What Are Impact Bonds ?

Image : The middle Road 

Impact Bonds are part of the Sustainable Finance or Sustainable Investing class of social quasi derivative instruments focused on generating social and environmental good along with a monetary return. A tool used by global actors within the development to meet the United Nations Sustainable Development Goals (SDGs). Impact Bonds are aligned towards themes within the corporate social responsibility for meeting social good. These bonds facilitate an evidence-based approach toward addressing solutions to problems in the social sector. Builds on the public-private partnership model with multiple actors working on a collaborative model. 

Impact Bonds word is a misnomer. They are quasi derivative structures with payoff designed like an (exotic call) binary call option with an all or nothing payment (major structures are designed this way). Pay for success or outcome model where the payout to investors (principal + interest) is contingent on meeting predetermined outcomes for interventions. Transfers risk to third-party non-government entities from public to private sector (Uses special purpose vehicle structure to enable the transfer of risk) more relevant for Development Impact Bonds. The outcome payer is a government entity (Social Impact Bonds) and a private donor. These financial instruments are designed to bridge the funding gap between the public and private sectors. Impact Bonds are enablers of the UN SDG 17 PPP model, a new asset class that works on a collaborative public-private partnership model. 

Uses evidence-based methodology for impact evaluation

Used to finance budget deficits of government

Blends social and environmental outcome with accountability, transparency for a monetary return

Facilitates corporate social responsibility

Builds on UN SDG 17 PPP model

A new asset class structure