Social Investing – Friend or Foe?

While social investing can unleash vital capital and skills to help tackle social issues, as well as commercial returns and innovation dividends for capital, there are a number of risks for not for profits, writes Kyrn Stevens, in the second in a three part series on social investing.

Service providers “might be willing to make a deal with the devil” to access social impact bond capital.

That’s the view of David MacDonald from the Canadian Centre for Policy Alternatives in the new documentary The Invisible Heart, which looks at the pros and cons of social impact bonds (SIBs).

A recent Australian Housing and Urban Research Institute report found one of the most significant risks of social impact investing (SII) is that “beneficiaries could be harmed if poor design of SII solutions has unintended consequences, if services are disrupted or cease when SIIs mature or are otherwise terminated”.

While the Stanford Social Innovation Review recently described SIBs “as an illustration of the cultural supremacy of market principles”.

The suitability of, and risks with, social investing will vary from organisation to organisation, however questions are arising for the NFP sector as a whole from these new approaches.

Lack of prevention

My research found that a primary concern with social investing is that it is not tackling the root causes, or prevention, of social issues.

This is echoed by Caroline Mason, who helped design the world’s first SIB, aimed at reducing prison recidivism in the UK in 2010.

She says in The Invisible Heart, that SIBs “are not great at dealing with the root causes of what they’re trying to fix”.

A 2014 article in the California Management Review proposes that a focus on profit might drive corporations to invest in easier problems than tackling broader social problems, leading to “islands of win-win projects in an ocean of unresolved environmental and social conflicts”.

At the very least, the profit motive fundamentally changes the relationship between service providers and users with the inherent motivator of social investing being profit and ROI, rather than helping people in need.

There is a risk of increasing corporatisation of social services failing to deal with social determinants of health such as poverty, unemployment, poor housing and lack of education, creating a more deeply entrenched underclass that will fall through the cracks. 

For example, University of Melbourne’s John Fitzgerald says that there may be concern in the medical profession over the role of SIBs in individually-oriented interventions as they “have minimal effects on the social determinants of health and wellbeing”.

This would likely put more pressure on the not-for-profit sector to service people disadvantaged by social determinants, such as Aboriginal medical services.

He also says measuring performance of preventative health is an especially difficult task.

Health sector

Creating shared value in the health sector has largely been tied to reconceiving products and new markets, especially in emerging economies.

For example, pharmaceutical and medical device companies have reconfigured products to make them cheaper and more accessible, as well as building local research and development and local supply chains/sales channels to further reduce cost.

This has been done in conjunction with strengthening local health systems and education/behaviour change campaigns to support new product rollouts.

While these have undoubtedly led to significantly improved health outcomes, especially in large emerging economies, it is noteworthy that my research found no shared value preventative health programs.

Successful preventative programs, after all, would remove the markets for treatments and products.

The shared value creation exception is in health insurance where preventative programs decrease the risk pool.

Ironically, whilst social investing initiatives focused on health prevention, rather than products or markets, may not generate the same level of short-term profit, they will help prevent overall market failure due to obesity, diabetes and other chronic disease epidemics.

Programs that focus on prevention and early intervention likely require longer lead times to achieve measurable results and lend themselves more to “patient capital”, with a higher risk tolerance and longer-term horizon than other forms of capital.

Due to the potential massive savings to public health systems, SIBs may lend themselves more to health prevention measures, with some aimed at tackling homelessness, the causes of dementia, stroke and hypertension prevention and diabetes prevention.

Creaming and parking

Research fairly early in outcomes-based funding cautioned that pay-for-performance funding could lead to “cream skimming”, or “cherry picking”, by service providers where beneficiaries close to the payment threshold are prioritised to achieve agreed outcomes quicker.

Providers may be inclined, or pressured, to work only with beneficiaries most likely to achieve outcomes and not with those who seem unlikely to achieve the outcome (“parking”), with the risk of the most needy beneficiaries being stranded if investors prematurely terminate a contract.

Outcomes-based payments may also stifle innovation and flexibility by favouring interventions with proven metrics over experimenting with more interactive approaches.

A January 2018 article in the Journal of Social Policy, which reviewed four UK SIBs, found that “the presence of private social investment appeared to stifle the flexibility and autonomy of service providers to innovate and deliver services according to their social mission”.

There are reports of investments regarded as “impact light”, which deliver relatively low social returns or with limited accountability for, or measurement of, outcomes.

Loss of advocacy

There is an argument that not-for-profit service providers may limit their ability to effectively advocate as social investing may allow financial institutions to increase their influence on government policy and priorities.

If financial institutions are allowed to unduly influence government policy, governments may move away from their responsibilities to provide services in key areas such as health and education with the expectation that these services can be funded by the private sector.  

Under this scenario, corporations may get greater access over government policy design and service delivery decisions in service areas where they can make a greater profit.

Tufts University’s Professor Jeffrey Berry has noted that “empowerment and advocacy fit poorly into an ROI framework” as it is hard to define advocacy “return”.  

Not achieving program impact and outcomes could also negatively affect advocacy, particularly given the high publicity SIBs are likely to receive.

Some commentators go so far as to say that social financing could threaten the very existence of service providers if they gain a reputation as a bad investment.

Other risks

A Brookings Institution review of SIBs identified several other risks for not for profits, including:

• underestimation of results discouraging investment;
• investors trying to put pressure on service costs to maximise their ROI;
• program termination if progress measures are not met or senior investors experience financial difficulties;
• the risk of government policy changes cancelling bond projects; and
• NFPs not having organisational capacity to deliver on performance measures.

Onus on NFPs

Cornell University’s Professor Mildred Warner says SIBs are “perpetuating a model that is dysfunctional at its core… [and] create an industry of intermediaries and deal makers and brokers and accountants and lawyers, and they’ll be making a lot of money”.

A review of the literature on SIBs published in January 2018, found that while they may have the potential to improve social outcomes, a “more cautionary narrative” is offered.

The authors of the Journal of Social Policy article call for public sector commissioners to oversee SIBs and the influence they allow over service providers.

With a strong evidence base yet to be built around social investing, the onus for now is on NFPs to mitigate the risks associated with social investing, if they pursue the opportunities and risks it presents.

The reality is that NFPs are faced with growing demand, shrinking government funding and a shift to outcomes-based payments. Can doing nothing to increase revenue be justified?

Part three of this series will look at what NFPs need to consider to become “investment ready” if, despite the risks, they decide to engage with private social investors.

About the author: Kyrn Stevens has executive experience across the non-profit, private, and government sectors, and completed an MBA thesis on social investing at Sydney Business School, University of Wollongong.  He is a senior corporate affairs and marketing professional who has worked in legal services, for a federal regulatory authority, as well as for Australian Red Cross and in Indigenous health. He is also a non-executive director of the Fairy Meadow Community Bank Branch of Bendigo Bank.