Giving Compass' Take:

• Ben Schiller, writing for Fast Company, discusses the success of social impact bonds, explaining that the metric of impact is difficult to measure because social impact bonds are ongoing.

• The author mentions that we still don't know the social consequences of social impact bonds, yet they are largely supported by philanthropists and impact investors.  How can investors gain more knowledge about SIBs and impact?

• Read about the good, the bad, and the ugly of social impact bonds.

Social impact bonds are not bonds in the traditional sense, like, say, bonds of government debt traded on an exchange. They are a type of impact investing through pay-for-performance (or pay-for-success) contracts. Normally they are led by governments that see an opportunity to raise fresh capital and cut costs by working with outside service providers to deliver a certain outcome.

It contracts with outside funders, like a bank, to raise capital to pay for the service. If the service provider meets its targets over time, the investor gets paid a return–perhaps 5% on their original investment over five years from the state. In theory, SIBs are win-win: improved social outcomes save governments money while paying investors for their capital.

The model of the social impact bond, now eight years old, is spreading. Figures recently released by Social Finance, a nonprofit that arranges SIBs, says there are now 108 around the world.

Does this prove that SIBs work on the whole? Not really. The truth is we don’t  really know, because many SIBs are ongoing. And, as important, we don’t know what the wider social consequences of SIBs might be. SIBs have widespread support among philanthropists and impact investors, among service providers and originators like Social Finance.

Several academics who’ve studied SIBs point to the potential for skewed incentives and expensive and complicated contracting procedures. They worry about misplaced enthusiasm for a model that remains largely unproven.

The positive case for SIBs is that they help raise capital for vital social services. The 108 projects have raised about $400 million in all, according to Social Finance, with about half of that flowing to U.S. projects. That is money that might not have been spent on helping kids and ex-prisoners were SIBs not started.

Read the full article about social impact bonds by Ben Schiller at Fast Company.