A New Market for Social Good Awakens
While still in its infancy, the field of impact investing is rapidly evolving. The market has moved beyond negative screening to include innovative solutions that generate both financial return and social impact, while connecting investors’ values with their portfolios. And the growth of this field is being driven by investor demand. In a recent survey, 43 percent of investors cited that their investment decisions are a way to express their social, political and environmental values. This sentiment is even more pronounced among the millennial generation, among which nearly 70 percent invest with these considerations in mind.
Social impact bonds (SIB), or pay-for-success programs, are one pioneering form of social impact investing that holds great promise in unlocking much-needed capital that can address pressing social challenges, such as chronic unemployment, education and training, energy, poverty, or HIV prevention. These innovative financing mechanisms can help state and local governments provide funding from private and institutional investors to select social service providers, such as nonprofits with a proven track record of success, to further needed government social programs.
This new model has the potential to be one of the best illustrations of shared value corporate social responsibility (CSR) today. Not only can it create financial returns and measurable social and environmental impacts, but the financial benefits are realized by investors only if and to the extent social and environmental benefits are seen.
Over the past several years since this inventive financing model emerged, we have seen pronounced growth of client interest in directing capital toward programs and organizations proven to produce positive outcomes in their communities and in society. The government is taking note, too – in fact, President Obama’s full-year 2014 and 2015 budgets have proposed a $300 million incentive fund at the Department of the Treasury to help state and local governments implement SIB initiatives in partnership with philanthropies that focus on job training, education, criminal justice, and housing. And, the Harvard Kennedy School has established an Impact Bond Technical Assistance Lab to provide pro bono technical assistance to state and local governments that are implementing SIB-based pay-for-success programs.
We believe it’s important to be part of the conversation with these groups and others, and as a global financial institution, we focus on adding value where we can be most helpful. In January of this year, we partnered with Bridges Ventures on “Shifting the Lens,” a report that outlined a set of practical risk mitigation tools for impact investing. Our hope is that the implementation of these tools will create a more accessible investment and attract a wider range of investors. We’ll be releasing another report with Bridges Ventures that identifies emerging SIB models globally.
We are also focused on leading the way with innovative partnership models required of SIBs. For instance, in 2013, we raised $13.2 million from foundations, endowments and high net worth investors to fund a 5 1/2-year pay-for-success program to provide comprehensive reentry employment services for 2,000 formerly incarcerated individuals in New York City and Rochester, New York. If the program succeeds in cutting recidivism rates by at least a threshold amount, the state of New York has agreed to "pay for success" with investors earning back their original investment, plus a rate of return. In the end, these instruments potentially allow governments to scale successful programs more quickly, without bearing the upfront funding costs.
We expect results can be replicated for other sectors of society and other pressing social issues. For example, we are currently assessing the use of innovative social financing to address shortfalls in the funding of effective reintegration and ongoing support services for military veterans. There are more than 21 million veterans living in the U.S. today, many of whom face employment barriers, struggles with homelessness and chronic physical and psychological challenges associated with their service. Our feasibility study will assess how new financial instruments and programs could help, how they would be funded and their success measured.
While groundbreaking, SIBs and other forms of social impact partnerships are but the most recent example of innovative approaches to connecting investors’ capital to their beliefs. As we look ahead, we’re committed to growing our impact investing capabilities and to further developing intellectual capital in the field. Through our work and research, we look forward to driving capital towards projects and businesses that have a strong social mission and that allow for investment in a better world, and a better future.
 2014 U.S. Trust Insights on Wealth and Worth