Social impact bonds are not the typical bonds that we encounter

What are social impact bonds?

A social impact bond is a contract where a governing authority pays for better social results in particular areas. It will also pass on the saving gained to investors. SIB is a comfort for some to see because people who invest in these do not only care about the financial returns and profits. They equally care about social impact. Thus, it was named as such.

However, the term says “bond,” but it is not the usual bond that we know. Its repayment and return on the investment will only be confirmed if the expected social outcomes are met. On the other hand, the investors will not receive repayment or a return if the expected results are not achieved.

What can investors get out of these?

Investors who invest in SIBs enter quite a risky deal because they depend on the social outcome success. On the other hand, the typical bonds are not safe from risks as well. They are subject to risks that involve interest rates, reinvestments, and the market. These things do not have any impact on SIBs, although they are not safe from inflation and default risks.

How does one determine whether a SIBs then? We can say that it depends on the social outcome. But if we think about it, there is really no exact way to measure it. How does one measure success anyway? In a sense, it is somehow subjective. If we compare them to the typical bonds, we can say that they are relatively easier to measure because we can always base them on data. This reason is one of the major concerns why SIBs find it hard to get government funding.

How did it start?

In 2010, Social Finance Limited issued the very first social impact bond. In theory, both private and public sector organizations and entities can issue social impact bonds. But if we look at all the records in the past, we can see that only public sectors were the only ones that issued them.

Who can make it happen?

We all know that we all have hurt the environment. Climate change, global warming, and pollution can attest to that. If we look around, we will see that the Earth is slowly deteriorating, and it will continue to do so if we will not act now. So, we need to help out in any way that we can. Investors are trying to give back to the community by investing in the society and social environment. In fact, more and more investors are doing the same. Of course, there are two sides to the coin. Investors could not do this if investments like these were never offered in the first place. Companies are also making their efforts by increasing their social responsibility. They became more involved in the community and became more aware of what was happening around them. Most, if not all, social impact bonds look for ESG or environmental, social, and governance ends.