Giving Compass' Take:

• Here are five common myths about impact bonds debunked and recommendations on how to ensure that they are being used successfully. 

• Why is it important to understand how impact bonds work effectively? 

• Read about the shortcomings of social impact bonds. 

Here, we summarise the truth behind five commonly expressed myths, and suggest ways to use them effectively.

  1.  Impact bonds are not bonds The use of the word ‘bond’ misleads development practitioners into thinking that impact bonds resemble instruments used in financial markets to raise money as a loan agreement. In fact, impact bonds are neither bonds, nor financial instruments at all. Rather, they more closely resemble multi-party contracts for sharing risk and paying for social outcomes.
  2. Impact bonds do not crowd in new money Impact bonds can be crucial tools for driving innovation and risk sharing, but they rarely bring truly new money to the table. One of the key ways in which impact bonds create value is by unlocking additional funds from private equity investors, but this is only true in a minority of cases.
  3. Impact bonds are not the only type of results-based finance Impact bonds are one of many results-based financing (RBF) tools available, and each of them caters to a different set of parameters and priorities.
  4. Impact bonds are not suited to all organisations Many nonprofits with a good reputation and track record of success, are willing to undertake the role of service provider as part of an impact bond. But because service providers can’t ever lose financially2—it’s either the investor or outcome funder who bears the financial risk always—they may need additional incentives to drive them to achieve outcomes.
  5. Impact bonds can work even when external risks are large and hard to manage The core value of the impact bond mechanism is to transfer the risks of a development programme to someone who can better absorb and manage them. Internal risks, such as the ability to hire on-ground staff to deliver the programme, are more straightforward to price in and manage for.

Read the full article about myths about impact bonds by Carlijn Nouwen, Dayoung Lee and Kusi Hornberger at India Development Review.