Impact Through Philanthropy and Government

How can you revolutionise philanthropy via impact investing/how can you use entrepreneurship to solve poverty?

It is possible to bring investment flows to philanthropists and the delivery organizations they are funding. It wasn't obvious how you could do that.

This resulted in the development of the first social impact bond in 2010, the now famous Peterborough bond, where we raised £5 million to fund delivery organizations, working with the young prisoners at Peterborough jail, 60% of whom went back to jail within 18 months of their release. And the purpose of the bond was to reduce the number that went back to jail. It was the first time in history, to my knowledge, that we had financial security where the return depended on achieving a social improvement, and it worked. The investors got their money back with a 3.1% return, because we succeeded in reducing the number going back to jail by 9.7%. Since then, social impact bonds have multiplied. A decade later, we have over 235 countries dealing with 15 different social issues and some environmental issues now. But they're still small, the largest social impact bond is $30 million in the United States addressing the issue of teenage mothers. The largest in Europe is just a little smaller, in Finland, dealing with the absorption of immigrant populations. But the average size of a social impact bond is still only $3 million. And our opportunity today is to scale these, because they provide a much more effective way to achieve social improvement than traditional philanthropy provides.

How does the burden of risk change when social impact bonds are involved?

If you can measure the outcomes, you can use social impact bonds by getting a philanthropist to promise to pay for the results when they're achieved, you shift the risk from the philanthropy to investors who fund the delivery organization and accept the risk of failure and loss of their money if the delivery organization doesn't achieve its targets. The delivery organization focuses on very specific targets it has to achieve. It develops the data necessary to understand how best to achieve it. It uses innovation technology, new approaches in achieving these objectives. 

What is the concept ‘pay for success’?

This concept of pay for success, by the way, has made itself into mainstream financial markets and is guiding investment to achieve impacts there. $159 billion today has been invested in pay for success bonds issued by corporations and now the Italian utility has issued $7 billion of these bonds where its interest rate falls if it achieves certain environmental targets. And Novartis, the pharmaceutical company, has issued $1.8 billion where its interest rate falls if its drugs are free to more vulnerable people. So, pay for success can bring an additional powerful tool to philanthropists in using their grant budgets to pay for outcomes or in using their endowments to invest in social impact bonds. 

How have endowments changed with the advent of social impact bonds?

Up until now, endowments have been kept completely separate from the grant giving of a foundation. You make money in every way you can, and then you do good by giving away 5% of it a year and it doesn't matter how much harm the 95% created. That's clearly an untenable illogical position and the Ford Foundation has led the way now in bringing its endowment in line with the mission of the Ford Foundation, therefore avoiding companies that are creating social and environmental harm in the investments which the endowment makes. 

Why do we need transparency?

Markets and the private sector can't do everything. They need governments, and in this case, we badly need a government to mandate the transparency on impact that we need if these massive flows of capital are to achieve impact, rather than to become discredited as green washing.

Why do governments need to get involved in these initiatives? 

We need governments now to mandate impact transparency through the publication of impact accounts that combine both the profitability of companies and their positive and negative impact. The impact revolution is here, but to deliver real impact, it needs governments to act now.