A social impact bond is an innovative financial instrument that uses private sector investment to support high-impact social programs that are meant to address social challenges. What makes these bonds unique is that the return to investors is directly linked to the achievement of measurable social impact.
Increasingly, innovative ideas for solving community challenges are coming from state and local governments, which are often in the best position to identify local challenges and develop targeted solutions. In New York City, for example, city officials identified the need to launch a program on Rikers Island aimed at preventing juvenile prisoners from becoming repeat offenders. To help fund this program, Goldman Sachs invested approximately $10 million in the nation’s first social impact bond in May 2012; Goldman achieves a return if there is at least a 10 percent decrease in the number of young people who return to jail.
Social impact bonds are investments designed to yield a financial return in addition to addressing a particular social need. These investments provide needed funding upfront, to help enable outcomes which ultimately result in cost savings for governments. Financial institutions can play an important role in bringing intellectual and financial capital to bear in the development of “impact investments” designed to address critical community needs.
The firm’s second social impact bond announced in June 2013 invests in early childhood education. Goldman Sachs and J.B. Pritzker jointly committed up to $7 million to finance The Utah High Quality Preschool Program, a high-impact and targeted curriculum focused on increasing school readiness and academic performance among at-risk 3 and 4 year olds in Utah. As a result of entering kindergarten better prepared, it is expected that fewer children will use special education and remedial services in kindergarten through 12th grade, which results in cost savings for school districts, the State of Utah, and local government. The first $1 million investment in this program enabled approximately 600 children to attend pre-school in the fall of 2013.
These new financing structures are beginning to take hold in the market. For instance, the Commonwealth of Massachusetts, along with Third Sector Capital Partners, recently announced a social impact bond that will expand services provided by a local non-profit organization, Roca, to help high-risk youth in the criminal justice system get on a new path through access to educational and life skills training and employment opportunities. If fewer young people go back to prison and get jobs as a result, the savings generated by the Commonwealth through the program will be used to repay investors in the transaction. Investors include the Goldman Sachs Social Impact Fund, the Kresge Foundation, and Living Cities. Philanthropic support is being provided by foundations including New Profit and the Boston Foundation.
Andrea Phillips at Goldman Sachs discusses the firm’s second social impact bond, which invests in early childhood education.
These innovative public/private partnerships enable governments to do more with less, focus on outcomes, and develop specific and sustainable responses to pressing social challenges. And, they allow investors to deploy their capital in a way that helps provide a social solution while also providing for a financial return on the investment.
This article was written by Goldman Sachs and not by the Quartz editorial team.