Your betting can make lives better!
An easy explainer on how investments in social and environmental causes is changing the financial investing landscape for good...
What if someone tells you to set a target and bet on education of girls in a state? Or maybe take a call on how much the criminal rate will decline in a region? And if that target is achieved, you receive monetary incentives for the same! Sounds too good to be true, right? But it is true!! And no, we are not talking about anything illegal here! Because we are talking about Social Impact Bonds!
Before discussing what exactly are these Social Impact Bonds (commonly referred as SIBs), let’s go through a short story first. Exactly 10 years back, a prison in the United Kingdom raised 5 million pounds from 17 investors to run a pilot project with an aim of reduction of re-offending by its prisoners. And if the group of prisoners undertaking the test performed better than a benchmark group, the investors would be rewarded with returns in proportion to the results achieved. Guess what, the prisoners performed better, and the investors received a healthy return of approximately 3% an year for 8 years. This is how Social Investment Bonds were born and since then, dozens of other bonds covering various social themes have come up in numerous countries.
Photo credits: Addenda Capital
In a nutshell, SIBs are public-private partnership that allows private investors to bet their capital on public projects that deliver social and environmental outcomes. If the investor succeeds and the targeted outcomes are achieved, then he is repaid by the Government or a philanthropic agency with the principal and additional interest. Unfortunately, if the project fails, the initial capital and interest both are lost(And that’s the catch you were looking for!).
Today, for developing nations, these SIBs have become a strong initiative to provision education for all. A successful example for these types of bond has been Educate Girls, which was issued in 2015 with focus on Rajasthan and North West India. It had a budget of $2,75,000 and reached 7,300 children in 140 villages with UBS being a prime investor. The results were really astonishing with the students considered in this group attaining 79% higher learning levels than their peers and of course based on this success, UBS received a handsome 15% internal rate of returns as that was the promised incentive on successful achieving of set target. These phenomenal results lead to second round issue of these bonds in 2018 with a larger group of students and larger returns too.
Photo credits: Think Advisor
That brings us to another question, are these bonds risk free? Absolutely not! Even though they are not subject to typical market risks like stocks in portfolio going up or down, they are still subject to default and investment risk (probability of losses due to unexpected outcomes). Being totally dependent on the social impact, it’s hard to quantify and measure their success exactly. And this is also one of the reasons for rising critics of these financial instruments. Fear of gamification and reducing accountability in public welfare programs due to lack of standard metrics are some of the key arguments which the pundits throw against these bonds.
However, investing in these Social Impact Bonds has risen constantly over the years as a way to give back to the community and with rising uncertainty in the environment, the interest for earning interest through these is at an all time high. Touted to be the next high-tech industry like venture capital, by the year 2019, 1340 organizations managed $502 billion in impact investing assets worldwide. This growing consideration of social and environmental factors in investing is also a signal of a larger shift in the global financial markets with an increasing number of people recognizing that their money should do more than just make more money.
Photo credits: LoveMoney
Groups like Social Finance India, UBS Optimus Foundation are providing a lot of innovative financial avenues today for private sector companies, philanthropic organizations, and government entities to collaborate, invest and improve social outcomes. And with rising interest in these bonds, the day isn’t far when there would be instruments readily available for average investors like you and us to invest in SIBs. If you also believe that your investments can, and should, also seek to fuel meaningful, sustainable, social and environmental impact, then all support to you as your “BETS WOULD MAKE LIVES BETTER”.
And if you believe that our posts are making your and others’ lives better, then don’t forget to subscribe and share Finns&Marks.
By: Anmol Gupta | Isha Garg