Happy Holidays 2015 in Review (Finance for Good)

Happy holidays from all of us here at Finance for Good. It’s been a full 2015 for the impact investing field globally and for us locally as we work to create new opportunities for investment in prevention and early intervention. Looking back we have a lot to be proud of in the year and much to look forward to in the New Year to come. In 2015, we had the privilege to work with clients such as the Mennonite Central Committee to advance social finance and evidence-based restorative justice programming. Along with these great ambitions, we also worked with smaller, innovative employment programming in Scarborough with the support of our partner Innoweave to explore new models of pay-for-performance. We advanced the conversation around Outcomes Finance and Social Impact Bonds with partners such as the Ontario Municipal Social Services Association, bringing leading practitioners from across Canada together with senior public sector executives to generate actionable opportunities with local authorities and government at “Social Impact Finance for Municipal Organizations”.

Moving into the New Year, we’re excited to design a retail impact investment fund for the Pond-Deshpande Centre, a first for Canada in a tax-assisted fund available to any resident of New Brunswick, and many more projects to come. As always, we’ve been paying close attention to everything going on globally, and here are some of the things capturing our attention and imagination as we head into 2016:

Crucibles for Impact

One of the most active conversations around Outcomes Finance and Pay-for-Success surrounded the United Way Salt Lake City Early Childhood Education deal. After the project was reported as successfully reducing special education, an article from the New York Times questioned the project metrics, leading to many op-eds and responses in defense of the project and the model, culminating in a detailed response from the project evaluator.

Looking at this flurry of material, we think it’s important to recognize that this public, critical debate was only possible because of the transparency and support of rigour that the project tried to bring forward. This kind of serious, outcomes-focused dialogue is the kind of system value that these tools can drive. It’s too often missing where significantly more public money is spent with less clarity or documentation around how decisions are made and on what basis of evidence. Looking forward we think an important question will be whether this transparency will persist when these are simply performance-based tools and the bridging finance is a common feature. It’s an important role for clearinghouses and central repositories so that a critical dialogue can be maintained.

More Success than Failure

Along with the visible successes like Utah, there have also been some visible failures like Rikers Island, with their own lessons learned. Separating the signal from the noise, we think it’s worth repeating that there isn’t just one model or really one market, because the value proposition of these projects really has to respond to the commissioners priorities. Some projects are designed to scale programming with a lot of fidelity, that is with a well-defined Theory of Change and ultimately are intended to change very little from that program model. Others are intentionally designed to more continuously adapt, essentially building a model that can identify and resource more emergent needs. In general, a critical mass of evaluation in the US has allowed some programs to be labelled “proven” and for the first approach to be more commonplace, whereas other jurisdictions like the UK and Australia seem to be practicing more of the second.  Despite the visibility of programming such as Rikers, there’s a lot of under-reported success in delivering outcomes for communities including:

If year by year we can see more of this success than failure and benchmark future programming to the levels of impact seen before, a very impactful transformation in social services is possible.

Construction Loans

Right now the developmental stage of projects before they’ve papered their contracts (sometimes referred to as the “project construction” phase) has been paid for either through philanthropic dollars, cash reserves, or public dollars. This work is often the nitty gritty of analytically selecting a target population, gathering data, and economic modeling, and it’s essential to the development of these deals. But as these tools mature, the justification for subsidizing programmatic and contracting innovation will decline and the need to more intentionally finance projects at this stage will arise. Given the risks but relatively low capital-intensity of this stage, this might be a perfect use of Program-Related Investments (PRIs) that seek below-market returns. Low-interest loans would be extended to project proponents with later investors essentially “re-financing” this small initial project debt with their investment, or that initial loan being rolled into the later deal as part of its capital stack. Beyond a hypothetical, the great news is that the Deutsche Bank Americas Foundation is piloting this with Third Sector Capital Partners. It’s perhaps exciting news only for the most wonkish, but we know it’s crucial to the development of this market that this developmental stage is considered bankable and could be truly catalytic for great deals that need early cash to develop.

We’re excited about what we accomplished in 2015, but know that we’re nowhere near our ambitions yet, and won’t stop until we get there. Here’s to an exciting 2016 ahead!