With increasing strain on many public budgets, the use of private dollars for social programs is gaining traction.
Social impact bonds borrow private investing principles to tackle community development goals (Governing). Also known as “pay for success” programs, Governing defines them as programs in which
private funders pay a government to establish a preventative social program aimed at achieving a certain measurable result. The only way investors get their money back is if the program meets those results.
However, these bonds are difficult to design (there are only eight currently operating in the United States), and they require large time investments, which can overwhelm small-staffed nonprofits running them.
Impact investing – private investment made with the intention of creating a positive social benefit – currently accounts for $60 billion in projects worldwide (Next City). The perception of impact investing is that, while good for society, it delivers a lower ROI than traditional investing. However, a new report from the University of Pennsylvania suggests that well-designed social impact investments don’t have to face this trade-off(SSTI). The study looked at 53 social investment funds and found they deliver financial returns comparable to market rates.
The biggest challenge to impact investing is liquidity. Each project is unique, making them difficult to replicate. Another issue is a disconnect between the impact investing and community development worlds. “At a recent impact investing conference I attended, hardly anyone there had heard of CDFIs. We’ve got a marketing issue here,” said Michael Swack of the Center on Social Innovation and Finance.