Impact investing is “a pretty radical departure from how we’ve funded nonprofit organizations in the past,” said Ian Galloway, Senior Research Associate with the Federal Reserve Bank of San Francisco. During Galloway’s recent presentation to the Association of Fundraising Professionals Wine Country Chapter, he explained a new financing model called impact investing, or more accurately, Social Impact Bonds, that’s just beginning to emerge as a possible way of funding significant social change efforts being tackled by non-profit partnerships with government agencies and generous funders.
The term Social Impact Bond was first used in the United Kingdom in 2010 to describe a pay for performance model for reducing recidivism among short-stay offenders. The British government promised to pay a large nonprofit organization, Social Finance, if it successfully reduced the re-offending rate of prisoners leaving a particular prison. Specifically, the government agreed to pay Social Finance only if there was a 7.5 pecent reduction in recidivism in that one prison as compared to a group of similar prisoners released from other prisons. The fee was based on a calculation of the savings the government was likely in realize over time as a result of reductions in re-offending. An outside evaluator was hired to validate the outcome.
To have the needed resources to implement recidivism reduction programming provided by a consortium of six nonprofit providers with successful track records, Social Finance needed to raise funds from investors. So, the organization brought together a group of foundations that were willing to pay Social Finance its needed upfront costs in exchange for receiving an agreed-upon return if Social Finance successfully achieved its anticipated outcome. The model was successful and Social Finance has since started a sister organization in Boston to establish Social Impact Bonds throughout the U.S.
In addition to reducing recidivism, the types of societal problems that seem to be most well-suited for impact investing solutions include reducing homelessness; reducing substance abuse and out-of-home placements for at-risk youth; preventive care and management for chronic diseases; job training for hard-to-employ individuals; school readiness/early childhood education; low-performing K-12 schools; prenatal and early childhood support for first-time, low income mothers; and supportive services among low income seniors to reduce out-of-home healthcare usage.
Last year, the James Irvine Foundation provided $2.5 million to the Nonprofit Finance Fund to launch the California Pay for Success Project. The first projects from this initiative focus on addressing employment for formerly incarcerated individuals in San Diego; increasing wellness for the chronically homeless and the acute mentally ill in Santa Clara County; and providing nurse home visits to first-time, low income mothers in the Bay Area and Orange County.
Being able to accurately measure anticipated outcomes is a critical component of impact investing. Only organizations that are implementing evidence-based interventions that definitely result in positive change are the types of organizations that can begin to consider a pay for performance model.
Rachel Cusick, Director of Development and Marketing for the Sonoma Valley Boys & Girls Clubs, attended the recent impact investing presentation. She commented, “The market for impact investing seems fairly new in the U.S. It’s an exciting area for growth connecting investors with nonprofit organizations. The focus on evaluation and results is what I find most compelling.” She added, “Regarding the feasibility of impact investing for Sonoma Valley, I am intrigued by the prospect of creative collaborations between investors and financial institutions that can benefit nonprofit organizations and our community. Future trends in nonprofit fundraising are all leaning towards enhanced evaluation measures and transparent reporting. Impact investing could be a catalyst for these changes in Sonoma.”
Funding programming to solve an expensive societal problem through Social Impact Bonds can be a daunting process for a nonprofit organization, however. To do it well requires a nonprofit organization with a history of implementing measurable, successful interventions; a government agency willing to pay for performance if specific targets are met; philanthropic investors willing to take a risk that the organization will achieve its stated outcomes; a solid analysis of outcome metrics; and an independent evaluator that attests to whether or not the nonprofit has achieved its targeted outcomes.
Another participant at the social impact session was Byron Nichols, a member of the Vintage House Board of Directors. Nichols stated, “Impact investing would be a very long complicated affair. There would have to be a powerful driver to bring it off. To find a bank or lending party would take lots of planning. A proforma that would spell the funding and repayment plan to take to a possible lender would have to be done by a CPA. A legal document would have to be set up by an attorney that would spellout every detail. If a charity had the perfect repayment plan available, it may be worth a go, but I see lots of work and expense.”
Time will tell if a pay for performance model will become a way for organizations with quality programming and measurable, positive results to improve their financial sustainability or if it simply will be too complicated to implement. The idea of venturing into the world of impact investing may become a powerful incentive for a nonprofit to take a hard look at the way it delivers programs and services and begin evaluating if that delivery model leads to positive, measurable outcomes that can be leveraged for funding.
Dr. B.J. Bischoff is the owner of Bischoff Performance Improvement Consulting, a Sonoma firm specializing in building the capacity of nonprofit organizations and public sector agencies to better serve their stakeholders. She assists her clients with strategic planning, training resulting in performance improvement, fund development, and community relations. She is Past President of Impact100 Sonoma and serves as a Sonoma County Board of Supervisors’ appointee to the Sonoma County Portfolio of Model Upstream Programs Review Committee. Contact her at firstname.lastname@example.org.