Investing in Social Innovation

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By Elly S. Brown

This post was originally published on Next Billion.

Image via Next Billion

“You, as the asset holder, have to challenge the status quo and provide the leadership necessary to co-create the world you want to see. It is that simple,” Lisa Kleissner, co-founder of KL Felicitas Foundation.

After successful careers in Silicon Valley, Charly and Lisa Kleissner founded KL Felicitas Foundation in 2000 with a vision to scale social innovation through impact investing. The foundation supports social enterprises everywhere along the spectrum from the seed stage to startups that are rapidly expanding. Led by visionary social entrepreneurs, these companies are addressing some of the most challenging issues in society including climate change and environmental destruction.

Along with capacity building assistance, KL Felicitas Foundation offers a wide range of investment vehicles including grants, social loans, loan guarantees and private equity. The foundation has committed to allocate 92 percent of its portfolio to impact investing vehicles by 2013. Placing a strong emphasis on knowledge-sharing and partnerships, Charly and Lisa are committed to building the field of impact investing. Along with Morgan Simon and Sean Foote, they co-founded Toniic, a global network of impact investors. Complementing GIIN, the industry-wide standards and frameworks for impact investing, Toniic provides a forum for members to learn how to be effective impact investors and to aggregate capital for investing (Click here for past NextBillion coverage on GIIN and TONIIC).

You can meet Charly and Lisa Kleissner from KL Felicitas Foundation and learn more about impact investing at the Columbia Social Enterprise Conference session titled “Impact Investors Spreading Social Innovation” on Friday October 7th between 9:45 a.m. and 10:45 a.m.

Pay for Success: Social Impact Bonds Come to the US

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By Kimberly Parker

Social impacts bonds (SiBs), which launched in the UK in September of 2010, may be replicated in the United States this year, under the more optimistic name, pay-for-success bonds. President Obama has proposed $100 million, or .003 percent, of the FY 2012 budget to go towards piloting the program in the United States.

Social impact bonds, or pay-for-success bonds, place the financial risks inherent in social programs on private investors. Government agencies contract private organizations (both for-profit and nonprofit) to implement programs that improve social outcomes, such as preventing recidivism and managing childhood diabetes. The organization then issues bonds to private investors to pay for up-front costs, and if the program is successful then the government pays the return on the investment from the cost-savings attributable to the program. Going into further details, Harvard Economist Jeffrey Lieberman reported on the bonds and their actualization in the United States.

These pay-for-success bonds have been designed for preventative programs, and there have been numerous studies — including one referenced in the New York Times — that show prevention is less costly overall. Investing taxpayer money in new preventative programs, however, has been considered too risky because, if the programs fail, the government risks paying twice. Instead, unsuccessful programs that focus on the after effects of social ills remain in place for years.

Preventative programs, though, may still be too risky for traditional investors, but there is hope that social impact bonds can eventually attract commercial capital to the social sector. Currently, investments are coming from foundations and impact investors, who are much quicker to accept the risks in the hopes of achieving social good.

There are other limitations to the bonds: the programs they support must have clearly defined outcomes and a base of research that supports these outcomes. Also, because of the riskiness of these investments, there is incentive for targeting low-risk populations, instead of those that need the social programs most. It can also be unclear which government department will pay if a program is successful.

The bonds do, albeit, represent a step towards innovation and collaboration and a bridge between the private and social sectors. Whether you think invoking private capital for social programs is a good thing, or not, there is a pressing need for this type of innovation.

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The Social Economy and SRI

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Socially responsible investing (SRI) is embarking on a new era of opportunity. The economic crisis, despite causing frustration with the traditional economy, perpetuated interest in social finance as a way to help those most in need. The tools being developed for the social economy, the cross-section between social and financial returns, are making it easier to direct capital to social causes.

Last week, the Big Lottery fund in the UK announced an £11.25m investment in social impact bonds (SiBs). SiBs, the work of Social Finance, align the financial interests of investors with positive social outcomes. In the early stages of implementation, SiBs will focus on early interventions in order to obtain positive social outcomes that are easily measured and directly related to a reduction in government spending. The investor assumes the financial risk for the intervention and, if successful, the government pays returns on the investment from a portion of the resultant savings.

The pilot project, launched in March, addresses recidivism in prisoners who have been sentenced to less than a year in Peterborough Prison. Through the SiB, organizations will provide intensive support to 3,000 male prisoners, and if the rate of recidivism is lowered, the government will pay a return to investors based on what it would have spent if the prisoners had received a second sentence.

Social impact bonds have created a new opportunity for making socially responsible investments by drawing new connections between positive social outcomes and government savings.

Though, even when the connection between financial gains and social cause is clear, such as in social enterprises, it can still be difficult to direct funding. This is why we need the Social Stock Exchange, according to Mark Campanale, one of the founders of Social Stock Exchange, Ltd. Listing social enterprises together, based on admissions criteria, will not only make it easier for socially conscious investors to find these companies, but the regulations associated with a stock exchange will make it easier for them to invest. (Currently, not all social enterprises can afford to list on traditional stock exchanges.)

As interest continues to grow in SRI, so does the importance of developing tools to direct capital to social causes and developing the social economy.

Learn more about socially responsible investing at the 2010 Social Enterprise Conference.

More information from Social Finance on:

• Social Impact Bonds
• The New Social Economy