relationships and create enterprises to achieve social change on a grander scale (Bugg-Levine, & Emerson, 2011).

Impact investing is best suited for service organizations that have a track record of successfully delivering interventions within a target population. Some main qualities shared by these organizations include capacity and capability, strong stakeholder relationships and clear vision and expected outcomes.

Similarly, main drivers for impact investing to be successful include: strong organizational leadership, collaboration between stakeholders, and shared vision with the organization.

Qualities for successful impact investment

Organization’s require: Investors are looking for:

Resources that have the capabilities to collect data and measure outcomes over a period of time;

Capacity and capabilities for multi-year and progressive planning, budgeting and financial management;

Strong organization governance and leadership;

Appropriate organization assets and resources;

Ability and willingness to collaborate with other providers;

Strong stakeholder relationships based on shared trust;

Collaboration and strong relationships between investees, investors and intermediaries;

A common vision and strategy regarding expected investment outcomes;

A shared vision with investees, investors and intermediaries, the organization’s mission and the sector;


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Effective business planning;

A thoroughly researched business plan that outlines what the organization does, who is involved and what the social mission is plus why there is a need for investment (what is the money for);

An engaged board;

Confident and capable management;

Committed, persistent and passionate leadership that is willing to acquire new skills as needed;

Flexible and efficient management;

Ability to demonstrate financial health including durability and sustainability especially when considering participating in longer term contracts;

Strong organization financial skills;

Organization’s abilities to plan for the future and think five to 10 years ahead;

Intervention programs that can demonstrate significant cost savings and where value creation opportunities exist;

Positive public confidence regarding impact investing;

Ability to make a compelling case for investment that appeals to multiple audiences;

A focus on preventive measures in a targeted area;

Ability to adapt quickly to meet the needs of a diverse population;

A positive track record of service delivery;

A diverse and consistent revenue stream plus a sturdy asset base;

Ability for organization to obtain (and afford) legal expertise who are knowledgeable about the non-profit sector and impact investing;

Assets in the form of property or money thereby increasing Board and investor confidence.

(MaRS Centre for Impact investing, 2010; Baker, & Goggin, 2013)

Concerns and challenges when considering impact investing

Organizations: Investors:

Peer learning from other investees;

Limited evidence and documentation of past successful impact investments;

The need for independent advice and support customized with organizational planning;

An unstable economic environment;

Lack of knowledge of legal and regulatory obligations;

The legal and governing structure within which investment takes place;

No desire to be a pioneer for impact investment – preference to allow others to take the risk;

Excessive cautiousness from non-profit organizations resulting in missed opportunities;


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Overburden of workload and responsibility especially with smaller organizations;

Projected financial outcomes not matching the values and culture of the organization

Lack of investor insight and experience of the non-profit sector resulting in limited abilities for them to understand and properly assess social impact;

Organizations are unable to generate profits enough to create interest from investors;

Stress related to investment returns being dependent on surpluses;

Social investment may not be as effective as other investments resulting in financial and reputational loss;

Simple, clear and accessible investment products;

Poor financial skills and risk aversion among charities;

Board training to assist with lessening nervousness around loan finance;

Non-profit Board members that are more interested in stability than growth;

Poor articulation at the outset regarding the process and what kinds of evidence or information investors require.

Lack of organization transparency.

(Baker, & Goggin, 2013)

Social investment or impact investment has the ability to increase available capital for non-profit organizations which could then assist organizations in achieving their objectives by increasing their sustainability through revenue diversification, encouraging innovation and enabling increased social impact programs (Baker, & Goggin, 2013).

The following two case studies demonstrate the successful use of key factors for attracting impact investors and increasing organizational capital. These organizations are: Organic Meadow1 and St Mungos2:

Organic Meadow Inc., an organic dairy farm in Canada, joined into a social finance agreement with Investeco, a Toronto-based investment fund.

Organic Meadow Inc. is the oldest and largest organic dairy brand in Canada. Its roots stretch back to 1989 when a group of dairy farms joined together to form OntarBio (now Organic Meadow Co-operative), Canada’s largest dairy co-operative. In 1995, they developed the Organic Meadow brand to in order to optimally distribute and market their products.

1 http://www.organicmeadow.com/ 2 http://www.mungos.org/

http://www.organicmeadow.com/

http://www.organicmeadow.com/

http://www.mungos.org/


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The environmental objectives of Organic Meadow are rooted in their ‘dedication to encouraging ecologically sound, diverse, self-reliant farm units’. Organic Meadow also has a clear social mission, ‘to build unity among farmers based on the principles of co-operation’.

Investeco made an equity investment of $1.5 million to Organic Meadow in 2004. Investeco was attracted to the co-operative’s strong relationship with distributors and the potential to grow the company with the help of expansion capital. In 2008, Investeco sold the company back to the dairy farmer co-operative, generating return on investment of approximately 400%.

The agreement between Organic Meadow and Investeco was successful due to a) shared goals and objectives (generating both financial and environmental returns), b) shared confidence in the growth trends in sustainable agriculture and organics (a strong business plan and feasibility study can provide these projections) and c) Investeco’s close relationship with company management (strong stakeholder relationships plus confidence in Organic Meadow’s abilities) (Social Finance, n.d.).

St Mungos is a London-based non-profit that addresses homelessness. The organization is one of the first in the UK to receive social impact funding.

It’s Street Impact programme, which aims to help over 400 homeless people rebuild their lives, has been granted a three-year ‘payment-by-results’ contract. It was commissioned by the Greater London Authority (GLA), with its upfront costs financed through £650,000 of external investment arranged by Triodos Bank.

The arrangement is possible thanks to a new type of contract called a social impact bond (SIB). These are novel because they require the use of private finance to tackle social issues on the government’s behalf. The borrower, who provides the service, is paid according to the success of its interventions. As such, payment by results contracts change the focus from what is done to what is achieved.

Instead of working to blanket targets, St Mungo’s will track the progress of 415 named individuals. The objectives are exacting. One is to help them find work: a tough task given that nearly half of its service users are ex-offenders or have been in prison, and two-thirds or more have substance abuse and mental health problems. The data produced could also help to shed light on the causes of homelessness and the difficulties of reintegration into social structures.

If St Mungos meets it deliverables it will receive £2.4 million from the GLA. This amount will cover operating costs plus repay investors (including interest) and may even provide a small profit for the organization. SIB investors will receive annual returns of 6.5% which is reasonable considering the risk involved and the lack of history for SIBs.

http://www.london.gov.uk/

http://www.triodos.co.uk/en/personal/


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SIBs have a limited track record: the first SIB in the UK, to help ex-offenders, reaching its maturity in 2014.

St Mungo’s was successful in securing external capital by investing £250,000 of its own money which demonstrated to investors that the organization a) shared their vision, b) was willing to take risks and c) had financial means and stability (Anonymous, 2013).

Though there are a wide range of features that will attract impact investors to an organization three key elements stand out: shared goals and objectives with funders, the organization’s ability to take risks, and, strong stakeholder relationships. With that in mind, there are also specific programs that best fit Social Impact Bonds.

Programs that fit Social Impact Bonds

A strong factor for SIBs to be successful is social programs that are focused on a specific population. This is due to the requirement of outcomes-based assessment for determining success or failure of these intervention programs. Examples of programs that may be more suitable for SIBs are:

Adult reoffending

Obesity

High school drop out

Foster care

Preschool readiness

Improved literacy in disadvantaged communities

Employment services for hard to employ groups

Homelessness

College retention services

Providing support for disabled or elderly to stay in their own homes

Health prevention for certain conditions (e.g. mental health) (Philipson, 2011; Bugg-Levine & Emerson, 2011)

Not all programs or issues can be addressed by SIBs. For many, traditional funding streams are the best fit. Impact investing is more about measurable deliverables and financial benefits than stories of misfortune and hardship. The traditional way of funding social services is that stakeholders pay so needed services can be delivered and that money then vanishes forever. With SIBs the money is invested and when deliverables are met, the principal plus interest comes back to the investor(s) and can then be ‘recycled’ into other services to help more people (Pettus, 2013).

There are several criteria that should be considered when trying to determine

whether a SIB would work for a specific social program such as:

http://harvardmagazine.com/profile/ashley-pettus


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Programs where it would be more appropriate to fund on the basis of activity rather than outcomes. For example, increasing the self-esteem of learning-disabled children though play therapy.

Difficulty in writing an effective outcomes-based agreement due to difficulties in identifying outcomes based on impact of the program rather than external factors.

Instances where a delay in payment (while working through the process of establishing a SIB) causes increased program costs.

If stakeholders are wanting to change existing contract agreements to outcomes based reporting in their efforts to improve performance.

(Symons, 2013)

The potential fit for a SIB is dependent on its ability to inspire and involve impact

investors in specific social issues. Bonds can be applied to issues where:

The cost of prevention is less than treating it;

A profit is created for investors and taxpayers;

Measuring success is definitive, predictable, and has a track record;

Intervention methods are evidence based thereby lowering investor risk. (Bugg-Levine & Emerson, 2011)

SIBs are an adaptable method of financing that can be applied to various types of programs. However, they are “best suited to programs that save government money in the long-term and can demonstrate measurable evidence of success” (Costa et al., 2012, p. 21). There are several experimental programs funded by SIBs that are currently operating or various sectors being considered such as: juvenile justice, prison recidivism, workforce development, homelessness, special education, early childhood education, veteran’s services, and energy efficiency, among others.

Initially SIB pilots are expected to focus on projects with measureable near-term

outcomes and governmental savings; however, in the future SIBs could be used to finance programs that do not lead to immediate government savings or that offer longer-term benefits. As an example, preschool programs for low-income children have proven to be very effective, but their demonstrated outcomes, such as higher graduation rates and lower crime rates, are not evident for many years (Social Finance, 2012).

The Nonprofit Finance Fund (2013) has created online Rapid Suitability Questionnaires (RSQs)3 targeting service providers, governments, investors, and other stakeholders who may be considering SIBs. The questionnaires are designed to provide a general assessment regarding the suitability of SIBS for each of the stakeholders involved and can be used for self-assessment or review of potential partners.

3 http://payforsuccess.org/provider-toolkit/rapid-suitability-questionnaires

http://nonprofitfinancefund.org/

http://payforsuccess.org/provider-toolkit/rapid-suitability-questionnaires


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Successful SIBs will initially reduce government spending as services will be funded by outside investors. Once the bond matures and investors are paid back the measurably improved social service outcomes will result in reduced government spending over the long run. Improved service delivery by organizations will reduce immediate demands for supports on limited government funding. This result, however, is based on all stakeholders meeting quite strict deliverables. This may limit the number of organizations able to meet these expectations plus investors may move away from community services with the biggest need and only target low risk programs that are easy to achieve

Impact Measurement

Investors are becoming more and more interested in redirecting their assets towards investments that preserve their wealth while tackling social and environmental problems; they’re moving away from simply giving their money away (Bugg-Levine, Emerson, 2011) . They are no longer satisfied with ‘giving back’ and working towards achieving a ‘warm fuzzy’ feel in the communities they serve. Today they are looking for investments with demonstrated social impact.

For financial investments, indicators or metrics measuring financial returns are

employed to assess opportunities and monitor assets. For non-financial investments, metrics measuring non-financial indicators are used to evaluate social or environmental impact or outcomes of a project/company/organization (Best, & Harji, 2012).

Investors are easily able to understand whether an investment is profitable by simply reading audited financial statements. But impact investors also want to know if their investment will generate social outcomes (Bugg-Levine & Emerson, 2011).

Non-profits typically use outputs (30 meals were served to the homeless) to

evaluate social or environmental impact , however, stakeholders are looking for outcomes based measurement (30 people were fed healthier meals over a 3-year time frame reducing impact on medical services by 20%). Plus, non-profits require the ability to demonstrate social return on investment by measuring outcomes of social, economic and environmental impact based on what stakeholders determine is relevant (Deloitte, n.d.).

SIBs are based on the assumption that intervention and reduction of social issues will result in significant long-term savings to government - meaning that an initial disbursement of funds, if successful, can yield a very high social return on investment (Deloitte, n.d.).

Owing to the current economic climate, SIBs are appealing due to the potential to impact budgets in two ways: reduced government spending and improved social services’ outcomes (causing reduced ongoing government support and services). For SIBs to demonstrate measurable societal impact a cost savings must be shown. Plus the overall savings must exceed the cost of service delivery. With clear objective


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mechanisms in place for evaluation of outcomes the program must show clear improvement in social outcomes that are directly related to the SIB funded program.

Outcomes can be difficult to measure due to investors and service delivery organizations wanting to prove success; stakeholders want to show the value of their investments. Plus, cost savings is multi-dimensional which may be challenging to measure and social issues are complex which also can prove difficult to measure (how many years are measured, what areas are measured) (Loxley, 2013).

For SIBs to work all stakeholders must agree on goals, clearly outlined metrics, and shifting from an outputs-based service delivery (typical in the non-profit sector) to an outcomes-based service delivery. They will also need to agree to how objectives will be measured, what time frame will be used, and what will determine program success (Deloitte, n.d.). The creation of standardized methods of accounting for the achieved social impact will assist investors in understanding risk associated with social investments.

Develop clear evidence-based intervention models that are appropriate candidates for SIBs.

Work with commercial investors to create assessment tools for specific interventions.

Shift service provider culture and systems from focus on outputs to outcomes. (Godeke, & Resner, n.d.)

The SIB outcomes focus provides more flexibility in how funds can be used which in turn enables more effective and innovative social services that are better able to achieve scale (Social Impact Bonds, 2009).

Measuring Social Return

The practice of measuring and reporting on social impact has progressed over the

past 40 years. Back then achieving contract requirements/deliverables was considered impact measurement. Reports were completed (typically by hand) and program evaluations had more to do with past accomplishments than future performance predictions. Today there are several online performance and information systems/programs available to help facilitate reporting (Bugg-Levine, & Emerson, 2011).

“Despite these advances, the metrics with which we work still reinforce the notion that

financial return and social impact are distinctly independent outcomes of an investment decision” (Bugg-Levine, & Emerson, 2011, p. 169). This is based on assumptions that for-profit organizations create quantifiable economic value and non-profits create social value reported through stories and pictures. This attitude prevents a true representation of impact measurement (Bugg-Levine, & Emerson, 2011).


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Of the many innovative methods for measuring social impact metrics the preferred method is dependent on investor risk tolerance, desired return, area where investors prefer to invest, reporting structure, etc. A few of the measurement methodologies available are:

1. Monetization methods that convert impact (outcomes) by assigning a dollar value

to them creating a benefit-cost ratios. This method simplifies comparison between programs.

2. Process methods that track and monitor productivity and success of outputs. 3. Impact methods that relate and track outputs and outcomes.

(Best, & Harji, 2012)

A summary of a few of the most common measurement frameworks employed by

impact investors and organizations is as follows:

Social Return on Investment (SROI)

Social Return on Investment (SROI) 4 is a structure for measuring change by integrating social, environmental and economic costs and benefits. Measured outcomes create a ratio of benefits to costs that reveals the story of how change is being created. For example, a ratio of 3:1 indicates that an investment of $1 delivers $3 of social value. SROI is the value of social change – not the money invested. Money is the common unit used to communicate the value. Just like a grant application expresses more information than the financial budget, SROI expresses more than statistics or integers. It is an analysis of change that may outline such things as: qualitative and quantitative information, financial data, plus case studies (Nicholls, Lawlor, Neitzert, & Goodspeed, 2012).

SROI offers a series of guidelines for the measurement of non-financial impact per investment by calculating social results for outcomes that are described in monetary terms, and with a net present value calculation resulting in a return on investment (ROI) ratio (Best, & Harji, 2012).

The two varieties of analysis of SROI are:

Evaluation based on past outcomes that have already taken place;

Evaluation of forecasted outcomes that predicts anticipated social value if outcomes are achieved.

(Nicholls, et al., 2012)

4 http://www.thesroinetwork.org/sroi-analysis/the-sroi-guide


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Projected SROIs are useful at the beginning or planning stages of a program. They can forecast how investment will influence community benefit plus they can pinpoint what areas should be measured (Nicholls, et al., 2012).

Identifying suitable outcomes data is a key challenge when developing an initial SROI framework. To create a true social accounting and cost-benefit analysis organizations should apply the following principles:

Involve stakeholders.

Understand what changes are needed.

Value the things that matter.

Only include what is material.

Do not over-claim.

Be transparent.

Verify the result. (Nicholls, et al., 2012)

Example - The City of Calgary’s Family and Community Support Services (FCSS) undertook a process of identifying indicators of social value creation beginning in 2008. This project eventually expanded to an SROI analysis of the organization’s activities. The FCSS views SROI as an effective tool for project planning, evaluating results and communicating achievement. SROI allows the FCSS to tell the story of their organization’s ability to create value in a compelling way (Best, & Harji, 2012).

Theory of Change

The Theory of Change model5, according to Community Foundations of Canada, (2012) is a map that describes the “process of planned social change, from the assumptions that guide its design to the long-term goals it seeks to achieve” (as cited by Best, & Harji, 2012). It connects activities to outcomes and creates a framework for reporting on impacts through descriptive narrative. The Theory of Change model basically demonstrates: what’s being delivered, how it’s being delivered and then the resulting outcomes.

Example - The J.W. McConnell Foundation is selectively testing theories of change in its own strategy and some of its work with non-profit organizations. “For one large-scale national project, the theory of change approach has been a major vehicle for having conversations with the communities involved in the initiative. It has been a way for communities to report things that are happening on the ground and changes that are emerging. Communities generate a descriptive narrative

5 http://www.wkkf.org/knowledge-center/resources/2006/02/WK-Kellogg-Foundation-Logic-Model-

Development-Guide.aspx


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about what is happening and then there is more thorough interaction to make sense of that story. This is done on an annual basis to express how things are evolving and changing” (Gamble, 2008, as cited by Best, & Harji, 2012).

Cost Benefit Analysis

The Cost Benefit Analysis6 provides an explanation, in monetary terms, of investment costs and social impacts. The analysis is measured according to one or more of the following: (1) net present value (the combined value of all costs, revenues, and social impacts, discounted to reflect the same accounting period; (2) benefit-cost ratio (the discounted value of revenues and positive impacts divided by discounted value of costs and negative impacts); and (3) internal rate of return (the net value of revenues plus impacts expressed as an annual percentage return on the total costs of the investment (Rosenweig, 2004, as cited by Best, & Harji, 2012).

Example - Job Corps is a program based in the US targeting disadvantaged youth. Job Corps undertook cost-benefit analysis to assess the value of the program. Benefits included the estimated value of reduced criminal activity, the value of goods and services produced by Corps members, earnings after leaving the program, higher tax payments, and cost savings associated with not having to use other treatment and training programs. Costs included the costs of running the program and output foregone by participating in the program (Rosenweig, 2004, as cited by Best, & Harji, 2012). There are several methods to assist in assessing impact; however their complexity

adds cost for organizations and investors who are seeking or implementing capital in this developing field. (Bugg-Levine, & Goldstein, 2009). There are also several administrative solutions/programs available that enable organizations to manage information and data more effectively and efficiently thereby helping them demonstrate value. These require time and resources to implement – something many smaller organizations may not have.

Despite the cost and effort involved to assess impact, a key factor remains that social

investors and organizations want to have their allocated capital and social initiatives assessed beyond “just the ability to tell a good story” (Bugg-Levine, & Emerson, 2011). The phrase’ making a difference’ is no longer sufficient; investors want to measure the long-term impact on society.

However, a missing element is standardization; because of this substantial capital for

social issues will remain untapped until investors are able to measure the social impact of their investments through the development and use of standardized and universal

6 http://escholarship.org/uc/item/80n4f1mf


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measurement systems (Bugg-Levine, & Emerson, 2011). Fortunately, industry leaders and investors are working on the creation of measurement standards such as:

1. The Impact Reporting and Investment Standards (IRIS) project – focusing on the

development of standardized definitions to describe social outcomes among the impact investment community. This project is also developing a system to create benchmarking reports showing comparable performance.

2. The Global Impact investing Rating System (GIIRS, pronounced ‘gears’) – GIIRS provides independent, outsourced, social impact assessment services. Similar to credit rating agencies, GIIRS offers a low-cost option for access to comparable social impact assessments of investments. Ratings identify the social impact an investment produces.

Social value measurement, universal standards and independent measurement

capabilities are necessary components in an impact measurement system to ensure data integrity and confident reporting. Conversely, there remains a strong need for expanded methods to describe, predict and improve qualitative and quantitative outcomes.

Too many systems in the market will impede measurement by creating barriers due

to cost and resources to review, learn and implement. Obtaining collective agreements regarding the value of various social impact investments will also impede the development of a comprehensive impact measurement system. However, though “transparency is an increasingly overused term … it will be a touchstone of successful impact measurement” (Bugg-Levine, & Emerson, 2011, p. 181).

Summary

As organizations around the world increasingly seek funding to help them achieve their social mission they are realizing the need for finding alternatives such as social investment. Responding to this demand is growing numbers of foundations and private investors that are providing not only grants but also various forms of repayable finance thereby enabling non-profits to meet their social mission such as: addressing poverty and/or improving communities by decreasing unemployment and encouraging growth (U.K. Cabinet Office, 2013).

Business managers are identifying and comprehending the relationship between

investing in social/ethical/environmental issues and financial return; they are recognizing that socially responsible strategies are critical to their success or sustainability (Sexty, 2011).

There is, according to McKinsey & Company (as cited by Cohen and Sahlman,

2013), approximately $200 trillion in financial assets worldwide. There are also

http://www.mckinsey.com/insights/mgi/research/financial_markets/mapping_global_capital_markets_2011


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remarkably low interest rates available to investors. By developing mechanisms — like Social Impact Bonds — that can deliver a higher financial return (accompanied with low risk) plus a high social impact, stakeholders will invest. Reasonable returns matched with social impact will attract capital and will attract talented entrepreneurs with the skills to develop innovative and effective means of improving social issues (Cohen and Sahlman, 2013).

With strained Government budgets and lowered charitable donations, poor returns on traditional investments, and some areas of the capital markets still dealing with decreased reputation there continues to be a growing need for social services – and governments are struggling to meet the demands.

By connecting financial returns to needed social programs, Social Impact Bonds, could be used to finance everything from a reduction in obesity to community development initiatives resulting in increased outcomes for each dollar spent (Perkins, 2011). With the poor current economic climate in Canada, SIBs are appealing as they have the potential to impact budgets two ways: reduced government spending and improved social services outcomes (causing reduced ongoing government support and services).

SIBs are based on the assumption that intervention and reduction of social issues will result in significant long-term savings to government - meaning that an initial disbursement of funds, if successful, can yield a very high social return on investment (Deloitte, n.d.).

Once initiated, the success of a SIB rests on the performance of the service provider. The organization is required to achieve both positive social outcomes and measureable results as specified in agreements with investors. If service providers fail to hit these metrics the consequences include: negative impacts to the community, losses to investors, and lowered reputation for all parties involved (Pinakiewicz 2011).

The best candidates for SIB funding are non-profits who are able to demonstrate clear outcomes in a specific market. These outcomes should translate into government savings that can be achieved within a specified time, are significant enough to cover costs of the program it’s intended for, and that provide a reasonable return to investors (Loxley, 2013).

For SIBs to demonstrate measurable societal impact a cost savings must be shown. Plus the overall savings must exceed the cost of service delivery. With clear objective mechanisms in place for evaluation of outcomes the program must show clear improvement in social outcomes that are directly related to the SIB funded program. Comparison of results may need to be assessed against a control group that is not receiving the same services.


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Concurrently, for SIBs to work all stakeholders must agree on goals, clearly outlined metrics, and shifting from an outputs-based service delivery (typical in the non-profit sector) to an outcomes-based service delivery. They will also need to agree to how objectives will be measured, what time frame will be used, and what will determine program success (Deloitte, n.d.). The creation of standardized methods of accounting for the achieved social impact will assist investors in understanding risk associated with social investments.

SIBs are a way of financing proven service delivery models through increased investments from new investors. It provides Governments with the ability to apply limited resources into more efficient preventative programs. And it provides corporations, who understand that “business legitimacy depends on corporations being responsible for social issues” (Sexty, 2011), with the ability to invest and participate in long-term social and environmental change.

The most common SIB model is where there are agreements between government, a private-sector intermediary, and social service providers. The general agreement is that government pays the intermediary based upon achievement of performance targets achieved by service providers. This then means that governments play a crucial role in the success of impact investing especially for Social Impact Bonds. Without their support impact bonds in Canada will remain a great idea that others are doing. The UK currently has 10 years of experience ahead of Canada and the US started on impact bonds in 2012 with Goldman Saks in partnership with New York City (municipal government).

Non-profit organizations that are most suitable for SIBs are those that are familiar with measuring outcomes and who are operating successful programs where the cost of prevention is less than treating it.

“SIBs will also promote the transition from siloed government programs to broader thinking about how interventions in one area, such as housing, affect outcomes in another, like health care. Cross-agency collaboration will encourage better use of public resources and possibly advance new solutions to some of society’s most pervasive and intractable problems. While not a panacea, SIBs hold the promise of becoming a multi-billion dollar source of growth capital for the social sector” (Social Finance, 2012).

Though SIBs are not a total solution, they do provide a unique option for investors and investees. They have the potential to increase organizational capacity to reach a larger number of people and deliver improved social impact as compared to more traditional forms of philanthropy.

With all this at stake literature searches indicate that very little has been

published about the first-hand experiences of organizations or about impact investing


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from the service provider’s perspective. In comparison much information is available regarding requirements and incentives for engaging governments and private investors.

Unquestionably, engaging government and private investors is necessary for the

implementation of SIBs in Canada; however, because of the key position service providers have in successful execution, an equal focus on their capacity requirements and readiness issues is required for SIBs to be successful and deliver significant systemic impact (Pinakiewicz, 2011).

Social finance is relatively new in Canada, however, momentum is growing and there are currently high-profile advocates for this new form of financing, including former Prime Minister Paul Martin and Stanley Hartt, chairman of Macquarie Capital Markets Canada. Despite this increasing interest there continues to remain few non-profit organizations in Canada that have actually participated in impact investing opportunities.

The non-profit sector and service providers appear to be generally absent from discussions regarding the social investment market, while other non-charity intermediaries in the industry are actively participating in them.

As well, knowledge in the general public about SIBs is limited. And so is the

concept of investors working together with non-government organizations (NGOs) and governments in solving complex social issues. Opinions about SIBs may become skewed where it is thought that private investors are financially benefiting from the misfortunes of others; governments may be seen as delegating their obligations for social programs to others or that taxpayer dollars are contributing to the profits of private investors.

Canadians may be concerned with the concept of SIBS due to their lack of

knowledge. Clear communication and engagement with the public about the social outcome focus of Impact Bonds and how investment returns are tied directly to positive social outcomes will be key to positive public perceptions and support (Deloitte, n.d.).

Educating and engaging all stakeholders including the general public about the social benefits of SIBs and how positive social outcomes are tied directly to financial returns will be integral to the success of any SIB program. Proper communication will enable social progress, create sustainability and open up opportunities to “address entrenched social issues” (Bolton, 2010).

Though SIBs are a relatively new form of funding social programs in Canada they

offer a way of reducing funding costs and improving service delivery. The projected outcomes, however, are based on strict expectations which may be difficult to achieve and which could potentially have harmful consequences (Loxley, 2013). Performing pilot projects across Canada that address various issues will be instrumental in increasing knowledge of how SIBs can be implemented effectively.


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Today there is a fundamental shift in the way charities are currently being funded

and organizations need to adapt or be left behind. “Impact investing is both morally legitimate and economically feasible” (Bugg-Levine, & Emerson, 2011, p. 262). Social Impact Bonds have the ability to recruit and involve investors to address a wide variety of preventative social issues.

By saving dollars through prevention programs the entire funding landscape can be transformed not only for non-profits delivering services but also for innovative social enterprises (Bugg-Levine, & Emerson, 2011). There is an urban legend that goes something like this:

There was a village that built itself on the edge of a cliff. And everyday children would play on the edge of the cliff and fall off resulting in many dying or receiving major injuries. So the Village Wise People came together to discuss the problem. They decided they had enough resources to do one of two things: build a fence to keep the majority of the children from falling off the cliff or buy an ambulance and staff it to pick up the results at the bottom. Social Impact Bonds can be applied very effectively towards preventing problems

before they become more costly to treat. From reducing the number of obese children, to averting high-school dropout, to reducing the number of Aboriginal children being put into foster care, each one of these social issues share the characteristics that make them strong candidates for impact bonds.

However, barriers exist, consisting of a lack of shared understanding between stakeholders and organizations in the social investment sector that is currently impeding development of the social investment field. Some intermediaries are unaware of the legal and regulatory obligations that non-profits deal with when delivering and receiving investments. They are also concerned with perceived poor financial skills and risk-aversion in non-profits and their leaders. Similarly, charities have concerns regarding the limited understanding and experience that investors have regarding the non-profit sector for them to be in positions of adequately assessing social impact and community needs (Baker & Goggin, 2013).

Impact investing is primed and ready to transform the way we fund organizations to deliver services addressing social and environmental causes. There are hundreds of millions of people suffering in the world due to lack of available resources. There also exists an abundance of opportunities for both investors and investees who have abilities to see beyond the problems and instead envision solutions through the use of impact investing (Bugg-Levine & Emerson, 2011).


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Statement of Findings

There is much written data regarding Impact Investments and how they relate to investors but little information as it relates to non-profits (other than they are the service providers). For non-profit leaders to be prepared for the emergence of Social Impact Bonds they require information and guidance so they may increase their chances of accessing and successfully administrating new funding opportunities.

It can’t come as a surprise that many social service organizations are keen to be one

of the first to receive Social Impact Bonds. Over the years, especially with the 2008 financial collapse, Canadian organizations have experienced major funding cuts and reduced donations, while being hit with increased demands for social services. The result? Organizations trying to do more with less.

Communities in Canada are witnessing a growing need for social services while

governments are cutting back resources. Social Impact Bonds provide non-profits a chance to raise new capital in support of their programs making it difficult for many to not see this as a good opportunity.

Just like any experiment, time is needed to point out what is working with SIBs and what isn’t - and why it’s not working. Plus, bringing together stakeholders such as government, non-profits and the private sector that have typically operated independently will be a challenge. However, it can be done. Investors are primed and ready; service organizations are keen and interested.

Initially, to help the success of SIBs, small pilot projects should be identified and executed while, simultaneously, research is being done on the implementation of larger scale social endeavours. Because some interventions have the potential to fail, the rate of return offered to investors should be high. This will encourage new investors while at the same time pushing governments to consider the long-term social and financial benefits of preventive programs.

Contingency plans should also be established in the event a pilot project ends up not meeting projected deliverables. Measures need to be put in place so that the service provider and the community they serve are not suddenly without resources if the bond is pulled.

As investors and government become more interested in impact investing caution should be taken to ensure that non-profit core program funding isn’t cut due to the financing of SIBs. While SIBs are a new funding tool caution should to be taken to ensure they don’t take away from currently implemented community services. This innovative funding model should enhance the current system – not detract from it.

As the impact market grows investors and government may decide to fund only specific issues such as homelessness. This can cause non-profits to shift their focus and, for instance, instead of providing community services around seniors they’ll move


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into providing services for the homeless. A common trend seen in 2005 in BC was the increase in available literacy programs. Because the government was focused on increasing literacy levels in BC a great deal of money was allocated for this initiative. The result was many organizations that typically offered other community services jumped on the ‘literacy bandwagon’ and moved away from their areas of expertise in their efforts to access a portion of these funds.

A major challenge for SIBs is in demonstrating measureable impact. A third-party arbitrator is necessary to ensure that reported outcomes are authenticated and that the resulting community change is due to the SIB program and not to random environmental factors. This information is necessary to enable SIB investors to ‘cash in’ their bonds and to ensure that the SIB model itself is effective and verifiable. However, how can a measurement be put to human suffering.

Proof that the SIB funded program works will require a comparison with another group not receiving the same service. This may prove to be difficult. It will also increase the amount of resources required to implement the program. Plus, many non-profits do not have a history of outcomes measurement nor do they have the capacity to administer in-depth measurement of programs. They may not have any past data to refer to for comparisons and their programs may not be large enough to warrant a substantial SIB investment.

A positive result of the requirement for detailed outcomes based data is SIBs may

influence non-profits to develop stronger more comprehensive data collection methods, begin to create better performance metrics, and establish defined measurable social outcomes.

SIBs are not the perfect answer to all of Canada’s social service problems. They are

new and there are no tangible results to date to support whether or not the benefits of impact investing outweigh the risks. However, Canada is known internationally as a country with a strong and vibrant social system; a system that is currently challenged by

increased demands for social services and decreased available funding. SIBs have the potential of becoming a multi-billion dollar source of growth capital for this flailing social service industry.

Overall, the data researched in this paper has shown that there is a need for Social

Impact Bonds in Canada and that they can provide solutions to declining funds and increasing social demands. Governments will play an essential role in the adoption of SIBs – they can either foster growth or hinder it depending on their approach.

The bottom line is - the time has come for Canadian governments and stakeholders, at all levels, to stop thinking about impact bonds and to start supporting and implementing them. Our futures depend on it.


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Significance and Limitations

While this paper is designed as a means to assist non-profits in their understanding of impact investing and preparation for Social Impact Bonds it is not a blueprint for organizations to improve their fundraising and/or stakeholder relationships. It is designed, however, to provide a general overview about impact investing and, more specifically, Social Impact Bonds plus provide basic information regarding program fit and outcome evaluations.

Since this paper is a general study of impact investing and Social Impact Bonds the results will not meet the needs of each and every non-profit; nor will it address all the issues associated with becoming successful in the field of Social Impact Bonds. Though there are multiple forms of social service providers including for-profit social enterprises this paper focuses on implications for non-profits delivering social services that address a social need.

In today’s economy new approaches to finding and developing funding streams

that support social causes is key to tackling the ever increasing social challenges presented to non-profits. However, there remain those who believe that profit making and social and/or environmental problem solving should be separate. This project does not set out to change their views – it is designed as a means to assist non-profits in their understanding and preparation for impact investing and Social Impact Bonds

Data regarding Social Impact Bonds is limited and new. The first Social Impact Bond was introduced in March 2010 by Social Finance and the Ministry of Justice (reaching maturity in 2014) in Peterborough, UK, to fund support services and attempt to break the re-offending cycle by short-sentence prisoners (Civil Society Finance, 2013).

With these considerations in mind, as impact investing markets grow, there is a requirement for an increased number of informed participants who are able to adapt their existing systems to meet the needs of investors wanting to generate social return while pursuing financial returns.

Future Study

Creating a market for impact investing

The research process used for this study employed a comprehensive review of a significant body of relevant literature relating to impact investing and, more specifically, Social Impact Bonds. One of the major findings in the review was limited available literature as it relates to non-profit service providers. Another issue that stood out is the weak impact investment market in Canada. The country is notably behind the UK and is also trailing the USA. With that in mind, it has been determined that more research is required regarding how Canada can move forward, learn from others and advance their knowledge around impact investing.


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After reading numerous documents and thoroughly researching the topic of impact investing and Social Impact Bonds I was left with many unanswered questions such as:

How can new people be encouraged to join the dialogue around impact investing? How do we advance our knowledge (and not continually repeat the same old questions/answers)? What's preventing the market from scaling up? Where do investors, investees and the government all fit into the big picture? What’s the actual true data on returns on investment? Will a market that’s interested in taking risks actually happen? Generally, how do we create a market for impact investing?

Non-profit service providers can be educated, primed and ready to implement impact investing; stakeholders, according to the research, are currently queued and ready to invest. The government is reviewing and considering Social Impact Bonds. Overall, it appears the impact investment market in Canada is fragmented contributing, in part, to slow growth.

According to the IVAR research report conducted by Baker, & Goggin, (2013) two of the major drivers, from the non-profit organization’s perspective towards positive development of a social investment market are tighter collaboration and stronger relationships between organizations, investors and intermediaries.

Excerpt from ‘The Economics of Happiness’: The challenges confronting the world today are daunting. After quadrupling in the 20th century, our current global population of about seven billion is expected to grow to nine billion by 2050. Yet the energy discoveries that have fuelled the expansion to date are declining in productivity, and new discoveries are not keeping pace with this decline.

Meanwhile, the ability of the globe to supply sufficient quantities of clean air, water and productive land in the face of continued population and industrial expansion is by no means a certainty. These questions of resource and environmental sustainability occur against a backdrop of geopolitical tensions, unprecedented imbalances in trade, and an evident shift in economic power from the West to the East.

When confronted by an uncertain future of growing challenges, an appropriate societal response is to save more for the proverbial “rainy day” – deferring some current consumption to invest scarce resources in infrastructure that will provide future returns. Yet, while global savings rates have remained stable in recent decades, in the Western “advanced” economies, savings have dropped from 22 per cent of GDP in 1980 to only 18 per cent in 2010. In the United States, where savers have been punished with near-zero interest rates for most of the past decade, savings are at all-time lows of 12 per cent of GDP.


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And where have our reduced savings been directed? In what industries are we investing for future returns? Not, in our minds, where impact is needed.

(Anielski, 2007)

Today’s investors are coming to realize that the sole pursuit of financial returns negatively impacts social and environmental value. Plus, they are coming to realize there is more in life than the amount of wealth left in their legacy (Bugg-Levine & Emerson, 2011).

It is also now known that philanthropy has the ability to play a critical role in new funding models like the Social Impact Bond by enabling investors to utilize both capital and experience towards influencing social issues. There is increasing interest in and around SIBs. Stakeholders from varying sectors – philanthropy, private, government, and non-profit – are motivated by the potential of SIBs and interested in testing them.

Many new and promising models in microfinance have emerged spurring a ‘gold rush’ effect in the field of impact investing producing the creation of hundreds of funds in just a few years and billions of dollars waiting to be invested. But investors are having difficulties finding good impact opportunities for investment. They are wondering how and where they should engage with new impact investment solutions. How, during these early days of experimentation, can they utilize the full potential of their investment (Koh, Karamchandani, & Katz, 2012)?

It is absolutely necessary that dialogue among the different stakeholders continues, that collaboration is encouraged, that tough questions are addressed, and finally that innovations like SIBs are able to move to the next level (whatever that level is). But how do we get there? How do we create a stronger market in Canada for impact investing?

Research has indicated that the impact investment industry is changing. It’s developing and moving from the ‘getting organized’ stage towards an implementation and execution stage (Jackson, et al., 2008). Much has been done in the impact investment field, however, there is still more to do.

“Impact investing has gathered enough momentum that it is unlikely to go away. But that does not mean the vision of a healthy and sustainable ecosystem will come to pass. A less optimistic vision could also come to pass” (Bugg-Levine & Emerson, 2011, p. 257).

Creating an effective impact investment industry is a long-term and multifaceted endeavour. To be successful Canada needs its most innovative leaders to come together and commit to the cause of building and advancing a fully developed industry. It won’t be easy. But that’s precisely why our leaders should step up and accept the challenge. It’s time for change.

http://www.rockefellerfoundation.org/blog/transformative-power-philanthropy


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Appendix: Definition of Terms

Outputs – to produce or create (e.g. provide 10 reading classes to 30 children); activities; what is done and who is impacted. Outcomes – end point or result; impact; accomplishment; the result (e.g. children read better and are more confident). Social Return on Investment - is a framework for measuring and accounting for change in organizations; it identifies how change is being created by measuring social, environmental and economic outcomes using monetary values to represent them (e.g. a 3:1 ratio indicates that an investment of $1 delivers $3 of social value). Stakeholder – a person with a ‘stake’ or interest in a project or organization.

Scale - expanding an intervention’s impact; bringing an item to scale usually refers to replicating it (e.g. a business model, a service, or a program’s impact). Social Finance – an approach to organizing and activating multiple sources of capital that delivers social and economic returns while achieving social and/or environmental goals.

Social enterprise/social purpose business - a company whose goal is to provide goods and services while also addressing a social issue.

Social impact - the effect on a community resulting from the actions of an organization


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