Social Impact Bonds: Can Private Investors Cure Society’s Ills and Make a Profit?
By: Anna R. Kimbrell
Abstract: A new financial tool has emerged in the U.S. that aims to use private investment to catalyze preventative social service programs, ultimately reducing the amount of taxpayer dollars allocated to remedial social service efforts. This new instrument is still in its infancy but is being tested in a number of cities and states around the U.S. and is gaining popularity internationally. This paper explores social impact bonds, the factors that determine success, and the challenges that have arisen so far. It identifies barriers to implementation, potential pitfalls, and possible resolutions for the future. Although new and only currently being tested, the Social Impact Bond is a promising development in the emerging “fourth sector” of the economy.
I. Introduction
The latest trend in socially responsible investing (SRI) is impact investing.[1] Whereas SRI is typically seen as an investing protocol that seeks to avoid investments that produce social or environmental harm, impact investing seeks to invest in companies, organizations, and funds that create a positive social or environmental impact in addition to a financial return.[2] One in every nine dollars under professional management in the United States (approximately $3.31 trillion) is invested using SRI metrics that consider environmental, social, and governance issues.[3] Currently impact investing represents only a small percentage of all socially responsible investing, approximately $36 billion, but is growing fast.[4]
Impact investing encompasses program-related investments made by foundations, direct investments into social enterprises through debt or equity financing, and microfinance investments. Whereas economic sectors have traditionally been seen as fitting into one of three spheres– nonprofit, government, and business (or social, public, and private), impact investing is a part of the increasing activity in the “fourth sector” that uses business models to affect social good.[5] In response to increased investor demand for impact investment options, Morgan Stanley announced in November of 2013, that it was creating the Investing with Impact Platform, providing analysis and options on a range of impact investments for all kinds of investors. The company hopes to manage $10 billion in client assets invested in impact investments in the next five years.[6] A few days later, Goldman Sachs announced the creation of a $250 million social impact fund to invest in social impact opportunities including the latest impact investing tool, the Social Impact Bond (SIB).[7]
*Anna Kimbrell will graduate with a Juris Doctor and Masters in Business Administration from the University of Kansas in May 2014. She begins work as an associate at Husch Blackwell LLP in Kansas City, MO in September 2014.
[1] Also called “social finance”, “social impact investing”, “blended value investing”, or “impact finance.” Maximilian Martin, Making Impact Investible, Impact Economy Working Papers Vol. 4, 3 (2013).
[2] About Impact Investing, Global Impact Investing Network, www.thegiin.org/cgi-bin/iowa/resources/about/index.html (last visited Dec. 13, 2013) (“investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”)
[3] 2012 Report on Sustainable and Responsible Investing Trends in the United States Executive Summary, US SIF Foundation (2012), http://www.ussif.org/files/Publications/12_Trends_Exec_Summary.pdf (last visited Apr. 20, 2014).
[4] Martin, supra note 1, at 4–5; Impact investing in developing countries, in particular, has the potential for high investor returns. Impact Investments: An emerging asset class, JP Morgan Global Research, 31–36 (Nov. 29, 2010) (detailing expected returns of current impact investments for debt and equity investments in developing countries).
[5] See, e.g., Heerad Sabeti, The Emerging Fourth Sector, Aspen Institute, http://www.people.fas.harvard.edu/~hiscox/Sabeti.pdf (last visited Apr. 20, 2014) (discussing the emergence of organizations that span the traditional three sectors).
[6] Investing with Impact, Morgan Stanley,http://www.morganstanley.com/globalcitizen/pdf/investing-with-impact.pdf?v=07112013 (last visited Apr. 20, 2014).
[7] Lydia DePillis, Goldman Sachs thinks it can make money by being a do-gooder, The Washington Post (Nov. 5, 2013).
