Microloans, such as those administered by the Grameen Bank, are perhaps the easiest model to understand. Small business people can get well-needed loans for equipment or business start up, a sewing machine, for example, and in a short period of time the business owner is ready to pay the loan back. It is more challenging to understand how funds invested in environmental causes or in hunger alleviation could make a financial return.
Social bonds work by recognizing that there is a real return in social and environmental improvements, such as reduced incarceration rates, reduced hospital bills, reduced need for water treatment, increased ecosystem services, etc. 3.1 “In a social bond, a government agency sets goals to fix a problem, and taps an outside expert to enlist a nonprofit to meet the objectives and raise money from private and philanthropic investors to fund the initiative. The government only repays investors if the program succeeds. If a program designed to reduce hospitalizations, for example, achieves its goal, investors will be paid with the money saved on patient care.” 3.2 Additionally, consideration of environmental and social factors can improve any stock’s longterm growth. 3.3
As a fan of metrics, I am encouraged by attempts to develop common frameworks for measuring and reporting performance of such bonds. These include Global Impact Investing Network’s IRIS (standardized metrics describing social, environmental, and financial performance of an organization) and B-Analytics’ GIIRS (standardized scoring system for investors to benchmark and compare social and environmental performance of various funds and companies). 3.4
One Square World is a registered non-profit investigating social-bond opportunities while completing pilot projects in several communities! More on the pilots in a future blog!
3.1 Brest, P. and K. Born. “When can Impact Investing Create Real Impact?” Stanford Social Innovation Review. Fall 2014. Available at: http://www.ssireview.org/up_for_debate/article/impact_investing
3.2 Agovino, T. “New Funding Tool Could Spur Nonprofit Innovation.” CEOWorks: News. 15April2014. Available at: http://ceoworks.org/new-funding-tool-spur-nonprofit-innovation/
3.3 Cohen, R. and M. Bannick. “Is Social Impact Investing the Next Venture Capital?” Forbes Magazine. 20Sept2014. Available at: http://www.forbes.com/sites/realspin/2014/09/20/is-social-impact-investing-the-next-venture-capital/
3.4 World Economic Forum Investors Industries. “From the Margins to the Mainstream: Assessment of the Impact Investment Sector and Opportunities to Engage Mainstream Investors.” Section 4.4, “Double Bottom Line”. 2012. Available at: http://reports.weforum.org/impact-investment/4-challenges-that-institutional-investors-face/4-4-double-bottom-line/