In India the government has recently mandated that companies beyond a certain threshold spend 2% of their net profits on CSR activities. This will make available a large pool of money that needs investing.
For many companies, CSR investment is a new requirement, there is little precedent to rely on. While in the past projects may have been chosen to promote charities of CEOs family members, the mandatory and long term nature of the new companies bill suggests that CSR spending needs to be more strategic and provide long term impact.
Anecdotal evidence suggests that companies find it difficult to find suitable projects to invest in because they are unable to do a proper social benefit analysis. This leads to suboptimal investments.
Financial Instruments like Social Impact bonds (SIB) could help companies mitigate the problems of investment choice and suboptimal investment.
What are SIBs?
Typically the governments decide what problems they want to address and then enter a contractual agreement with an intermediary (or bond issuing organization) that is responsible for raising capital from independent investors including banks, foundations, and individuals, and for hiring and managing non-profit service providers. If the project achieves its stated objectives, the government repays the investors with returns based on the savings the government accrues as a result of the success of the programme.
SIBs – a developing story
In the past couple of years, a number of investors have become interested in developing social impact bond projects in UK, US and Australia. These are typically socially minded socially minded and mostly quasi-public sector investors who are willing to make a smaller return for public good. These have been focused on social services.
The first instance of social impact bonds was in 2010 when the UK Ministry of Justice applied this approach at a prison in Peterborough, England. It tied with a non-profit intermediary, Social Finance, to provide services to prevent reoffending by 3000 short sentence male prisoners over six years.
Following this several other experiments with social impact bonds have been started. These include -rehabilitation of prisoners in Rikers island, US; two programmes for young people dis-advantaged or at risk of disadvantage to help them participate and succeed in education or training and thereby improve their employability in US; programme for homeless in US; adult recidivism in New South Wales, Australia; and more.
In probably the first public request for social impact bond programs in international development, DFID, UK’s development agency has included a request for social impact bond approaches in its requests for proposals through the Girls’ Education Challenge Innovation Window. The programme would be spread across 16 countries to find better ways of getting girls in school and ensuring they receive a quality of education to transform their future.
The interest in social impact bonds is growing largely because of several factors – saving public money; correcting poor incentives by aligning payment and success; unlocking new funding form philanthropists and social investors; promoting evidence based transfer; risk-shifting to private sector;, etc. Despite these benefits SIBs are, as yet, untested with even the first investment in Peterborough not yet fructified.
SIB’s and Corporates
SIBs or variants could play a significant role by bringing discipline in corporate social spending by ensuring that money goes towards desirable projects and using the pay for benefits concept to ensure that money is fruitfully spent. A context driven decision matrix driven by some of the following parameters could help CSR managers take a strategic decision on the direction of their CSR investments:
- Quantum of funds available
- Social Issue or issues that the company and other supporting companies have chosen
- What is the impact expected and the timeframe?
- Do the co-investors including government body agree on all critical parameters?
Overall the impact metrics must be simple, and incentive must be built into the bond value. Subject to the final rules surrounding CSR investments and SIB’s the funds from encashed bonds can also be reinvested in more CSR projects, or core business.
However, this requires both an active interest in CSR and a change in mind-set by corporate India.
Are the corporates willing to go beyond the beaten path? Are they willing to make CSR a serious benefit based proposition? Are they willing to move beyond local communities around their factories? Many questions that are in search for answers..
Article coauthored with Utkarsh Majmudar and originally published in Economic Times.