Social impact bonds: Private finance that generates social returns

Social impact bonds are a results-based form of social impact investment. Private investors provide capital to launch or expand innovative social services that provide a public good. If the expected social benefits are achieved at the end of a given period, investors receive back their capital plus a rate of return (negotiated with public authorities and varying with the level of results achieved). Social impact bonds are increasingly common in the United Kingdom, as well as in the United States and Australia, and have begun to be used in a number of other EU Member States.

Social impact bonds have the potential to tap large capital markets so as to launch new social services. Private investors can earn attractive investment returns for assuming the risks associated with the service. Social enterprises can benefit from the business experience of investors, and the interests of all partners may be better aligned from a strict results-oriented approach. Public authorities do not need to stump up capital to launch a new service and do not need to shoulder the risk if the intervention is not successful. On the other hand, designing services where results can be accurately measured is not easy and more experience is needed before investors have a clear idea of risks and returns in this new asset class.

The European Commission has promised to facilitate the exchange of experiences between Member States with social impact bonds. The European Parliament has called for greater use of innovative financing for social benefit and for more specific proposals from the European Commission.