This post was originally written for Ethos Journal
When Social Finance launched the first social impact bond (SIB) in October 2010, we were not anticipating the level of interest it would receive. The Peterborough Prison SIB is a £5m scheme that funds interventions for 3,000 short-sentenced male prisoners who are expected to leave the prison over the course of the subsequent six years. The scheme was oversubscribed by investors willing to take a risk on a project that would explore new ways of injecting funding into one of society’s most pervasive problems: recidivism.
We wanted to provide increased funding for preventative services, with the dual aims of improving social outcomes and reducing long-term costs. Investors receive payments from the Ministry of Justice if – and only if – a measurable reduction in reoffending is achieved. The government will fund the payments with a proportion of the cost savings it can expect as a result of reduced criminal activity.
This small scheme has caught the imagination of world leaders: President Obama has allocated $100m (£65m) to fund better outcomes in areas such as recidivism and chronic homelessness through social impact bonds. Social Finance has established a sister organisation in Boston to meet growing demand in the US. We are also working in partnership with other countries, including Australia, Ireland, Canada, New Zealand and Israel, to help them launch SIBs in their own markets.
Investing in change
Building a market from scratch is not easy; there may be high-profile failures, and products that lack any track record make for wary investors. However, with the launch of government-backed initiatives such as the Investment and Contract Readiness Fund and Big Society Capital, much-needed support to scale social enterprises into investable propositions is becoming more readily available.
It seems that people are waking up to the attraction of investing in this way. The bottom line need not always be to maximise profit at any cost, but instead what we at Social Finance call ‘investing for a social and financial return’. In terms of delivering social outcomes and change, the investment model is harnessing this sense of accountability and provides the incentive for innovation. The investors in the first SIB were trusts and foundations, but retail products are the next step in enabling this burgeoning social-investment market to grow. At a time when society’s needs are increasing and public expenditure is declining, the concept of social investment is ripe to be more fully explored.
By David Hutchison, Chief Executive of Social Finance