Third Sector | Rodney Schwartz: A German innovation I hope we don’t overlook
Social impact incentives (SIINCs) are a positive innovation and an improvement over social impact bonds (SIBs) which seem to be an expensive and labour-intensive instrument.
At ClearlySo we have never been very fond of social impact bonds. They seem an expensive and labour-intensive instrument, not of good value to our clients. But they have been intensively supported by government and leading players in impact investment. To some extent this proves the point about their lack of fundamental appeal. An innovation so supported surely should have progressed much more rapidly. This in no way undermines the contribution they have made to how we think about the possibilities in impact investment.
One breakthrough of SIBs, much to the credit of their creator, Social Finance, is that they secured payment by governments to investors based on social impacts achieved. The problem is one of externalities. When enterprises generate social impact as a by-product of what they do, society benefits. These benefits can be, say, government expenditure that is no longer necessary or things we enjoy for free, such as clean water. The challenge has been capturing the benefits of those positive externalities. SIBs are a complicated way of achieving this, because they require a set of agreements between commissioners, investors, providers, impact verifiers and others. Securing agreement by so many parties is difficult and time-consuming, and there are fees at several levels. We have argued, with no success, for using the tax code to “tilt” in favour of enterprises generating positive social externalities.
Social impact incentives are a positive innovation and a logical next step. Originated by Roots of Impact, a German organisation, SIINCs have been developed in cooperation with the Swiss Agency for Development & Cooperation, with a test on high-impact enterprises in Latin America. Simply, a direct payment is made by an organisation such as a foundation or development agency (“outcomes payer”) to an organisation generating social impact. The need for an independent verifier of outcomes or impact on customers or beneficiaries remains, but this is the only necessary complexity. Roots of Impact argues that the SIINC model is flexible, adaptable and requires no agreement except from the outcome payer and the enterprise. The payment increases the revenues of the enterprise and the profitability of the enterprise is enhanced. Even an agreement with the investor might prove unnecessary, and in any event can be a separate discussion.
The brilliance of this model is that it facilitates payments by those who care about positive externalities directly to the enterprise, changing their business model. This is a simple bilateral agreement that addresses the complexity of SIBs. The added cost for an independent verifier of impact should be offset by the cost savings achieved to governments, say. As more positive externalities are captured this way capital markets will adapt to the new business models of these high-impact enterprises. SIINCs are a great innovation, a next step in the thinking prompted by SIBs and I congratulate Bjoern Struwer, Christina Moehrle and Rory Tews of Roots of Impact. My only concern is that as a non-Anglo-Saxon innovation, they will fail to get the attention they deserve.
Rodney Schwartz is chief executive of ClearlySo, which helps bring impact to investment.