Social impact investment is one of the great, contemporary buzzwords in philanthropy. And for good reason. If done right, social impact investments (loans, bonds and pay for success models) can channel additional capital to important social problems and optimize the use of public funds. And for donors, they can be an innovative way of creating more impact from their donation budgets.
In the United Kingdom, where the number of social impact bonds has risen from one in 2010 to 183 today, social impact investing has fundamentally changed the social sector and created new opportunities for financial investors. In the rest of the world, the method is increasingly being tested and adapted to local needs and partners.
Social impact investments have the potential to be a win for everyone involved. But how do we ensure that we direct the capital, and the considerable development resources of all those involved, towards the right projects?
Like others who are regularly on the receiving end of social impact investment proposals, we, at North-East Family Office, look at certain criteria to ensure that we don’t chase the wrong opportunity for the sole sake of trying something new. Our approaches and methods are constantly evolving, but so far we start by asking ourselves and our partners three fundamental questions.
1. Is this the best intervention for the target group?
It sounds trite, but we start with the very question that we ask when considering a possible donation to a partner: What lasting, positive effects do the target group attain? Does this intervention best meet the wishes and needs of the community, or are there other projects or partners (including governmental) that can bring about a more profound and sustained change?
It is easier said than done to keep your head straight and not simply fall in love with the idea of innovation in a conservative sector or in countries where whole communities are excluded from essential social services.
But it is important that we do our homework and critically consider the landscape, the different partners and projects, and assess them on the quality of their interventions rather than their ability to make the projects investable.
2. Are we enlarging the pie?
If we have answered yes to the first question, we consider the investment itself and how it affects funding for the sector.
In doing so, we ask ourselves and our partners the following questions: does the investment mobilize additional capital to the area? Are new, commercial or institutional investors involved in the investment? Is the expected return sufficiently attractive for us to bring capital outside of the donation budget to the table, or would a commitment go out of our donations? What is the prospect for financial return and how long is the investment horizon? Can we expect a cash flow from the social impact investment that can be utilized for other projects? Will an investment stretch the budget to more impact vis a vis a donation? How significant and likely is the public savings from the project? Will the savings go to other public budgets or will they benefit our target group? Will we achieve a real efficiency gain, or are we subsidizing budget cuts instead?
This question, too, sounds simple, but social impact investments are often complex, and there is a long lead-time from project start to impact, savings and returns.
From the United Kingdom, where every pound invested by the private sector typically equals £1.15 of public spending, we know that the expected savings often are delayed or never materialize. As such, the analysis should be carried out and we, as investors, should be clear about whether we believe that the investment, in the short or long term, will help generate additional funding for the benefit of the target group.
3. Is a social impact investment our best chance of achieving the change?
When a potential social impact investment has cleared the hurdle of questions 1 and 2, we consider the merits of using this particular approach as a means of implementation.
Social impact investments are complex to develop, manage and evaluate. Often there are at least three parties to the investment agreement itself, typically an intermediary who designs the investment and brings the parties together, plus an evaluation partner who is responsible for the independent evaluation of the implementation and impact of the intervention.
In other words, a social impact investment is a significantly more resource-intensive form of cooperation than donation-driven partnerships. And sometimes a social investment is to use a sledgehammer to crack a nut.
We have, for instance in Asia, seen examples of social impact investments where simple changes in public procurement practices, the introduction of performance targets in contracts with civil society organizations, or additional resources for monitoring and evaluation, could achieve the same results.
We have seen examples of successful grants-based projects reinventing themselves as social impact investments, in a well-intentioned, but costly, attempt to jump on the investment wagon. And we’ve seen investment designs that either don’t adequately measure quantifiable social outcomes, or overcomplicate monitoring and evaluation and draw disproportionate resources from the core intervention.
For that reason we ask ourselves and our partners whether the desired effect can be achieved in a simpler way than through a social impact investment. Are there simple actions within the control of one or two of the partners that can bring about the same change? Can a corresponding allocation of public funds solve the problem, or can a similar donation? Are the required resources and additional complexity justified by the effects of bringing us, as an external investor, into the mix? Is there a currently unmet need for innovation in a social area, which justifies this particular funding model?
When is 2 + 2 greater than 4?
Evaluations from the United Kingdom show that not all social impact investments deliver the desired upside to all involved. But social impact investments hold unique promise and potential when used correctly.
If a social impact investment passes the three tests above, it is likely to:
- Contribute to significant, lasting, positive change for the target group
- Introduce an intervention that is difficult or impossible for, for example, a municipality to deliver on its own
- Increase capital and resources for the benefit of the target group
- Contribute to significant innovation in the social sector
- Ensure the collection of evidence and facilitate learning in the field
- Enable funders to stretch their grant budgets
In these years, we are, globally, exploring the use of social impact investments, and that is important. We are currently, with the ECCA Family Foundation as a possible long-term outcome guarantor, involved in what could potentially become one of the first social impact bonds in Singapore.
Exploring a variety of partnerships in very different circumstances will hopefully make us wiser on when to reach for a social impact investment in the philanthropic toolbox and when to resort to other methods.
Hopefully, in a few years’ time, this will allow us to ask quite different and more qualified questions when presented with a possible social impact investment.
Mette Ekeroth is Chief Legacy Officer and responsible for philanthropy at the North-East Family Office. North-East Family Office assists its owner families in implementing impactful philanthropy through structures such as ECCA Family Foundation and Liljeborgfonden.