Introduction to Impact Bonds 

What Are Impact Bonds ? 

An introduction to impact bonds, this educational video covers a brief overview of impact bonds- a financial instrument used within the global development sector. An in-depth course is designed to cover this topic; stay tuned for the upcoming educational series on Impact Bonds. Impact Bonds are part of the Sustainable Finance and Impact Evaluation series on The middle Road but are covered in-depth separately. This comprehensive publication on Impact Bonds is a derivative of many research papers and works and is based on the outline of the educational tutorial on this subject at The middle Road. The purpose of the report is to share a brief on the evolution of Impact Bonds and outline recent findings especially both the positives and negative aspects of these instruments.

Impact Bonds are recent social innovation instruments enabling private capital within the development sector. Structured as a participative public-private partnership model involving multiple sets of actors, Impact Bonds started as Social Impact Bonds. Impact Bonds bridge the funding gap between the public and private sectors and transfer the investment risk to non-governmental players. Based on the public-private partnership model,  194 impact bonds contracted with $441 million capital paid upfront to implement the projects or interventions targeting specific preventive social outcomes for a financial return. (Until the original publication date of this piece on The middle Road). This tool outsources public funding for deterrent social outcomes which public entities might not pursue. There are two types of Impact Bonds — social impact bonds and development impact bonds. Development Impact Bonds are primarily implemented in low- and medium-income countries. Unlike a government entity for a social development bond, the outcome payer is a third-party example, a donor. Over a decade, various thematic bonds focused on education and healthcare have been contracted

Social Impact, first implemented by Social Finance is to pay for success or results-based financing pay out structure to reward successful interventions within the global social ecosystem. 

The middle Road classifies Impact Bonds as part of Sustainable Finance, or Sustainable Investing class of social, financial quasi derivative instruments focused on generating social and environmental good and a monetary return. Impact Bonds are part of the alternative investment class. The bond word is a misnomer with pay out designed like an exotic European call option with an all-or-nothing pay out (major structures are designed this way). The product rewards outcome-based performance linked to interventions designed to correct market failures. The critical aspects of impact bonds include its public-private partnership model, ability to combine social good with a financial return, an exotic call option with a pay out linked to a threshold outcome for investors. Many impact bonds include concessional finance that works as grants to cushion the first capital loss.