Social Banking

Andrew Chappell      16th May 2011

In an era of such severe austerity, public services have and will continue to take a bashing from Westminster in terms of their funding. Criticism has been made that certain charities and social groups who aim to improve the lives of the most underprivileged will unfortunately be underfunded and their good work will be limited; thus escalating the already heightened tensions between the population and the coalition government. In the current climate it would be difficult for the government to justify large sums of funding to such so called ‘preventative’ schemes which produce no real immediate impacts; they are more effective over the long term.  Such ‘preventative’ schemes include projects which help stop criminals re-offending, family support groups, drug rehabilitation centres and groups who aim to guide underprivileged children.

 All is not lost however, since September 2010 a new type of financial instrument has been introduced which could just ease the pressure on the government. Financial instruments and social good is an unlikely combination but it does have the possibility to become a very powerful tool.  This instrument is the Social Impact Bond (SIB). SIB’s are a new investment product created by London based Social Finance, and in their own words ‘Social Impact Bonds are an innovative way of attracting new investment around such outcomes-based contracts that benefit individuals and communities’. They work as follows: Investors purchase an SIB, the proceeds from this sale go towards ongoing funding for such preventative groups, then the public sector pays the investor a ‘dividend’, if and only if the social outcomes reach a certain level. The ‘dividend’ represents a percentage of the cost saving for the public sector. If the interventions made do not reach their targets, the investor loses his investment. It is a re-allocation of risk from the relatively adverse public sector to the more risk accepting private sector.

The charities and social groups chosen to receive the proceeds from the SIB’s have to be established entities. In Britain, an estimated $300million has already been poured into these social investments and J.P. Morgan calculates that the market could reach a value of between $400million and $1 trillion in the next decade.  This combined with Britain’s “Big Society Bank” are representing a real paradigm shift in the views of how to solve social issues. For example, the reconviction rate for so-called ‘low level’ criminals in the UK is 60%; 38% of 15 to 16 year olds in the UK have tried cannabis, one of the highest rates within Europe.

Charitable trusts typically sit on a wealth of assets, and only putting a small amount of capital into impact investing, however the SIB’s could really give them an extra helping hand in running the projects which they do and crucially so that these projects can run consistently for a long period of time. This is yet another new angle from which authorities can begin to approach the social problems which they face; it could be the new ‘trendy’ way for bankers and wealthier types alike to ‘do their bit’ and at the same time to redistribute their wealth as best they can.