Social Impact Bonds will fail without solving the evaluation problem first

Social Impact Bonds are the darling of the minute in the social sector. Another day, another push to pretend the social sector is a damsel in distress, only to be saved by the brawn and brilliance of public-sector innovations.

The problems Social Impact Bonds aim to address are real. There are limited financial resources available for social interventions, and we do need to figure out ways to maximize impact per dollar.

Social Impact Bonds attempt to do this by tying returns on investment to outcomes indicators. When an investor purchases a bond in a particular social program, she receives her principal plus an additional monetary return if the agency she invests in yields measurable results. If the agency fails to meet its outcomes threshold, the investor loses her money.

These bonds would be backed by the government, which would theoretically only be obligated to pay for successful social interventions. The intended benefits are

  • The government only pays for what works
  • New money enters the system as social impact bond investors seek profits
  • Non-profits are incentivized to achieve impact

However, it is not clear how different social impact bonds are from the status quo. Funders already require organizations to demonstrate their outcomes. It is unlikely investors are going to be able to do that any better than existing foundation and government grant review committees. Indeed, the real problem of course is ambiguous and non-uniform evaluation criterion, plus the general lack of capacity to monitor impact.

Furthermore, the argument that Social Impact Bonds will bring new money into the sector is an empirical point yet to be seen rather than a logical conclusion. Social investors already get financial benefits in the form of tax write-offs at zero risk. I’m not saying the risk/reward of Social Impact Bonds won’t work, but let’s not be so sure they will, either.

Ultimately, ideas like Social Impact Bonds and non-profit market exchanges that mirror the world of finance dance around, rather than address, the core issues facing the social sector. Investors are a necessary part of a functioning for-profit or non-profit sector, but innovation and execution is king.

We are so enamored of the giving and investing aspects of philanthropy, yet our eyes glaze when the charts and logic models come out. Designing investing models and website that connect us with our favorite causes are so exceptionally beside the point when we lack the cohesions and capacity to measure impact.

It’s no wonder those who focus on the giving side of philanthropy gloss over the implementation aspects. Actually helping people is hard, but giving sure feels great. So too, does making bold claims about how we should only give to effective organizations.

But what does effective mean, and how do we measure it? Those are the questions that actually matter, and without real answers, funding models are not going to make a lick of difference.