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Demand for social change is rapidly increasing. Greta Thunberg’s speech to the United Nations, branded a milestone moment for the climate change movement, forms part of a wider landscape in which the groundwork for social change is being laid. The United Nations Sustainable Development Goals (“SDGs”) provides a shared blueprint to address social challenges, including those relating to poverty, inequality and climate change, with an ambitious 2030 target date. With the challenges identified, targets agreed and deadlines set, social impact investing’s role in providing the necessary finance has become key.

Authors: Ranajoy Basu Andrzej Janiszewski Priya Taneja Christos Antoniou

The typical structure of social impact investing

Social impact bonds (“SIB”) (which, confusingly, do not necessarily include an issuance of ‘bonds’ at all) seek to channel money to projects with a positive social impact while allowing governments to only make payment once the desired results have been achieved. The appetite for such projects has been growing since the first SIB launched in 2011 and development impact bonds (“DIB”), the close cousins of SIBs funded by non-governmental entities, have seen a concomitant rise in popularity.

While there are several ways an impact bond can be structured, a typical structure involves: 

  • a risk investor providing upfront capital in order to achieve pre-agreed target outcomes;
  • an intermediary, acting as project manager by coordinating and managing the ongoing implementation of the project; 
  • implementers who execute the intervention and coordinate with the intermediary on the implementation of the project; 
  • an independent evaluator who evaluates and confirms whether and to what extent the success metrics, as agreed between all key stakeholders at the outset, have been met; and
  • an outcome funder who will make payment to the risk investor commensurate with the extent to which the target outcomes have been achieved. Depending on the extent to which the target outcomes have been achieved, the risk investor may receive more or less than its initial investment.

Funding in this structure has typically been provided by way of grant funding, cognisant of the fact that the risk investor is usually a charitable or philanthropic organisation. However, private investors are increasingly applying capital market principles to outcome-based social impact structures, providing the tools to scale up social impact investing to the levels required to meet the targets and deadlines set by the SDGs.