Impact bonds: horns of plenty

Social impact bonds put private capital to work in ventures that aim to do more good than just making returns. The launch of an offering of “rhino bonds” this week hopes to extend that reach into animal conservation. But, almost a decade since the launch of the first SIB, a big question remains. Do they work?

A defining feature of SIBs is the pay-for-performance clause. Returns are dependent on the success of the projects. For the rhino bonds this means higher animal numbers at the end of the bonds’ five-year term.

But pay-for-performance clauses attract some rhino-sized criticisms. Critics say they turn needy people, or wildlife, into commodities and can cause more harm than good. The vast majority of the $500m of outstanding SIBs are for health or social projects, that would usually be funded by governments or charities.

One of these intended to help London’s homeless population drew charges that its workers were helping deport homeless migrants in order to hit targets.

Avoiding conflicts of interest means rigorous monitoring. Which, in direct opposition to the raison d’être of SIBs, can increase costs relative to traditional funding models. A study by the Policy Innovation Research Unit found that four of five UK “Trailblazer” projects generated no obvious financial savings.

Impact bonds purport to bridge the gap between philanthropy and profit seeking. But wellbeing is harder to quantify than money. Investors should scrutinise each SIB for soft targets and skewed incentives.

The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below.


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