These solutions can only work when issues are clearly measurable and performance indicators, which measure how successful the programme has been from a social point of view, are indisputable. For example, recidivism has a clear, scientific cost for society. But these programmes can take several years before they come to an end, and before it is possible to assess whether they have been successful.
Yet there are two innovations that are particularly interesting about social impact bonds: first, their capacity to mobilise private capital to finance social projects and second, the notion of “payments for results”; for the first time with this mechanism, investors get a direct correlation between social impact and financial performance. In the case of the prison project, if successful, the UK government will pay initial investors their capital and a coupon that increases in line with the success of the project.
Beyond liquidity and absorption capacity, another key to reaching a broader audience of private investors and ultimately enable the sector to go mainstream is to offer a product with similar financial returns to mainstream investments, with the social aspect being an additional consideration.
It is also crucial to be able to demonstrate that the promise of social impact has been delivered. Although the industry has made huge progress over the last few years in terms of impact measurement and standardisation, we are still at the beginning of the process and lack efficient and universal tools to assess the heterogeneous impacts these investments are producing.
Despite all the challenges, the growth trend in impact investing is set to continue. In the last couple of years, the interest for such products has increased and more successfully it has reached clients who were not experienced impact investors.
Bertrand Gacon is head of impact investing and socially responsible investing at Lombard Odier
Key points
* Impact investors hope to generate social and environmental goods alongside financial returns.
* A majority of vehicles available to investors in this space are private equity or real asset funds.
* Solutions can only work when issues are clearly measurable and performance indicators are indisputable.
