Social Impact Bond (SIB): Definition, How It Works, and Example

What Is a Social Impact Bond (SIB)?

A social impact bond (SIB) is a contract with the public sector or governing authority, whereby it pays for better social outcomes in certain areas and passes on part of the savings achieved to investors. A social impact bond is not a bond, per se, since repayment and return on investment (ROI) are contingent upon the achievement of desired social outcomes. If the objectives are not achieved, investors receive neither a return nor repayment of principal. SIBs derive their name from the fact that their investors are typically those who are interested in not just the financial return on their investment, but also in its social impact.

Understanding Social Impact Bonds (SIBs)

Social impact bonds tend to be risky investments, as they are entirely dependent upon the success of the social outcome. Unlike normal bonds, social impact bonds are not affected by variables such as interest rate risk, reinvestment risk, or market risk. However, they are still subject to default and inflation risk. It can be hard to determine the success of social impact bonds, as they are based on social impact, which is often harder to quantify and measure. There are many more variables than regular bonds, which are comparatively easy to measure because they are based on hard data. For this reason, it's hard for social impact bonds to get government funding.

The first social impact bond was issued in 2010 by Social Finance Ltd. So far, social impact bonds have only been issued by the public sector, but in theory, private sector organizations can also issue them. The trend of investing in the social environment and society has risen in recent years and has become a way for investors to give back to the community, as well as a way for companies to expand their social responsibility. It's a way to increase community involvement and awareness of social issues. Most social impact bonds seek environmental, social, and governance (ESG) ends. 

A Social Impact Bond in Practice

In 2010, Peterborough Prison in the United Kingdom issued one of the first social impact bonds anywhere in the world. The bond raised 5 million pounds from 17 social investors to fund a pilot project to reduce re-offending rates of short-term prisoners. The relapse, or re-conviction, rates of prisoners released from Peterborough were to be compared with the relapse rates of a control group of prisoners over six years. If Peterborough's re-conviction rates were at least 7.5% below the rates of the control group, investors would receive an increasing return that is directly proportional to the difference in relapse rates between the two groups and is capped at 13% annually over eight years.

In 2017, the Ministry of Justice announced that the Peterborough Social Impact Bond was successful. Compared to a control group, it had reduced repeat offenses by short-sentenced offenders by 9%, surpassing the bond's target of 7.5%. As a result, investors received a return of just about 3% a year.