British social impact investing has left the US playing catch-up

http://www.theguardian.com/business/2013/dec/20/uk-social-investing-us-impact-bond

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It’s rare when America plays catch-up with other countries on matters of business. But when it comes to “social impact investing”, catch-up is exactly what the US is doing.

Social impact investing marries corporations, government and non-profits to make money, and do some good in the process. The reason is simple: governments can't afford the full slate of environmental and social services, corporations have the money, and non-profits need it. 

“I think there’s just a growing a realisation that there’s more money in the private capital markets than we could ever need to meet all the pressing needs in our societies,” said Kippy Joseph, associate director of Innovation at the Rockefeller Foundation.

The British government has long thrown its support behind impact investing, early adopting an increased awareness about big, global issues like climate change, alternative energy, and a crippled social services sector. In 2012, the UK saw the birth of Big Society Capital, a social investment bank that has at its disposal £400m in unclaimed assets from UK bank accounts and a further £200m pounds from the nation’s consumer banks.

While the US government has been more supportive lately, there isn’t yet an equivalent to Big Society Capital, said the bank’s chair Sir Ronald Cohen, a leading venture capitalist and early adopter of social investment. “Because [impact investment] started in the UK, we started to worry earlier about an ecosystem that could sustain it,” said Cohen. The Giving Pledge, a campaign that encourages the world’s wealthiest individuals to give half of their fortune to charity, may put up a few billion dollars to create something similar to BSC, but no concrete proposal has so far been put forward, said Cohen.

The US government, however, has been more shy. Only now are the government, non-profits and the private sector starting to work together in the US in nascent collaborations.

In part, America’s latecomer status was due to a simple language issue. For years people had spoken of ethical or socially responsible investing, but those terms weren’t “enticing”, said John Goldstein, managing director at Imprint Capital. To remedy this public relations snafu, in 2008, the Rockefeller Foundation very purposefully coined a new term: “social impact investment”.

Since then, the institution has provided more than $20m in grant money to promote the new term. "It made a very real difference," said Goldstein.

Millennials embrace impact investments

Experts also point to a huge transfer of wealth to a younger generation that is far more engaged with social issues.

“The next generation has a very integrated view of what they expect from their lives,” said Audrey Choi, CEO of Morgan Stanley’s new Institute of Sustainable Investing. “They want to make sure the causes they’re most passionate about, are at best supported by their investments, and at minimum not counteracted by them.”

The stale economic climate, in which companies are on the lookout for new revenue streams, is another factor. There were a total of $3.74tn in socially responsible investment assets at the end of 2011, a 22% increase over 2009, according to a recent study from the Forum for Sustainable and Responsible Investment.

One in every nine dollars invested in America is engaged with some form of impact investment, for a total of roughly $33.3tn in assets managed in the United States. That accounts for over 11% of US investment, and its share of the overall market is growing faster than overall investment figures. Impact investments grew 486% between 1995 and 2012. During the same time, broader asset management grew much more slowly, or 376% in the United States.

Huge financial institutions are getting involved. Morgan Stanley’s multibillion dollar sustainable investment institute, launched earlier this month, aims to invest $10bn of its clients' money sustainable assets over the next five years. Goldman Sachs, which established its Urban Investment Group in 2001, has committed more than $3bn to help poor communities in the US. It is also launching a $250m social impact fund to look beyond its own balance sheet.

Barriers to impact investing

But there are still challenges. There are a lack of high-quality investments in some areas – a fact that the White House saw when it realized that, in the case of infrastructure, there are few "shovel-ready" projects. There are many impact investments to be done in sectors like real estate, but fewer in an area like social innovation, said Alicia Glen, managing director and head of the Urban Investment Group at Goldman Sachs. Social innovation is the sector that includes working conditions and education.

The area of investment getting the most attention in finance is so-called social impact bonds, or pay-for-success programmes.

Social impact bonds

Social impact bonds are not like other financial bonds, where a company issues debt and pays it back. Instead, they're contracts that generally involve three groups: a social services provider – which is sometimes supported by an intermediary – private investors, and the government.

Investors provide private capital to fund social projects typically funded by the public and philanthropic sectors. If the project is deemed a success based on an outside evaluation, then the investor receives a modest return based on the funds the government has saved. If it fails to meet established benchmarks, investors lose their money.

The first such bond was launched in the UK in 2010, and funded a programme to reduce recidivism rates among 3,000 prisoners at Her Majesty’s Prison Peterborough in Cambridgeshire. So far, the results are promising: interim figures released by Britain’s Ministry of Justice earlier this year found a 6% decrease from 2010 to 2012 in reconvictions for those released from the prison compared to a 16% increase nationally for the same period.

Social impact bonds are still in the experimental phase in the US, where there are only a handful of programmes in their early stages. One, called Roca, which has been successful at steering at-risk youth from violence and poverty, was chosen by the government of Massachusetts to be part of its pay-for-success pilot. The state has set up $27m in potential success payments. If the programme succeeds, it would serve 1,300 young people in a nearly nine-year period.

The organisation’s in-depth, data-driven approach appealed to investors who wanted to be reassured that their financial and time commitments would pay off. The resulting scheme provides a window into how other such arrangements could be conceived going forward.

“We used to spend a gazillion hours to try to piece the money together,” said Roca CEO Molly Baldwin. “But now if we do well, the money is in place to implement the programme.”

Joseph said these pilot projects will provide the first “gold standard” social impact bond that will set the trend nationally, and could be replicated. Earlier this year, President Obama allocated $300m for social impact investment in at least ten states in his 2013 federal budget. “It’s currently the only vehicle in investing in social services at that kind of a scale,” said Joseph.

One of the ironies in the growth of social impact investing in the US is that the financial system and the non-profit sectors have traditionally be larger here than in the UK; the difference is that they are usually slower to work together.

“You have a planet whose population is rocketing to nine billion, and with that, enormous demand curves that we’re going to have to address,” said Morgan Stanley's Choi. “And we really believe we’re only going to be able to tackle those problems collectively, and if we harness the speed and flexibility of private sector capital.”

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