Impact bonds

Impact bonds are a type of outcomes-based contract between an investor, an outcomes payer, and a service provider, that tackle a social or environmental challenge.

They are designed to overcome the challenges governments have in investing in prevention and early intervention. They mitigate the risks of failure and bring in impact investors, who want to test innovation and scale successful programmes. Investors provide flexible funding to programmes that are designed to be responsive to the needs of vulnerable groups to improve their lives.

Social Finance set up the world’s first social impact bond in Peterborough in 2010, which aimed at reducing reoffending among short-sentenced prisoners. While our business has since diversified beyond impact bonds, they remain a key part of our approach.

A social impact bond – or social outcomes contract, as they are known today – is an innovative way to finance projects where funding is not tied to specific activities and outputs, but to the outcomes it is aiming to deliver. It can support long-term projects and needs three partners:

1. An impact investor who can provide at risk, upfront funding with no guarantee they’ll get it back – often a private philanthropic organisation or individual

2. An implementing organisation to deliver the programme – often service providers or charities

3. An outcomes funder who will pay back the investor if and when the project achieves the desired outcomes – for example a government or commissioner 

Return on investment depends on whether or not the social outcome improves. If it does, the outcome payer repays the investors for their initial investment plus a return for the financial risks they took.

Development impact bonds (DIBs) are a type of social outcomes contract common in low- and middle-income countries, in which investors advance fund development programmes with returns linked to specific development goals. The lead outcomes payer in a DIB is external to the country, typically an official development partner, but occasionally a philanthropic foundation.