On the 4th of March, the 1st Belgian SIB ( Social Impact Bond) structured and financed by BNP...
How to properly structure a Social Impact Bond: challenges and opportunities
On the occasion of the Barometer of Social Entrepreneurship 2019's publication, published by Convergences, Maha Keramane, Head of Social Entrepreneurship and Microfinance Europe at BNP Paribas and Emmanuelle Davy, Social Entrepreneurship Project Manager explain the stakes and the impacts of the Social Impact Bond .
Often described as a “social” public-private partnership (PPP), the Contrat à Impact Social (CIS), the French cousin of the Social Impact Bond (SIB) in the US and UK, is, in essence, a multi-actor tool that aligns with the UN’s 17th sustainable development goal.
These instruments enable joint innovation by diverse but complementary partners on an experimental project in the public interest. Here is how they work: private financiers (e.g. banks, companies) assume, for a fee, the risks of failure of a project carried out by social agents (association, social enterprise, etc.). An independent, specialised evaluator then assesses whether the project has had the expected social impact. The financiers are then reimbursed by the public authorities. In the event of an unfavourable evaluation, they lose their stake.
SIB enable joint innovation on an experimental project in the public interest
The SIB a tailor-made tool, adaptable to the social agent’s DNA
This mechanism allows the social agent to avoid financial risk and to benefit from stable funding over several years in order to test out social innovations. The approach also makes it possible to demonstrate with almost scientific precision the social added value generated by the project. In this way, the social agent can demonstrate that its action provides an effective response to a social problem that has been poorly addressed or ignored, while at the same time saving money for the public authorities.
SIB allows the social agent to benefit from stable funding over several years in order to test out social innovations
If successful, such an experiment may even become a focus of public policy, as with the first SIB in Peterborough, England, which reduced the recidivism rate of prisoners serving short sentences to below the 7.5% target. In orchestrating the whole process, the structurer manages the contractual and organisational structure, seeks investors, creates a tailor-made financial product that promotes social impact, and coordinates interactions, while ensuring that the interests, constraints and risks of each party involved are respected.
One for all
The structurer must also play the role of “interpreter” to ensure a meaningful dialogue between all stakeholders – a key element for the project's success. While an association may need to familiarize itself with the "ROI"(Return On Investment) so dear to investors, the investor, on the other hand, will need to learn to work with the social return on investment, or “SROI”.
To ensure a balance between the parties involved in the bonds, the contractual provisions must be understood by all. It is therefore essential to clearly define the evaluation criteria and indicators, the rights and duties of each party, the terms of payment, and so on, because the terms of the bond must absolutely reflect the alignment of the interests of all the SIB stakeholders. In this five-party initiative (Social agent, payer for outcomes, investor, evaluator, structurer), trust is key and must be built over time. The common denominator must be found that satisfies each of the actors involved with optimism, perseverance and pragmatism. Above all, it is vital not to lose sight of the ultimate focus of this whole scheme: the intended beneficiary.
Measuring impact: a key challenge for the SIB
Should the added value of a solution be measured in relation to the problem it is intended to solve, or in relation to existing schemes? What criteria should be chosen, and over what length of time? What should serve as a reference value? On issues that are not well addressed or that are tackled from a new angle, baseline data may be incomplete or non-existent. The challenge is therefore to identify clear, measurable and compelling indicators that are both ambitious and realistic. Properly assessing the feasibility of collecting these data over the SIB’s life is essential, and must take into account the source and reliability of the data to be measured.
In the case of the SIB issued to fund Adie, a French association that issues microcredit to foster employment in isolated rural areas, the right compromise between feasibility and lofty goals was to define success as a permanent job held for two years.
The challenge is therefore to identify clear, measurable and compelling indicators that are both ambitious and realistic.
Other results are more difficult to capture. How does one measure less-tangible progress, such as skills development (e.g., resume writing, interview skills) or improved employability? In addition to quantifiable indicators that trigger repayments, more in-depth qualitative analyses are often carried out on other observed impacts.
The SIB also promotes innovation because it requires all actors involved to step out of their comfort zone.
The SIB also promotes innovation because it requires all actors involved to step out of their comfort zone. Associations like Article 1 and La Cravate Solidaire are thus discovering bond issuance, commercial registries are enrolling foundations, ministers are adapting their budget processes for shared payments, and banks, like BNP Paribas, are learning yet another way of viewing risk-profitability-impact… It's a new mix of firsts for everyone!
From surprise and enthusiasm to resistance, the SIB is challenging preconceived ideas, secular habits, and traditional ways of working, all for the benefit of social innovation.
Maha Keramane, Head of Social Entrepreneurship and Microfinance Europe at BNP Paribas
& Emmanuelle Davy, Social Entrepreneurship Project Manager for the 2019 Social Entrepreneurship Barometer.
The Social Entrepreneurship Barometer
Photos header ©Flamingo Images
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