Impact Investing: the Challenge and Opportunity of Social Impact Bonds

In the last few years, interest has grown in developing new investment approaches to social problems. There is extensive evidence on potential paybacks to investment in early years programmes, or preventive measures in crime or health. Turning these into propositions for investments has proved hard, but five developments accelerated thinking during the early 2000s:

  • Greater interest on the part of investors and philanthropists in combining commercial and social returns (and the related interest in finding new methods for assessing and evaluating social and environmental impact alongside commercial returns).1
  • Steady advances within government in methods for assessing the impact of public investments on human capital, and bringing more systematic analysis of the links between spending and social outcomes such as crime reduction or health improvements.2
  • Widespread experience of private finance initiatives and public private partnerships, with growing knowledge on when these do and do not add value.
  • The development of markets for carbon reduction, prompted by Kyoto and the EU. Despite many complexities in terms of pricing and measurement these have led to the creation of new asset classes, and substantial trading. They have encouraged greater confidence in the potential to invest in social gains.
  • Experimentation in health around such initiatives as advanced market commitments, in which a payer guarantees a market will be available for breakthroughs such as vaccinations for malaria.

    This paper builds on previous papers on Social Impact Bonds published by the Young Foundation in early 2008, and early 2010, and sets out our current thinking on their concept, their potential, as well as some of the challenges they face. We are optimistic about the potential of SIBs and we welcome the enthusiasm they have elicited. However, so far there has been relatively little serious analysis of the strengths and challenges of the SIB idea, and there is a risk that unrealistic aspirations will be projected onto the idea. Our hope is that SIBs can ‘under-promise and over-deliver’ rather than the opposite.





The Young Foundation


Geoff Mulgan, Neil Reeder, Mhairi Aylott & Luke Bo'sher


November 1, 2010

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Social Impact Bonds