Innovation and the Philanthropic Dollar

While the fusing of philanthropy and investment always poses difficult challenges, the emerging concept of social impact bonds is shaping as one possible way of generating profound change.

Put simply, a social impact bond is a set of financial arrangements that allow institutional investors to invest in activities that solely focus on achieving a positive social impact in the community. In the case of such a bond involving, say, a drug and alcohol rehabilitation program, the heart of the arrangement would constitute detailed costings of the harmful effects that drug and alcohol abuse have on society. These factors could be things like higher health care costs, teenage pregnancy, levels of theft, the additional burden on the court system, or higher incarceration levels. Any program of activity that reduces these likely costs has a social and financial benefit to the community.

A social impact bond would subsequently enable a philanthropic investor to put money directly into a program with very clear KPIs. That investor, along with the not-for-profit agency that delivers the program within the community, will then get to share in any value that is represented by the societal cost savings generated as a result of their work. As part of the arrangement, governments that would traditionally fully fund that service in advance of its delivery would now commence their financial commitment after the foundations of the program have been laid. It’s a whole new paradigm in the way that social services could be funded and may even represent a whole new class of investing for philanthropic investors.

Appropriately, the question of how such arrangements can be designed and applied represents a significant area of thought for us here at the Business School. To that end, we’ve recently been working with Australian NGO and Business School partner Life Without Barriers and the NSW Treasury to help them deliver the first social impact bond to be offered in Australia. It’s been a highly rewarding experience for us all, as there is nothing more important or pressing than helping stimulate the sorts of innovations that can better society.

Author: Dr Nigel Finch - Academic Program Director, Master of Management / CEMS MIM