From the Wall Street Journal, writer Shelly Banjo explains what makes this type of bond different.
Originating in the U.K., social-impact bonds encourage private investors and philanthropic foundations to fund privately managed social programs in areas such as health care and prisoner recidivism. If the programs succeed in reaching previously set targets—and social outcomes improve—investors receive so-called success payments from the government. If the programs don't work, the government pays nothing. In these scenarios, investors take on all the risk and the government pays only for programs that work.
"When money is tied to outcomes, rather than inputs, it increases the efficiency of how taxpayer money is used and steers more money toward nonprofits that are successful," says Antony Bugg-Levine, a managing director at Rockefeller.
In January the Rockefeller Foundation closed on a $500,000 investment in a social-impact bond structured by Social Finance Ltd., a UK-based organization that launched the first social-impact bond in the criminal-justice sector in order to reduce the rate in which prisoners go back to prison.
Ideas behind these bonds have since begun to garner attention in the rest of the world: Currently, the White House is working on a $100 million pilot program to launch social-impact bonds.
After working with U.K. based organizations, the Rockefeller Foundation wants to help bring these ideas to the U.S. as part of two initiatives the foundation began in 2007 and 2008 with more than $54 million to find ways that for-profit investors can put their capital to work to address social and environmental challenges.
"There simply isn't enough money in philanthropy and government alone to solve the problems that need to be solved," Mr. Bugg-Levine says. "There's $80 trillion in for-profit capital markets and we believe there's huge potential in unlocking some of that money and deploying it to solve social problems."