Despite the launch of the UK’s sovereign green bond dominating the socially conscious fixed income discourse, there is still room for social impact bonds in schemes’ portfolios.
As the Peterborough Bond, the world’s first social impact bond, turns 11 years old, experts argue these instruments are far from reaching their true potential but can be a solution for pensions funds looking to fulfil environmental, social and governance requirements.
The Peterborough Bond was launched with the mission of reducing reoffending rates among male offenders released from HMP Peterborough by funding interventions in the community once they had been released.
Fast-forward six years, and in 2017, Social Finance, the organisation behind the Peterborough Bond, announced that the 17 initial investors would have their initial capital back alongside a return of just over 3 per cent per year for the period of the investment.
Social bonds can enable investors to generate both income and a meaningful social impact due to two key factors: the scale of the opportunity set and the targeted nature of social bonds
Tammie Tang, Columbia Threadneedle Investments
The return on investment came as the Ministry of Justice announced that the bond had reduced reoffending of short-sentenced offenders by 9 per cent overall compared with a national control group, exceeding the target of 7.5 per cent set by the department.
Tammie Tang, senior portfolio manager for fixed income at Columbia Threadneedle Investments, notes that pension funds and other institutional investors have typically focused responsible investments through equities and private market strategies.
However, social bonds can enable “investors to generate both income and a meaningful social impact due to two key factors: the scale of the opportunity set and the targeted nature of social bonds”.
She adds that the scale of the fixed income market creates opportunities for highly specialised products – for example, within “social housing or renewable energy projects”.
“As a result, pension funds have greater opportunity to make a positive impact and a material difference in the need to deliver the UN’s Sustainable Development Goals and create a fairer world for the future,” Tang says.
Yet amid the apparent success of the Peterborough Bond, some similar schemes have failed to deliver, and there are those who argue that the broader social impact bond market has not matured enough or fulfilled its potential.
In the US, a bond to tackle reoffending at the Rikers Island jail complex was discontinued after it failed to meet its objectives, raising concerns around the long-term feasibility of such offerings.
Not meeting expectations
Conservative MP Gareth Davies, former global head of responsible investment business at Columbia Threadneedle, says in a report published by think tank Onward on Friday that the social investment sphere needs to broaden its scale if it is to attract greater flows of capital and, subsequently, make a more substantial impact.
Notably, he argues that social impact bonds have “failed to mobilise investment capital at scale”, owing to the complexities in striking a balance between the ease of adoption and the necessity to tailor the bond to local needs.
Additionally, Davies notes that social impact bonds do not present to investors as a viable investment proposition as they lack the robust modelling on returns investors require.
He says: “This is an extremely innovative and interesting approach to tackling common problems and I want to be clear that I support their existence and believe there is a place for them in public policy.
“However, of the 87 different arrangements so far launched, only £73m in investment capital has been committed to these schemes.
“This is a remarkable failure when you consider that a decade ago it was hoped that the market for these arrangements would hit £1bn by 2020.”
Impact opportunities
The £1bn figure, as touted in 2016 by the then minister for civil society Rob Wilson, has not yet materialised in the UK, but the ingenuity of the Peterborough Bond and the ability for social impact bonds to benefit underexposed parts of society has seen interest in the approach increase.
As of September 2020 there are 194 impact bonds globally, with nearly 2m beneficiaries of both current and completed schemes. Of these, almost 80 per cent of the global total of impact bond beneficiaries are in India, spread across only three bonds, primarily focused on education.
But in the UK, the hyper-specialised approach of the strategy remains in vogue for those requiring specialised streams of capital.
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Sport England’s Chances Programme, co-developed by Substance, the Life Chances Fund and Big Issue Investment, which will deliver £1.25m into the project, aims to support young people from disadvantaged backgrounds through sport.
Sport England chief executive Tim Hollingsworth says that the social impact bond “embodies the values of collaboration and innovation that we wish to live by in our new strategy, and this new model represents an excellent opportunity to diversify and develop our investment approach”.
But the evolution of the social bond sector is far from complete. As portfolios become increasingly personalised, and the demand to make a social impact intensifies, more pension funds may be drawn towards the opportunities within this area, in turn attracting new products to assist those who may otherwise not receive help under the broader ESG umbrella.
