Giving Compass' Take:

• Social impact bonds and impact bonds are becoming a viable option for investing in early childhood development interventions by providing flexible funding for implementation. 

• What other investment opportunities are there for foundations to improve intervention-based methods in other social issue areas?

• Read about the unfortunate shortcomings of social impact bonds. 

Some 250 million children under the age of five—43 percent of kids five or younger worldwide—are at risk of not developing to their full physical, cognitive, and socio-emotional potential.

Changing this is possible. The first step in preparing today’s children for tomorrow’s world is to intervene early with programs such as pre-natal care and nutrition, breastfeeding promotion, quality preschool education, and a multitude of other early childhood development (ECD) services that stretch through to primary school entry.

Early investments not only make sense in the short term, but research also shows that every $1 invested in reducing stunting (chronic malnutrition) and quality preschool is estimated to have a return of between $15 and $138 and boosts adult earnings by between $6.4 and $17.6.

Nevertheless, while the privileged few usually have access to the quality services they need, for the rest of the world’s population, access to early childhood services depends upon funding and support from government and non-profits; even when those services do exist, they can be unpredictable, of poor quality, and at small scale.

Social and development impact bonds (SIBs and DIBs), also known as pay for success financing (PFS), offer a viable and promising solution. They allow impact investors to bridge the risk and time-delay barriers to government or foundation investments in ECD, and in turn, these private investors may share in the high returns reaped by society. More importantly, impact bonds are a results-based financing mechanism that allow service providers flexibility in their delivery methods and encourage rapid improvements in the delivery of services based on feedback from internal data, helping to ensure the potential positive impacts of ECD interventions are achieved.

Nonetheless, in contexts where they are feasible—and if designed and implemented well—impact bonds have the potential to result in big improvements in ECD interventions. They can produce system-wide changes in how governments and nonprofits do business, by forcing the strengthening of monitoring and evaluation, encouraging adaptive learning, and improving collaboration across stakeholders in a system of social service delivery.

Read the full article about impact bonds for early-childhood development by  Emily Gustafsson-Wright & Sophie Gardiner at the Stanford Social Innovation Review.