Building Social Bonds

By Shannon MacDonald, Michael Wenban and Gianni Ciufo

Investing for impact in Ontario

Would you invest your money to ensure recently released prisoners don’t reoffend?

A traditional investment it’s not. But social impact bonds (SIBs) are a new approach to social problem solving.

Governments across Canada are joining this burgeoning global trend and taking steps toward launching their own SIBs.

In fact, Saskatchewan is leading the charge. Its provincial government just announced its own SIB, the first in Canada. Officials in Regina hope to raise $1 million dollars to build a supported living home for at-risk single mothers. 

Think of SIBs as crowdsourcing for our most intractable problems. Instead of helping to map the human genome, however, you’re helping solve chronic problems like homelessness.

Saskatchewan isn’t alone. Other provinces are taking tentative steps forward:

• Nova Scotia, New Brunswick, Alberta and British Columbia have all expressed interest in SIBs.
• In March, the Ontario government launched a call for ideas around high-priority challenges, including housing, at-risk youth and improving employment opportunities for those facing barriers to the job market.

Meanwhile, the federal government has also recognized the potential for social financing, identifying 15 potential projects ranging from reducing recidivism among young offenders to training aboriginal Canadians in skilled trades.

Private capital for the public good

SIBs differ from traditional social programs because they seek to tackle the root cause of a social problem rather than treat the symptom. They are based on a model of intervention and prevention, seeking to create a lasting change by resolving underlying issues.

They bring together governments, social service providers, and private investors through a pay-for-performance model that compensates investors when social outcomes are met.

Here’s how they work:

• The government identifies a problem and desired outcome: reducing recidivism among parolees by 10%, for example.
• A qualified service provider offering innovative, root cause interventions signs on to tackle the problem.
• The government issues the SIB contract to raise capital from investors.
• The government agrees to pay back the investment plus interest, but only if the project is successful.

The fact that the investment is only recouped if the project is successful encourages accountability and effectiveness – attractive qualities for socially-oriented investors looking to get the most impact from their investment.

Making an impact

The broader field of impact investing, in which SIBs are one tool, is rapidly growing around the world. There are currently 350 impact investment funds controlling $36 billion in capital. (tweet this) While this is a large market, there is room for much more growth.

If just 1% of the world’s investment market was directed at impact investing, a trillion dollars could be invested in doing public good.

Even 1% percent of Canada’s capital markets would be equal to $30 billion, much greater than the $100 million the Canadian Social Finance Task Force estimated foundations are investing in mission-related investments.

What’s next for Ontario

 
A recent study by Deloitte and the MaRS Centre for Impact Investing found capital markets are starting to take note. Deloitte surveyed 80 potential investors ranging from foundations to private individuals to gauge their interest in SIBs, identifying $30 to $40 million in potential capital for SIBs. Many investors were willing to invest more than $1 million. 

Impact investing has a long way to go before it reaches its full potential in Ontario. Governments should look to SIBs in other parts of the world, especially the United Kingdom and the United States for lessons in success.

Governments need to:

• Find better tools to measure outcomes
• Create incentives to mobilize private capital
• Find a tent that’s big enough for as many social problem solvers as possible

It’s time to seize new problem-solving opportunities such as social impact bonds. In fact in an era when government-funded programs and safety nets are straining under shifting demographics and stagnating economies, there is no other choice.

To learn more about the investment potential of SIBs read our report, Social Impact Bonds in Canada: Investor Insights.

Shannon MacDonald is Deloitte’s Lead Client Service Partner to the Government of Ontario. 

Michael Wenban is a former president of the Monitor Institute and leads Deloitte’s Impact Investing initiative. 

Gianni Ciufo leads Deloitte’s National Social Finance Practice.