In recent years there has been a groundswell of activity amongst councils, churches, charities and community groups to give greater emphasis to Environmental, Social and Governance (ESG) factors in their investing decisions. We are not surprised as all these organisations are trying to improve social and environmental outcomes for the communities they serve. Amicus is a strong supporter and has written extensively on the most mainstream product in this sector being Green Bonds. However, we believe while a great idea for some clients, the actual ESG impact of this Green Bonds is very low because there is minimal differential pricing between “Green” and “Non-Green” bonds, meaning the price signals which affect investor funding behaviour are currently very weak. In contrast, Social Impact Bonds (SIB) have an extremely strong effect as the project does not proceed without private investor funding which is often leveraged further with government support.
The basic tenet of an SIB is there is a deep and often chronic social problem which costs governments relatively large amounts of money to alleviate with limited success. Typical examples are: recidivism, foster care, and homelessness. There exist many new experimental programs that have been proven (often in overseas countries) to make improvements to these difficult issues. SIB’s allow these programs to be funded (usually partially by government and partially by external investors) by shifting part of the risk onto investors and putting strong disciplines and structures around the delivery of the program by competent service providers with outcomes stringently measured against pre-agreed benchmarks to determine payments.
SIB’s are not a charitable donation, but a genuine growing asset class where the majority of SIB’s overseas and all in Australia have produced strong results for investors (so far). Amicus believes the primary reason for these early successes is the strong alignment of interests between all parties involved. This results in the selection of only projects with high probabilities of positive outcomes and service providers who can execute effectively. If the program succeeds, sponsors (usually government entities) who guarantee the success payments to investors make economic gains from the social problems mitigated and acquire proven programs to roll out going forward; service providers (who are typically large charities) get funding to run the programs and will get ongoing funding for other projects as they are seen to be competent at delivering; and bankers, lawyers, accountants involved who provide the frameworks for the transactions all get large amounts of kudos. In contrast if the program is not successful, the reverse is true and this may kill off this nascent asset class so everyone involved is highly motivated to see the programs succeed. The outcomes measurement on which SIB payments depend is highly transparent so success, partial success or failure is obvious.
For investors, the twin reasons for consideration are: the strong economic success of these bonds both overseas and in Australia, and the very positive impact of their investment dollars, which if the programs are successful, produce many multiples of the original investment in both social and economic terms (far better outcomes for program participants at less cost to society).
Amicus fully appreciates this is a new asset class for many investors and it is impossible for us to comprehensively explain all aspects of SIB’s in one page of our newsletter; so if you would like to learn more please feel free to call or email Amicus and we can provide you with a greater overview and concrete examples of recent and live SIB issues happening in Australia in 2018.
