New debt instruments are providing institutional investors with a means of earning a steady yield while also helping social programs aiming to improve society. SAM RILEY reports.
An innovative NSW Government pilot project to launch a social bond could be attractive to sophisticated investors and provide competitive returns, compared to those achieved through sovereign or corporate bonds, a key research organisation says. The proposed bond, which was announced as part of the recent NSW Budget, is a financial instrument that pays a return to investors based on the achievement of agreed social outcomes. The Centre for Social Impact has provided research and advice to successive state governments on forming social partnerships with government, investors and not-for-profit groups, including a report earlier in year focussed on social bonds. Les Hems, the centre’s director of research, says the two social benefit bonds proposed by the State Government have the potential to provide a form of socially responsible investment that is also an attractive investment option.
“The discussions we have had with investors, not-for-profits and governments is that you have to make this as close to a commercial proposition as you can, where there is the added value of social benefit,” he says. The NSW Government has allocated $20 million towards the project and has flagged two areas that would be suited to issuing bonds. The first of the bonds would aim to reduce the number of children in foster care as not-for-profits focus on reestablishing families where children have become wards of the state. The second bond would fund programs aiming to lower re-offending rates among former prisoners through education and support. The State Government has called for expressions of interest from not-forprofits. The negotiations between the service providers and the government will determine the model that emerges. It is not yet certain if the bonds will be government-guaranteed, or if investors will have to bear the risk of a not-forprofit failing to deliver on the social outcomes and eventual savings that they promised to the government. “We are down the risk profile. If there is government guarantee then it would be close to a government bond,” Hems says.
“If it is something that a not-forprofit runs – but you are still getting the cash flow from government but [the not-for-profit] is driving it – then it might look more like a corporate bond.” Hems says institutional investors have expressed interest in the ideas of social bonds and their potential in the medium to long term. “From a timing sense there is a growing interest in not just screening out socially negative investments but also investing in things that have positive social outcomes.” The bond proposal looking at reducing re-offending rates in newly released prisoners is roughly modelled on a social bond program run through Petersborough prison in the United Kingdom. At Petersborough, a not-forprofit operates a prisoner release program. Every prisoner it handles is benchmarked against 10 similar prisoners with comparable age, offending and demographic characteristics who are released on the same day around the country.