I attended a Harvard Business School alumni event this week where Sir Ronald Cohen was setting out the case for impact investing. Impact investing is where one makes an investment decision not only on the grounds of risk and return but also on the social impact it generates. Ronald is arguably the father of social investing in the UK and also the father of venture cap investing (he started Apax Partners in 1972).
Sir Ronald pioneered the first social impact bond in the UK. A social impact bond is a contract with the public sector (or foundation) where a commitment is made for an improved social outcome that result in public sector savings. It is not really a ‘bond’ in the financial sense as its payoff is more equity based. Sir Ronald was explaining that this type of financial innovation can potentially solve a social problem, by putting a framework around success or failure (of the social problem), which one can therefore price, this creates a risk and reward dynamic and can attract private investors. The challenge with these type of structures comes in the measurement of success and failure and the significant amount of work needed to go into the design and structuring of each transaction.