Individuals, philanthropists, institutions and governments around the world see impact bonds as a way to provide funding for social and environmental projects or causes. As of January 1 the Brookings Global Impact Bond Database tracked 134 impact bonds as either completed or in implementation, up from 110 last year.
The report says most of these contracts are social impact bonds (SIBs), where the outcome funder is the government, while seven are development impact bonds (DIBs), with third-party funders paying for outcomes.
The total amount invested is small, around US$370 million, but the potential is large. Brookings’ report says analysis of early deals shows most have returned principal to the investors as well as positive returns.
In countries like the United Kingdom, the US and Australia, state or federal governments have helped the development of social bonds. They see them as a way to help fund the improved delivery of services that will achieve better social outcomes for the community.
Social bonds generally are not used as a replacement for government services - rather they are a way to allow not-for-profit organisations, charities and social enterprises, who are already involved in providing the relevant services to the government, to scale up a promising service innovation, or undertake a longer and more flexible programme of services than is possible under standard government contracting arrangements. This is the case with the Genesis Youth Trust.
The programs are often preventive in nature. The aim is to achieve benefits over the longer term through greater investment in the shorter term.
The bonds have the potential to establish a new market for financial innovation that brings together government, philanthropic organisations, investment funds and private sector companies to provide funding, know-how and governance support to drive more efficient and effective delivery of outcomes that benefit our communities.
The bonds are part of a wider movement known as impact investing. The sector also includes green bonds, strategic philanthropy, ethical funds, social enterprise and other investments or activities designed to achieve social or environmental benefits, as well as financial returns.
The Global Impact Investing Network has estimated more than 1,340 organisations currently manage around $US502 billion in impact investing assets globally. It’s a large number, but of course pales beside the wider investment industry, which The Boston Consulting Group estimated was worth $US76 trillion in 2018.
Although relatively small the potential for impact investing, and specifically impact bonds, is huge.
It is important to recognise impact bonds can be challenging to bring to market for a number of reasons.
First, they require collaboration across a range of different government departments, as well as the service provider, investors and other financial intermediaries who will be involved in the transactions.
Investors need to see a track record from a service provider in order to be comfortable with the performance risk they are taking. This is where the Genesis Youth Trust’s almost two-decade history was important in the progression of the G-Fund SIB.
Transactions involving smaller service providers can be particularly challenging. Investors prefer service providers with some financial strength and other sources of income who may be able to contribute financially to support service delivery where there are budget overruns.
There also needs to be a reliable method of measuring outcomes which can be validated by an independent third party.
Social bonds have also attracted controversy. There have been concerns and misconceptions that the private sector is potentially making a profit from a vulnerable client group.
Social bonds raise sums that are small by the standards of the capital markets, but they require as much, if not more, due diligence by investors than larger deals which can offer higher or less risky returns.
Despite the challenges, ANZ is keen to help develop this market. There is growing investor demand for investments which aim to achieve positive social and environmental impacts, as well as positive financial returns.
We see potential in the conservation, environmental and climate finance sector where there is a substantial funding gap and a need to bring in private investment. The characteristics of impact bonds also seem well suited to the task at hand; with upfront investment required to deliver what is hoped will be longer-term benefits.
The bonds can also help scale up innovative programmes which have already demonstrated a positive track record, while also allowing the service providers the time to adapt and improve their services in order to achieve better results.
Impact bonds are still a very small part of the financial markets but ANZ believes there is great potential for the private sector and government to work together to deliver better outcomes for everyone.
Paul Goodwin is Managing Director Institutional at ANZ