A dose of perspective on the SIB movement…
Perspectives On Impact Bonds: Scaling The Social Sector Through Innovation & Impact Bonds
Ian Galloway – Brookings
I recently read Joe Nocera’s column on Congress’s market-based solution to acid rain in the late 1980s with great interest. That novel policy, known as cap-and-trade, created a financial incentive for power companies to curb their production of sulfur dioxide, ultimately leading to a 76 percent reduction in emissions since the legislation passed in 1990. “The brilliance of the scheme,” according to Nocera, was “that while [cap-and-trade] set emissions targets, it did not tell power companies how to meet those targets, allowing them a great deal of flexibility.” That flexibility led to industry-wide innovation and, ultimately, a solution at scale: the all-but elimination of acid rain in the United States.
I was reminded of this success while reviewing Emily Gustafsson-Wright, Sophie Gardiner, and Vidya Putcha’s compelling new review of the global impact bond landscape. Gustafsson-Wright and her colleagues ably capture the current state of the industry—alternately known as pay for success financing or social impact bonds—and the important implications of shifting social sector resources towards an outcomes-based funding projects, like impact bonds. In particular, I was drawn to the study’s treatment of several common claims about impact bonds—10 in total, ranging from their net effect on overall giving patterns to their ability to reduce risk for government and sustain impact over time. But two claims stood out for me, in particular: the ability of impact bonds to 1) achieve scale in the social sector; and 2) foster innovation in service delivery. Of the 10 claims, only these two were found to be largely inaccurate.
I was struck by this. Like a lot of people, I had long assumed that impact bonds would follow the same trajectory as cap-and-trade, achieving scale through innovation. But as I reflected on that view in the context of the study’s findings, I’ve come to the conclusion that something has gone wrong here and that there is a real difference between how cap-and-trade was used to solve a difficult technical challenge and how impact bonds are being used to solve difficult challenges in the social sector.