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The Future of Social Impact Bonds in the US Summary Report

Forum for the Future: Helen Clarkson, James Goodman, Clare Martynski The Raben Group: Jamal Simmons, Karen Marangi, Donald Gaitlin, Robert Raben

1. Introduction “An ounce of prevention is worth a pound of cure” - Benjamin Franklin Social Impact Bonds (SIBs) are a particular type of impact investing. Despite their name, they are not bonds or debt instruments but rather multi stakeholder partnerships managed through a series of contracts. These contracts are outcomes-based, in which a commissioner (often a public sector body) sets up a contract with one or more non-profit organizations to provide a service. The public sector body commits to pay for this service on the basis of the improvement it makes to social outcomes for a defined population1. The primary aim of this project is to better understand the current and potential future political landscape impacting the development of Social Impact Bonds (SIBs) in the United States, and to proactively develop a broader communications strategy to address the political discourse on these innovative financial vehicles. Forum for the Future worked with the Rockefeller Foundation and the Raben Group to develop scenarios which examine the future of the funding of social outcomes in the US in the next twenty years. These scenarios have formed the basis of the SIBs communications strategy prepared by the Raben Group for the emerging field of SIBs. About scenarios Scenarios are plausible, coherent and challenging descriptions of possible future worlds. They can be a powerful tool to help organizations navigate the future. By exploring what might happen, and 1


tackling uncertainty head-on, organizations can be better prepared to mitigate the risks and seize the opportunities presented by a changing world. Scenario planning is a way of discussing complex future issues in a clear and structured way in order to identify and prioritize risks and opportunities. Scenarios are tools that we use to help people think about the different possibilities in the future - they are not an outcome in themselves. The aim is to challenge perceptions about what the future holds and encourage people to consider uncertainty when creating strategy. Scenarios are not predictions and there is no such thing as a “right” scenario. The future may contain elements from of all of them, although as they are developed using expert insight and up to date literature, it is unlikely that nothing in the scenario comes about. The important thing is to use the scenarios to stretch thinking and challenge assumptions, to help people imagine a future that is very different from today. No one can predict the future and our assumptions are constantly challenged by developments.

2. Key Findings It is, of course, impossible to predict exactly how the political landscape of the US will play out in the next couple of decades and therefore what the future of SIBs might be. However, the ambition of this project was not to make a prediction, but to develop a set of scenarios that explore the possible outcomes for SIBs and a communications strategy that helps shore up the success of these tools. The key messages are set out in section 6 below and are shaped by the insights from the scenarios work that success for SIBs should not be defined too narrowly.

Through this work we have observed that there appears to be an assumed path for a successful SIBs market: that success means that SIBs become a mainstream financial product. However our scenarios show SIBs surviving or having different impacts in different possible futures. For example, in Scenario Four SIBs have proven the importance and expedience of funding preventative approaches in the medium term, leading to changes in government spending policy, and the evolution of different SIB-type products. In this scenario, therefore, SIBs have created significant change, even though SIBs themselves look very different. We believe that this should be deemed a success for SIBs, even though there is the possibility for them to have this demonstration effect while no longer continuing to exist as vehicles themselves in the long run.

The diagram on the next page outlines the different possible future pathways for SIBs that our scenarios suggest. The strategic implication of this diagram supports the conclusion of many players in the field – that success of early SIBs is critical and the next five years will be the testing ground for the players in the market. However we believe that in order to future-proof SIBs, strategy makers and communicators should remain neutral as to which of these final states SIBs are headed for and allow success to encompass this range.

One of our interviewees said early in the project: “We’re focusing a lot on the cost savings to government. But what we should be doing is to set a benchmark for the outcomes we want achieved and the price we are willing to pay for those outcomes.” By focusing on SIBs as a financial product, rather than as a means for financing social outcomes, some of the possible success pathways may be downplayed. 3

Possible Future Pathways for SIBs

INVESTOR SHIFT • Wariness among first round investors as new innovations capture imagination

BIG MARKET • Large market for SIBs though could take different forms: + Many small SIBs And/or + Fewer big SIBS attracting sovereign wealth and pension funds + Individual investors









• New investors appear after success



• Programs, intermediaries and evaluators create market • Early Investor class grows

BOUTIQUE MARKET • Deals done one-by-one – very specific interest driven outcomes • E.g. big deals financed by major funds or small ones done by individuals

• First SIBs mature and pay out proving concept

PUT SELVES OUT OF BUSINESS • So successful at proving social innovation – Government switches funding to prevention policies • Government cuts out private financing and keeps savings

EXOTIC SIBS APPEAR • Conservative efforts to prevent outcomes such as abortions

FAILURE If any of the factors that are necessary to nurse SIBs from infancy to adolescence fails to materialize, SIBs will lose momentum and fail.



• Companies do SIBs without government




3. Factors Affecting the Future Landscape for Social Impact Bonds To identify the key factors that will affect the future of SIBs we conducted desk research to ensure that we were building on the growing body of work around SIBs and social impact investing and conducted interviews with a range of stakeholders from across the sector. We also drew on Forum’s extensive futures research and work in the finance system.


It would be easy to devote an entire report to any one of these subjects. What follows is therefore a high-level overview of their possible future directions, concentrating on the broad themes within these sections, and the linkages between them.

From this research we brought more than 80 discrete factors to a workshop with leading thinkers in the field and used their expertise to prioritize the factors for their importance in shaping how SIBs will evolve. We used a second workshop to choose the macro factors with the most significant role in shaping the future for SIBs, and used these to develop scenario axes.

The US Economic and Political Context At the macro level the impetus and drive for Social Impact Bonds and other forms of impact investing is, to a large extent, the result of reduced availability of governmental funds for social outcomes as a result of both the economic crisis and the current politics of deficit reduction. At the same time there is growing evidence base for the potential cost savings from preventative programs.

Below we examine the key factors from our research that the workshop participants prioritized, which we have clustered together under two broad themes: the US economic and political context, and social impact investing.

While ideally government would shift its funding where possible into prevention, there is a fundamental mismatch between the period of time over which evidence of success for prevention accrues versus the electoral cycle. How these macro factors

“We will continue to see a very tight fiscal market. There is no way that government will have more money for the next 10 to 15 years, so we’re having to do a lot more with a lot less” – project interviewee play out in the coming decades will be likely to continue to set the backdrop for how SIBs evolve. The US is still recovering from the 2007-09 recession: although the country has not been officially in recession since June 2009, growth has been relatively slow and projected to continue that way for the next few years with the IMF forecasting growth of of 1.6% for 2013, and 2.6% for 20142. While poverty levels have risen as a result of the recession3, the amount of money available for social funding has decreased against a backdrop of cutting budgets to reduce both federal and state deficits. Since 1970 the US Federal Government has run deficits in all but four years (1998-2001). Much of the projected increase in government spending is linked to entitlement programs (mandatory spending including Social Security, Medicare and Medicaid) which are growing as a share of revenues as the ratio of workers to retirees is decreasing4 - a trend which will continue as the population ages. State and city budget deficits are also growing, with corresponding impacts on social service delivery –

a recent report found “The state budget gaps of the last five years led to $290 billion in cuts to public services and $100 billion in tax and fee increases… Federal aid mitigated the harmful effects of the spending cuts in the early years of the budget crunch, but its expiration last year had a catastrophic effect, making 2012 the worst year since the downturn began for cuts in funding for services5.” The lack of funds to invest in social outcomes is seen as a key driver of impact investing and focusing funding on effectiveness, as one interviewee said: “Lack of funds is not exclusively a bad thing: it can lead us to be more creative and look at things with a fresh eye”. The rising deficit has heightened the political debate about the role of the government in providing social services. A survey by the Pew Research Center found that the role of the government in delivering social services is the single issue that most divide Democrats and Republicans (75% of Democrats vs. 40% of Republicans believe the government should “take care of those who cannot take care of themselves”6). Although the scenarios with stronger economic growth (One and Two) might be expected to have better social outcomes than those with weak growth, other factors playing through the scenarios temper to this to some extent. As we played out other factors from the research through the scenarios, the world of Scenario One seemed likely to be one in which the spoils of growth had not been shared evenly across society and stratification was high. On the other hand in the fourth scenario, weak economic growth has fueled innovations in efficiency and a shift to preventative measures which are benefitting people. Alongside the economy, the workshop participants ranked ‘trust in government’ as one of the most important macro factors that will shape the future for SIBs, given the need for investors to trust that government will pay out. Trust in government has historically been quite low in the US compared to

2 3 4 5 6 7

other developed countries, with only around 38-45% of people trusting government ‘to do what is right’. Trust has fallen further during the recession and, according to research by the Pew Center, reached an all-time low in 20127. In its research the Pew Center found that trust tends to decline during economic hard times, but can rise when Governments successfully handle natural disasters or during times of war8. In Scenario One we see that, despite strong economic growth, successive governments have failed to move the needle on trust, in part because they are not credited with having driven growth. Conversely, in Scenario Four despite there being weak economic growth the government is seen as having becoming more streamlined and efficient, and trust has risen as a result. One factor playing into public distrust has been the growing partisanship in politics in recent years. While stakeholders did not think that we would see any reduction in partisanship in the coming decades, they felt that the key question – as one of them posed it - is “how do we avoid SIBs being politicized?”. As another noted: “The government appropriation process – and every other process – has grown more and more politicized”. Alongside trust in government, trust in the private sector was also viewed as an important factor in driving the development of SIBs, as it might determine preferences for entrusting outcomes to the private sector over the public sector. The private sector has traditionally been trusted more than government in the US. However, trust has fallen in the wake of the recession, often attributed to continued slow economic growth and high unemployment levels9. A number of surveys have also found that the public’s expectations from the private sector are increasing, with an increasing share of the public seeing the private sector as having a role in solving

social issues. Social Impact Investing and SIBs Some of the trends that will drive the growth of SIBs in the coming years are endogenous to SIBs and others affect the social impact investment space more broadly, however they are clearly highly related and many of these trends will drive each other. Overall the growth of the space is being driven by the lack of funds for social outcomes (as set out above) and an interest in new funding models. SIBs require a high-level of cooperation and interest from a range of different parties, from government issuers to investors to intermediaries and non-profit service deliverers, the relationships between the different parties are set out in the diagram below10. There are key uncertainties that will drive the evolution of the market at each part of this model. Stakeholders felt that investor appetite for risk - and how this will change over time - is crucial to SIBs’ development. Current SIB models place the risk on intermediaries and investors, removing risk of program failure from the government issuer. While 17 foundations were willing early-adopters in the first SIB, it is not yet known how much of this risk mainstream investors will be willing to take on. But the Center for American Progress warns: “If social impact bonds end up combining equity-like risk with bond-like returns, then the market will likely be limited to philanthropic and socially minded investors willing to accept lower returns in exchange for promoting social goals.”

without support from government, SIBs will never take off”. The Monitor Institute proposes other possible policy mechanisms to support SIBs including a reduced capital gains tax on impact investing products, scrutiny and clarification of the meaning of “fiduciary duty”, or the development of a fund to catalyze impact investments similar to the Community Reinvestment Act, but for a broader set of social and environmental issues. They suggest that governments could also leverage their role as large-scale purchasers by providing anchor demand for promising enterprises, enabling them to prove and scale their business models12. Another set of issues identified were government ‘siloism’ and ability to provide data to support the evidence needed for payouts. Federal, state and local governments are widely perceived as lacking coordination and communications between agencies and different levels of government. For example, the department that funds prisons may not be the same as the agency funding interventions designed to prevent recidivism. As a result, savings to society resulting from a social intervention may not always be clearly visible, which is also a worry to potential investors: “Inadequate impact measure-

ment practice” was listed as a key challenge by investors polled by JP Morgan13. Some felt that as data becomes more accessible and easily integrated, such silos may start to break down, others that the lack of trust in government might limit government’s ability to capture data in the future – an outcome we see in Scenario Three. This trend was seen as possibly playing out through the evolution of privacy laws in the coming decades. There were also some near-term factors that were felt to be critical in the performance of SIBs in the next five years: the performance of early SIBs building increased trust in the model, the availability of sufficient intermediaries, and the availability of proven solutions to fund. While there was disagreement about how uncertain these factors were (some stakeholders felt strongly that there are definitely sufficient intermediaries, others not quite so sure) there was consensus that the next five years are critical for the growth of the model. We have reflected this in the diagram in section 2 above.

Government support is seen as vital, but highly uncertain. As noted in the section above, the reduction in funds available should drive governments at all levels to seek innovative solutions, however it was felt that this alone would not drive SIBs to success. One interviewee said “People often dismiss the role of government; government will pay returns and that’s all we need it for. But

7 8 9 10 Adapted from diagram from “A New Tool for Scaling Impact: How Social Impact Bonds can Mobilize Private Capital to Advance Social Good”, Social Finance Inc, 2012 8 11 Social Impact Bonds: A promising new financing model to accelerate social innovation and improve government performance, Jeffrey B. Liebman, February 2011, Center for American Progress

12 Investing for Social and Environmental Impact: A Design for Catalyzing an Emerging Industry, The Monitor Institute, January 2009 13 Market.pdf 9

4. Scenarios for the Future of Social Impact Bonds At the second workshop participants worked in groups to experiment with different factors to see how they could work together as frameworks. Having experimented with different combinations, the group settled on the following framework which takes economic growth and trust in government as the key axes underpinning the scenarios.

Four groups then took one quadrant each and started to build the scenarios, including thinking about scenario narratives and how SIBs and impact investment more broadly could look in each world in 2030. Forum for the Future took this work to build the final scenarios set out below.

Economic Growth

Weak Trust in Government







Strong Trust in Government

Economic Contraction



5. The Four Scenarios Below are the summaries of each of the four scenarios – an overview of what is happening in each of the 2030 worlds. The complete scenario texts are available on request.

Scenario One Weak trust in government, strong economic growth The expansion of the global economy and resurgence of the financial sector have sustained two decades of slow but steady growth, and the US economy is strong. With more capital in circulation, government has reduced the deficit, though has not been able to eliminate it completely. The American public credits neither political party for the growth, and increasingly calls for government to keep out of the way of business to ensure continued progress. The specter of the remaining deficit creates broad support for reducing public spending, and is used to justify the “outsourcing” of social goods to the private realm.


with inequality. Across the country, a debate on the pernicious effects of stratification is taking place. While small pockets of activism rise up against the power of the private sector, these movements tend to flourish only briefly and then burst. Social impact bonds have wide appeal as an investment class perceived to be a “private sector approach” to addressing social concerns, and are used for an extensive range of applications. The investment market includes social impact bonds issued in the Internet-based currency, Bitcoin, as well as products funding pro-life measures to encourage young mothers to keep their babies.

Scenario Two

Though the economy is robust, financial gains have not been evenly distributed and unemployment runs high. The principle beneficiaries of growth are clustered at the upper end of the income spectrum, leaving those at the bottom largely cut off from social services and support.

Strong trust in government, strong economic growth The economy is growing and public trust in government runs high. Policymakers have successfully brought down the deficit, and in the wake of the 2017 financial crisis federal spending is tightly focused on data-driven interventions that offer measurable value for money and social returns. Government has pared down its role in providing services, and instead supports private sector initiatives that deliver social goods.

Foundations and corporations have stepped in to fill some of the gaps in service provision, bringing goods namely to the areas in which they operate. As a result, the delivery of social goods varies widely between states. Society is not blind to the problems associated

The public holds Wall Street responsible for the crisis, and as a result is receptive to new regulatory and cultural checks to ensure that capital flows to stable investments with long-term returns and social impact. The emphasis on private sector activities has resulted in a scaling up of businesses that are

efficient, produce measurable outcomes and deliver goods to hard to reach populations. However, sections of society remain hidden from view and largely cut off from the successful economy. These hard to reach groups are left off the roster of government-led interventions as they do not represent value for money and cannot attract private sector support. In the absence of government-led or commercial interventions, they are dependent on private philanthropy.

Scenario Three Weak trust in government, weak economic growth Following two decades of limited growth, the US economy is weak. Any hopes for recovery that have been spurred by short periods of growth, have been swiftly displaced by prolonged periods of contraction, contributing to growing public dissatisfaction and widespread malaise. The public blames government for not lifting the country out of the mire, and no president has remained in the White House for more than a single term. Polarized political parties offer different solutions, and the House and Senate have changed hands repeatedly, though no party has devised an effective strategy for growth. Budgets are continually stalled and lurch from one crisis to the next, resulting in tax and spending cuts that leave no room for paying off the deficit. The effects of this situation resonate across society, but none are so affected as the poor. Social programs have been scaled back to their bare minimum, and are focused on short-term goals that can be accomplished within a single electoral cycle. However, in the interests of maintaining a healthy and educated domestic workforce, the private sector is funding social impacts, and companies are investing unevenly in select states. Social impact bonds have been eliminated from the investment landscape, but foun-

dations and companies have refined their original model, and established partnerships to finance the innovative provision of social goods.

Scenario Four Strong trust in government, weak economic growth The US economy struggled for years as the nation reckoned with its new, and diminished, place in the world market. However, following a period of protracted depression, America’s political and economic values have been realigned. The concept of “growth” has slowly but surely come to be redefined as an index of positive social outcomes, and gross domestic product is no longer regarded as a relevant metric. The US has ceased to be a center of private sector activity, and as a result, investment is much harder to come by and unemployment has increased. In an attempt to cut costs, government has downsized and become more efficient, with funding now focused on outcomes and prevention. Political parties, while still ideologically distinct, have converged round the goal of rebuilding the economy, leading some commentators to observe that the US has “united in the face of adversity.” Government supports local initiatives, and engages citizens to selectively invest in the projects and initiatives they care most about. Communities are encouraged to design and administer their own social welfare programs, and successful models are being replicated across the country. In this poor investment landscape, impact investment mechanisms are no longer deemed the “risky” alternatives that they once were. Social impact bonds are a popular investment choice and their success has initiated a broader trend in outcomes-based financing and investment in prevention programs.


6. Summary Communications Strategy

The team from Forum for the Future worked with the Raben Group to tease out the outcomes for SIBs across the four scenarios and to understand what success for SIBs looks like. The Raben Group used this to develop a communications strategy for the Rockefeller Foundation. The development of SIBs in the early phase is quite similar for success under any scenario. Simply put: there must be more successful SIBs that prove the concept. That requires the identification of a host

of proven programs, intermediaries and evaluators and actual government pay-out for the success achieved. After the market has matured past its current state of infancy, there are several possible outcomes for SIBs. Without proving the concept and growing the number of SIBs, they likely fail and none of these prospects is probable. Our team boiled down the findings from the four scenarios, and the pathways diagram above, into the following possible outcomes:

Outcome I: Big Market – As more Social Impact Bonds are implemented, results are proven by evaluators and governments pay out returns to investors, the market grows in size. Potential investors include high net worth individuals; family and institutional foundations; commercial banks with Community Reinvestment Act requirements; and pension and sovereign wealth funds. This market could include large baskets of small SIBs that are easily packaged together to spread the risk out more evenly or SIBs that are quite large to accomplish goals such as energy conservation. Outcome II: A Smaller Boutique Market – SIBs achieve their prevention objectives, meet commonly accepted standards of proof and the government proves to be a reliable counterparty, however market conditions, fickle investor appetites or other investment innovations may limit the growth of the SIB market. Though quite reliable and used across the country to achieve various policy outcomes, SIBs remain a boutique financing instrument with regular investments made on a case-by-case basis. Outcome III: Success Puts SIBs Out of Business – Social Impact Bonds could be proven remarkably successful at achieving their prevention goals and as more investments are made in additional policy categories, the confidence in SIBs grows significantly. As a result of these proven prevention successes, governments seeking to cut costs may shift resources to funding prevention models. Without the uncertainty of prevention that existed before SIBs, governments no longer see the necessity of raising private capital and eliminate that financing option from the policy toolkit. Instead, governments finance the prevention programs themselves, keep the proven programs and intermediaries that assured success, and save or reallocate the money that would have gone to investors under the SIB arrangement. In any of these scenarios several common developments are possible: • New investors are likely to replace many of the initial investors who tire of SIBs as they become more routine instruments and look for new opportunities to innovate. • Once the market grows, foundations or corporations could begin to finance SIBs without government involvement. For example, health care companies seeking to lower costs later could raise money for prevention programs using SIBs. • Governments could issue SIBs for more conservative social policy goals such as abortion prevention, abstinence programs or to lower the divorce rate. While these avenues may raise concerns among some early SIB proponents, their development may be the price of maintaining bipartisan support.



Suggested Messaging Social Impact Bonds are innovative investment instruments that enable governments, non-profits, philanthropies and private investors to collaborate on fixing stubborn social policy problems. SIBs scale up proven long-term solutions that improve lives, use independent auditors to rigorously evaluate their results, save government money and provide returns to investors. This message provides an overarching context for Social Impact Bonds that can be used with any audience; however supporting arguments and relevant messengers should be tailored to specific audiences. The matrix below outlines key supporting arguments and broad profiles of messengers who will resonate with each audience. Strategy: Proponents of Social Impact Bonds should remain focused in their communications on three key elements: 1. The population the SIB is intended to help -without likely positive impact on social policy problems, all parties could spend their resources elsewhere; 2. The collaborative and innovative nature of the investment -- breaking down the barriers between pools of capital and between publicprivate and non-profit efforts to do something

new and different is a strong selling point; 3. The proven results that will yield government savings and investor returns -- all parties have other opportunities to invest their time or money in social programs or financial instruments, so proving social policy results and getting financial returns is critically important to all involved.

Audience: Each targeted audience plays a role in the adoption of SIBs as an impact investment instrument. They are private and philanthropic investors; elected, appointed and civil servant decision-makers; non-profit implementers; and opinion leaders.


14 The media are not listed as an audience as they are primarily key engagement channels through which messengers will communicate with intended audiences.

Competitors: Each targeted group has alternative avenues to pursue instead of Social Impact Bonds, but unlike those alternatives, SIBs are a unique and innovative way to break down barriers between sectors and scale up programs with proven results. • Investors have several ways to support promising or proven programs including other impact investments or direct gifts. Direct philanthropic gifts offer donors greater tax benefits and direct influence over the receiving programs. • Alternate CRA Investments – Depository institutions have established CRA investment models to choose from, typically hard assets. CRA guidelines encourage innovative investments and SIBs offer a creative new way to invest in underserved communities to achieve measurable impact. • G  overnment Bonds – These options for those investors looking to diversify their portfolios

present no opportunity to target funds to address specific outcomes. • Government Programs – Policymakers can direct public funds to promising programs and exert more control without the additional layer intermediaries occupy. • T  raditional Non-Profit Programming – While SIBs will require rigorous evaluation, reporting requirements and paperwork already present hurdles to non-profits seeking funding from foundations and government. SIBs will present greater funding opportunities with a longerterm time horizon for program planning and execution.

Recommendations We recommend the following broad steps as a jumping off point for action: 1. Continue to prove the concept with additional, diverse SIBs. There is great concern among potential financial investor and policymakers about SIBs due to the dearth of evidence and individuals with direct experience. As the number of successful SIBs grow, so will the comfort level of potential participants. 2. Develop potential ambassadors to espouse the efficacy and potential of SIBS. People who have “skin in the game” will make the

most valuable messengers. Those who have either created a SIB, financed one or are performing an intermediary or service delivery function can speak with the most authority to targeted populations. 3. Educate broader audiences with an expansive program that includes one-on-one meetings, interviews, speeches, panel appearances and progress reports.

In the initial phases one-on-one meetings will be a key tactic for building support, specifically in the donor community. The number of people with the resources to devote to SIBs is quite small, as is the number of issuing authorities. Our research indicates these actors will respond most positively to respected voices of similar stature and experience who espouse SIBs as a valuable tool. Conclusion This plan will help establish Social Impact Bonds as a sound feature in the toolbox for policymakers, non-profit service providers and investors focused on measurable results. The strategy, messages and tactics included here should resonate with the targeted communities despite any of the possible outcomes revealed by the Forum for the Future strategic process.


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