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Social impact bonds: An innovative tool to release impact

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By Kai Ming Chang

· 7 min read

With the emergence of ESG investing, more and more people are trying to introduce innovative approaches to release positive impact or reduce negative impact by financial tools. International institutions such as Principles of Responsible Investment (PRI), CFA Institute, and Global Sustainable Investment Alliance (GSIA), have defined ESG investing in numerous categories, including negative screening, best-in-class, thematic investing, norms-based screening, ESG integration, corporate engagement and shareholder action, and impact investing (definitions may slightly vary in different institutions). 

Among these approaches, impact investing is a rapidly growing field. According to a survey by the Global Impact Investing Network (GIIN), the scale of impact investment in 2021 reached US$116 million, an increase of more than three times compared with 2018. Impact investing participants utilize various tools to provide funding and measure their impact, one of which is called Social Impact Bonds (SIBs). 

What is the mechanism of Social Impact Bond (SIB)?

SIB is an outcomes-based financing tool created with specific purpose of improving social outcomes and improving efficiency of the capital allocated (Berndt & Wirth, 2018). SIB projects typically involve five sectors (see the graph below).

  1. A commissioner (e.g., a government agency) identifies the social need and pays for outcomes. 

  2. Investors provide the working capital needed for the project and are repaid based on the achievement of outcomes. 

  3. SIB specialized intermediary meets the needs of actors involved in the partnership and defines the transaction agreements, as well as for the raising of capital. 

  4. A service provider delivers the service to the beneficiaries of the project. 

  5. An independent impact evaluator evaluates the impact and communicates the results to the commissioner. 

In general, SIBs link investor repayment to achieved outcomes, transferring risk to investors rather than service providers. Also, SIBs typically concentrate on preventive measures and public cost savings. Additionally, these projects heavily depend on independent evaluators to confirm their outcomes.

SIBs leverage private investment for social programs where governments pay based on achieved outcomes. It encourages private investors to fund interventions for issues like homelessness and juvenile delinquency (Warner, 2013; Casasnovas & Jones, 2022). These kinds of bonds involve agreements among governments, service providers, and investors to finance specific social outcomes, securing funds from investors and paying service providers upon meeting agreed-upon goals. In practice, labeling them as "bonds" is misleading. From a financial standpoint, SIBs function as future contracts based on social outcomes. They are alternatively referred to as Payment-for-Success bonds in the USA or Pay-for-Benefits bonds in Australia (OECD, 2015; Fraser et al., 2016).

Example for SIB: Peterborough SIB

The first instance only emerged in March 2010 with the Peterborough SIB in the United Kingdom, which was pioneered by Social Finance with a contract duration of 96 months. In this example, a set of service providers were funded to decrease the reoffending rates among 3,000 short-term (sentences of less than 12 months) male prisoners aged 18 and older released from Peterborough Prison. The bond met its targets, and the investors were repaid (Disley et al., 2014).

From 2010, the A package of intensive support services (called ONE Service) at Peterborough Prison aimed at reducing reoffending among male offenders with short sentences. It provided pre and post-release support for up to 12 months, including housing assistance, drug and alcohol treatment, employment assistance, parenting assistance, and mental health support. Investors were paid back if targets reduction in re-offending by 10% for any of the three cohorts of 1,000 ex-prisoners, or 7.5% across all 3,000 were met, making it the first of its kind globally. The intermediary, Social Finance UK, raised £5 million from 17 investors, most of which were charities or foundations. Social Finance indicated that if reconviction events were reduced by 10% in one or more individual cohorts, investors can expect the equivalent of an annual IRR of around 7.5% (up to a maximum of around 13% form U.K. Ministry of Justice and the Big Lottery Fund, depending on the scale of the reduction in reconviction events). If there were no reductions in reconviction events investors would not get a return and would lose their initial investment. The Ministry of Justice placed a cap of £8 million on the outcome payments to ensure that its liability is limited (Disley et al., 2016; Emily Gustafsson-Wright et al., 2016).

Pros and cons for SIBs

Impact bonds offer a compelling approach to driving innovation and addressing complex social issues, particularly in preventive measures. They present a system where the public sector pays solely for proven results, transferring the risk of service effectiveness to third-party investors. Moreover, Tortorice et al. (2020) showed that when the government is unduly pessimistic (or averse to projects with greater costs than benefits) SIBs can finance positive net present value projects that debt finance cannot. 

On the other hand, the challenges are that these bonds foster collaboration among diverse stakeholders but demand adaptability due to their complexity and time-sensitive nature, often proving to be costly. Giacomantonio (2017) suggested that SIB-financed initiatives are not attractive to investors but are rational choices for governments. In addition, Mazzuca et al. (2023) indicated that SIBs investors are mainly altruistic, risk-averse, not particularly interested in financial returns, and therefore detached from the main logic of traditional finance. To date, the SIB market remains limited, with a total upfront capital invested of nearly $463 million, and their use is controversial also due to an intense political debate (Edmiston & Nicholls, 2017; Mazzuca et al., 2023).

As the SIBs market emerges, stakeholders start to exam the impact of existing cases and to delve into the financial structures or determinants contributing to SIB success. Despite this, some view SIBs as excessively risky with limited potential. Debates surrounding SIBs persist. These innovative tools hold promise in creating impact, yet to gain a comprehensive understanding, further evidence, robust evaluations, and empirical studies are essential.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.


Berndt, C., & Wirth, M. (2018). Market, metrics, morals: The social impact bond as an emerging social policy instrument. Geoforum, 90, 27–35.  

Casasnovas, G., & Jones, J. (2022). Who has a seat at the table in impact investing? addressing inequality by giving voice. Journal of Business Ethics, 179(4), 951–969.  

Disley, E., & Rubin, J. (2014). Phase 2 Report from the Payment by Results Social Impact Bond Pilot at HMP Peterborough.  

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About the author

Kai Ming Chang is a Researcher in ESG at the Center for Corporate Sustainability, National Taipei University. He led the 2022 Taiwan Sustainable Investment Survey project, analyzing data from 103 financial institutions. Previously, he worked on the “CDP Reporting Guidance” project with First Financial Holding, constructing scenario simulations for loan customers in carbon-sensitive industries. Kai Ming is currently pursuing an MSc in Sustainability and Social Innovation at HEC Paris and holds a BBA in Finance and Cooperative Management from National Taipei University.

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