Recipients Generate Millions in Market Revenue While Serving Social Needs Created by the Trico Charitable Foundation in 2011, the biennial Social EnterPrize celebrates Canadian social enterprises that demonstrate best practices, impact and innovation. Social enterprises are organizations, for-profit or not-for-profit, that blend financial success and social impact by using markets to solve social problems. The […]Read More ›
Social impact bonds: What’s in a name?
Social finance remains an emerging market, both in the nature of developing innovations, and the terminology used to describe them. Social impact bonds are one recognized tool within this market, but depending on whom you speak with, they may go by any number of different names. The term social impact bond was coined in early 2008 by Geoff Mulgan, founder of the Young Foundation, a non-profit, non-governmental think tank based in London that specializes in social innovation. This term is used extensively within the UK, and globally it remains the most commonly-used vernacular when describing a financial mechanism where private investment is used to scale up proven social programs.
In Australia, the term ‘social impact bond’ was replaced by ‘social benefit bond.’ It’s unclear from my research who originally coined this term, however, it was used as early as 2011 within the New South Wales government’s request for proposal where social benefit bonds were first piloted. This terminology is unique to Australia and is intended to be synonymous with social impact bonds in the UK.
While the term ‘social impact bond’ is common in the United States, an equally prevalent term is ‘pay-for-success contract.’ Once again, the etymology of this term is unclear however, its first public use may have been in a report from the Center for American Progress titled “Social Impact Bonds” and authored by Jeffrey B. Liebman in February 2011. In the U.S. this term is often used interchangeably with ‘social impact bonds’ however, individuals in the sector often assert that ‘pay-for-success contracts’ capture a broader group of instruments. Pay-for-success contracts may refer to any financial mechanism within social finance where payout is contingent on meeting a target outcome. This broader definition asserts that social impact bonds are a subset of the pay-for-success asset class, rather than a synonym.
Like their British counterparts, Canadians typically use the term ‘social impact bonds,’ however, the term ‘community benefit investments’ is also used analogously. ‘Community benefit investments’ was coined by members of the Canadian federal government within Public Safety Canada and was meant to provide a Canadian brand to the term, while recognizing that the instrument does not actually have the characteristics of a bond. Unfortunately, the term may raise some confusion as it can also be used in the U.S. to refer to investment requirements for non-profit hospitals trying to maintain federal tax exempt status. Time will tell whether this term gains further traction in Canada, or if individuals continue to borrow the UK terminology.
Finally, the term ‘development impact bond’ has recently gained significant traction globally within the social finance community. A development impact bond refers to a mechanism very similar to a social impact bond, except that it focuses on improving social outcomes in developing countries. This mechanism was pioneered by Instiglio and is also being explored by the Development Impact Bonds Working Group in the UK.
By no means is this meant to be an exhaustive list of terminology; rather, the goal of this article is to illustrate the breadth of terms used globally, and to highlight the importance of understanding the vernacular within the social finance market. So far government involvement has necessitated that social impact bond organizations remain quite geographically restricted. As the market matures and these organizations begin to expand internationally, perhaps we’ll see a convergence in terminology. I for one am eager to find out!
Editor’s note: This post was originally featured on the Finance for Good blog. It is reposted here with the author’s permission.