Traditionally, the investment capital necessary for structural social change came from governments or philanthropists. Governments use taxpayer dollars to support vital transformations in healthcare, education, poverty and criminal justice. However, with a strained budget and complex social challenges in need of financing, the public sector must seek innovative means to finance reform.

Social impact investing has recently emerged as a promising means of funding social impact. The aim of social impact investing is to generate quantifiable, long-term solutions to social or environmental challenges with potential financial returns by investing in funds and organizations. The Global Impact Investing Network defines four core characteristics of impact investing: intentionality, investment with return expectations, range of return expectations and impact measurement. (For more, see: Go Green With Socially Responsible Investing.)

Core Characteristics

Impact investing is used to positively impact a variety of sectors. These investments expand access to critical goods and services, providing solutions to climate change, education and development, among other issues.

While a return on capital is the main objective, impact investments are also expected to deliver financial returns. Investments can replicate many traditional asset classes in addition to bonds, including fixed income, venture capital and private equity. Likewise, crowdfunding platforms offer impact investment opportunities as an innovative and alternative means to traditional assets.

Social Impact Bonds

The most widely recognized form of impact investing is the social impact bond. Social impact bonds are contracts with the public sector or a government body that aim to improve social outcomes and provide financial returns to investors. The primary structure in the deployment of social impact bonds involves investors, the government and a nonprofit organization.

A state or local government will issue impact bonds to support the improvement of critical social areas; interested investors then provide financial support to ensure the launch of beneficial programs. The nonprofit organization then uses the investor funding to initiate programs with measurable social benefits: for example, the Rockefeller Philanthropy Advisors sponsors GIIN, which centralizes investors and bank activities with regards to impact investing.

From Prisons to Preschools

Social Finance UK launched the first-ever social impact bond in 2010. With the support of 17 foundations and investments amounting to £5 million, the pilot program was designed to offer Peterborough prisoners comprehensive and individual support in an effort to reduce recidivism. 

In 2012, the first social impact bonds project was launched in the United States to decrease recidivism in penitentiaries. This program used a unique public-private partnership between several organizations, including the City of New York, Goldman Sachs (GS) and MDRC. Goldman Sachs’ Urban Investment Group funded the $9.6 million to launch the program. In addition to criminal justice efforts, social impact bonds have also been launched to fund early childhood education, such as the Utah High-Quality Preschool Initiative, and employment and workforce readiness programs.

The Bottom Line

As an innovative financial instrument, impact investing not only provides an alternative to traditional securities, it also offers measurable solutions to critical social challenges. Impact investing can replicate traditional asset classes and innovative tools such as crowdfunding platforms. In addition to investors, The Rockefeller Foundation, J.P. Morgan Chase and Goldman Sachs, as well as other large foundations and banks, have supported impact investing. Through impact investing, investors are able to fund social reform while earning financial returns.