Is the social impact bond philanthropic investment?

Silvia Steisel - Managing Director of Degroof Petercam Foundation

Marie Melikov - Senior Program Manager of Degroof Petercam Foundation

Raising private funds to finance public social initiatives is the aim of social impact bonds. This type of investment can represent a real opportunity to address the lack of public funding for certain social issues.

Interesting success stories

The first social impact bond was launched in the UK in 2010. The British Justice Secretary announced that he was working with a number of associations to set up a program to monitor and reintegrate 3,000 prisoners in order to prevent recidivism and thus reduce incarceration costs. If the initiative achieved a 7.5% reduction in recidivism after six years, investors would receive a share of the savings. Seven years later, the target was exceeded by 2%. The 17 pioneering investors not only received a refund of their initial investment, but also a bonus (calculated on the basis of an annual return of 3%). The first social impact bond was born. Thirteen years on, there are now 277 social impact bonds worldwide.

Impact bond: how does it work?

This form of public-private partnership offers governments the prospect of innovative collaboration with the private sector. In effect, this financing tool enables private funds to be channeled into financing innovative (and therefore riskier) solutions to societal problems. The investor commits to financing a promising social program that saves the state money. The state in turn undertakes to remunerate the investor with part of the funds saved. In short, it's a win-win situation. To implement this type of bond, external players such as structurers (for financial modeling, management of the various stakeholders and fund-raising), specialized lawyers and external appraisers are required.

This type of investment brings benefits to all parties involved:

For investors, this allows them to invest with impact. Philanthropy and social investors have their share of risk to take if they wish to tackle these societal issues, which often require a major change of course, with the uncertainties that this can entail. Repayment of both principal and bonus will thus vary according to the social objectives predefined in the bond.

As far as the public authorities are concerned, the societal impact bond enables them to test an innovative solution without taking any upstream financial risk. Indeed, the public authorities will reimburse the initial investors only if the solutions provided by the operator have proved their worth, giving priority to preventive rather than curative measures.

At the level of organizations or associations (the operators), this social bond not only gives them visibility, but also legitimacy in the solution they provide. Indeed, if the results are there, the public authorities directly recognize that the solution they provide to the current social challenge is a solution, and may decide to continue structural funding of these organizations post-investment. This bond thus requires associations to be able to measure their impact by clearly specifying the objectives to be achieved.

Explanatory diagram of the structurer Kois Investment 2023 for the social impact bond concluded in 2023 between Duo for Job, the French Ministry of Labour and Degroof Petercam Foundation.

A miracle tool?

At a time when impact investing is booming (estimated at 80 billion euros by 2022), how can we explain the fact that, in the nearly 13 years of their existence, social impact bonds have only raised 700 million euros?

In an article published on the World Bank blog , one of the reasons put forward to explain this slow start is that this type of investment is still confined to a limited number of investors. This is due in particular to the very high set-up costs, the lengthy implementation times and the absence of a secondary market for this type of instrument.

Others warn that these are very specific tools which should never become investment products. Indeed, it seems essential to guard against possible abuses on subjects that must remain eminently beyond the reach of any speculation.

Another obstacle to the deployment of the system is that it relies on the evaluation of social action, which is particularly difficult and must be taken with great caution.

The social impact bond does not work for all societal issues: the solutions provided must be measurable in a relatively short timeframe, and address a critical issue for public authorities. That's why it's interesting for the subject of employment, an essential and measurable public policy criterion. It is much more difficult for education or preventive health, for example, even if these are public policy priorities, since the "time to impact" is very long term and costly to measure.

This method of financing has definitely become attractive to philanthropists keen to play a complementary role to the public authorities and to open up this area of cooperation. Based on solid data and rigorous evaluation, it instills virtuous practices in philanthropy, demonstrates that the system can progress, and gives the public sector confidence that more efficient solutions are possible.

Meanwhile, the Degroof Petercam Foundation was a forerunner, subscribing back in 2017 to the first social impact bond launched in Belgium with the Brussels Regional Employment Office (Actiris) and Duo for a Job. The aim of the bond was to help young jobseekers (aged under 30) with a migrant background find employment in the Brussels region. If the employment rate of Duo for a Job participants was at least 10% higher than that of a control group, the public authorities reimbursed the social investors, with the possibility of an additional return depending on the degree of success of the program. Three years later, the initial investment and an additional return of 4% have been reimbursed to the Foundation, and 322 new duos have been created, reinforcing the action and visibility of Duo for a Job.It is with conviction and enthusiasm that the Foundation is investing again in 2023 in Duo for a Job's second social impact bond, this time with the French Ministry of Labor, Employment and Integration. This subscription is in line with the impact investment policy that the Foundation has recently put in place, and which we will discuss in an upcoming article.