The Downside of Social Impact Bonds

Stanford Social Innovation Review, by Nadine Pequeneza

When I started making The Invisible Heart, a documentary film about Social Impact Bonds (SIBs), the concept was relatively new. It was 2015 and there were roughly 45 SIBs globally. Observers had great hopes that this new financing model would revolutionize social service delivery. By making private investment available to social programs, SIBs were expected to bring innovation, more money, and better outcomes for society’s most disadvantaged people. Private investors would be paid a return only if the program achieved predetermined outcomes, such as reducing prison recidivism or improving academic performance.

My film, which premiered on TVO in January 2019, focuses on two SIBs: a Toronto program to house the chronically homeless that was still in the design phase and a Chicago pre-kindergarten program that was entering its second year of implementation and about to deliver its first results. I also highlight a third SIB—a program to reduce hypertension—as a way to chronicle Sir Ronald Cohen’s efforts to promote impact investing globally.

I wanted to document SIBS that represented a variety of issue areas, populations served, investor types, and stages of completion from design to evaluation. Having high stakeholder participation was also a critical factor in deciding which SIBs to feature.

Today there are 151 SIBs in 29 countries, but there is little evidence that they are delivering on their promise. After three years filming the evolution of this financing model, I believe we need to consider that SIBs might be doing more harm than good. SIBs have the potential to undermine democracy and basic human rights, and perpetuate wealth inequality—the root cause of many social problems. Impact investors have an important role to play in building a just society, but the revolution might be better targeted at corporations, 500 of which control about 70 percent of world trade and therefore have the ability to create both positive or negative impact at scale.

Promoting Simplistic Solutions to Complex Problems

Like many impact bonds around the world, the three SIBs featured in The Invisible Heartare low risk and high return. Instead of funding innovative programs, private capital is backing social programs with a proven track record, often evaluated by publicly funded studies.

In Chicago I filmed a SIB that is paying a premium to investors for financing an early education program. The program is a well-documented success since the mid-1980s thanks to the ongoing federally-funded Chicago Longitudinal Study. The pay-for-success model will cost the City of Chicago more than double the actual cost of putting the 2,618 students through pre-school, if the program hits certain targets. The highest payments are awarded for every year a student does not require special education. The program has been criticized for financially incentivizing service reduction in public schools where special education is already underfunded, and for paying investors a continued return over 15 years for a one-time intervention.

The positive benefits of preschool are widely accepted, as is the fact that child development depends on many factors. In the film, I profile Reginald, a 4-year-old enrolled in the Chicago preschool SIB, who along with his family and community faces a myriad of challenges. At the start of the school year, Reginald’s older brother was shot and killed outside their home. And throughout the year, his school was on lockdown due to neighborhood shootings related to drug trafficking. For Chicago’s children and families to succeed, we need a comprehensive policy response to unemployment, drug addiction, and gun violence. But because SIBs require direct attribution of outcomes, they narrow our focus to a single program when we should be thinking more holistically about how to address complex social problems.

From The Invisible Heart, La Tonya Rounsaville talks about her son Reginald, enrolled in Chicago’s pre-K SIB. from HitPlay Productions on Vimeo.

Disincentivizing Comprehensive Evaluation

The theory that SIBs bring business rigor to solve social problems has not been demonstrated. Rather, the need to return profits in a timely fashion to investors has deterred the kind of comprehensive program evaluation that leads to possible program improvement. In making The Invisible Heart, I witnessed the development phase of two SIBs, which revealed many of the tensions at play between the various stakeholders—government, investor, intermediary, service provider, and program participant.

Over the course of three years I witnessed the evolution of Activate, Canada’s SIB-financed program to prevent hypertension. I later discovered that the program is remarkably similar to HATICE, a government-funded, multi-national study in Europe. Both interventions provide internet-based lifestyle coaching to reduce the risk of hypertension, but HATICE offers far greater value in terms of impact metrics and program outcome attribution.

The European study evaluates its success by tracking participants’ blood pressure, cholesterol, weight, and healthy lifestyle changes. Activate has just two metrics: enrollment numbers (regardless of whether participants attend or complete the program) and maintenance of blood pressure. Activate’s investors will earn a 6.7 percent return if these two targets are met. The need to return money to investors favors payment triggers that are milestones, not outcomes, which in turn disincentivizes rigorous evaluation and program improvement.

From The Invisible Heart, Sir Ronald Cohen on Canada’s SIB to prevent hypertension.from HitPlay Productions on Vimeo.

Pay-for-Success Undermines Our Commitment to Basic Human Rights

Around the world governments have bought into SIBs as a cost-saving measure; a way for private money to finance early interventions that help prevent expensive services downstream. In moving from theory to practice, many SIB pioneers have found this expectation can negatively impact program participants.

I spent time filming Mainstay Housing, Toronto’s largest provider of supportive housing for the chronically homeless. A cost-benefit analysis of the organization’s program to help tenants access disability benefits showed a financial loss for the government. While negotiating its SIB, Mainstay’s executive director, Brigitte Witkowski, had to repeatedly remind partners that the program’s objective is to not only house people who have been living on the street for years but to also connect new tenants with long-term community supports.

The SIB model necessitates that we commodify individuals by weighing every service they consume against every outcome they produce. This commodification fundamentally alters our commitment to basic human and democratic rights. Perhaps the most glaring example of this is a SIB program to reduce the number of people sleeping on the streets of central London that incentivized the deportation of homeless people.

Since I began studying the SIB market, one example stands out as unique in its attempt to deliver on some of the model’s early promises: the South Carolina Nurse Family Partnership. The program pairs low-income mothers with a nurse for regular at-home visits to improve maternal and child health. It’s the only SIB that does not offer an investor return, counts government as the largest single investor, and has the ultimate goal of securing stable public financing to expand the program. Unfortunately, it is an anomaly and antithetical to the SIB model promoted by most impact investors.

From The Invisible Heart, Director Brigitte Witkowski on Mainstay’s SIB for the chronically homeless. from HitPlay Productions on Vimeo.

Are We Measuring the Wrong Things?

The impact investment market is estimated to be worth $502 billion, but more than half of the world’s 151 SIBs each serve fewer than 480 people. Given their limited number and demonstrated negative impact, it might be time to consider other ways capital can help create a just society.

The social challenges SIBs aim to address often stem from poverty. If we want to have a scalable, sustainable impact on the lives of disadvantaged people, we need to invest in companies that value income equality and fairness more than their stock price or price-to-earnings ratio. Impact investors can lead the way in reorienting corporations away from maximizing shareholder profits and toward investing in social and human capital.

To direct capital to companies that have real positive social impact, we need access to reliable, relevant information. The Environmental, Social and Governance (ESG) ratings upon which impact investors rely are in reality no more than a series of judgments by scoring companies—and their assessments often differ substantially. Moreover, ESG reporting by companies is not required, standardized, or audited.

There are hopeful signals in Europe. In 2017, European Union countries started requiring corporations to report annually on their business model, policies, risks, and outcomes regarding environmental, social, and employee matters; respect for human rights, anti-corruption, and bribery issues; and board diversity. What we’ve learned is that corporations need to improve on measuring their social impact.

This is where our focus should be. We need a common, global framework for measuring the societal value of individual corporations with a mandatory baseline of disclosure requirements and metrics. Ensuring we can properly measure a corporation’s social impact will allow investment capital to generate far greater results than measuring the individual successes and failures of society’s most disadvantaged people.