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The “Aces” and “Faults” of ESG Disclosure

The Paris Agreement of 2015 marked a turning point in the global awareness and action on climate change and sustainability. Since then, there has been a growing demand for more transparent and consistent information...

In a fast-paced sustainable finance market currently struggling with how exactly to best align capital with environmental, social and governance (ESG) objectives, social impact bonds (SIBs) emerge as yet another innovative but puzzling instrument. Often referred to as ‘pay-for-success financing,’ SIBs rest on a complementarity between public sector financing and private investor expertise, arguably offering a win-win scenario. By leveraging the capital and know-how of private investors, SIBs may not only address pressing social issues but can also lead to government cost-saving and risk-sharing (Davies, 2014).

SIBs can be described as the outcome of a structured process involving various key stakeholders. This process begins with identification of a pressing social issue, which is followed by design of an adequate intervention. The proceeds to finance this intervention are primarily provided by private investors via intermediaries directing capital to a service provider. The success of the process hinges on well-defined measurable outcomes that ultimately determine the returns for investors. If the predetermined outcomes are achieved, the government or another government entity repays the investors their initial capital along with a return on the investment, contingent on the level of success (OECD, 2016).

In 2010, the UK became a first mover in the development of SIBs under the Labour government of Gordon Brown when it issued a SIB to finance rehabilitation work/reduce reoffending in Peterborough prison. Since then SIBs have been attracting increased attention from both practitioners and academics. Issuances have spread across Europe and around the world. To be more specific, “there are currently more than 251 impact bonds in over 35 countries, mobilising more than USD $700m” (Socialfinance.org.uk, 2023).

In a world grappling with the twin challenges of pressing social issues and scarce government resources, this financial instrument offers a novel approach with which to address gaps in impact finance and public financing. However, despite global policy enthusiasm, SIBs have faced considerable challenges in attracting private market investors without substantial additional guarantees (Warner, 2013). While governments may be optimistic about the potential of social impact bonds as a politically viable policy tool to address complex social issues, there is still limited conclusive empirical evidence of this (Child et al., 2016), mostly because of immature outcome metrics that need better operationalisation and evaluation methods (e.g. Wang and Xu, 2022: 1).

Undeniably, SIBs represent a promising opportunity to harness capital markets to launch innovative social services (GO LAB, 2023) while contributing to the UN Sustainable Development Goals. The approach not only presents private investors with an opportunity to earn attractive returns but also to promote valuable knowledge-sharing among all stakeholders. By aligning interests in a results-focused approach, public authorities can avoid upfront capital requirements and the risks associated with programme failure (OECD, 2016). Nonetheless, the challenge of accurately measuring results remains significant, and investors lack substantial experience in understanding the risks and returns involved in this emerging asset class. While many actors are still assessing whether to play an active role in SIB issuance, some early movers, among which are a few European banks, have entered the field despite high transaction costs. A key question remains, though: are social impact bonds a step too far in the financialisation of social services?


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