The social impact bond (SIB) mechanism is becoming an important tool for tackling social and environmental problems. While this form of investment is not usually the most obvious source of yield for bond investors, it has become more popular in recent years as a means for private investors to give back to the community and reduce the impact of tackling social problems on the public coffers.
The International Committee of the Red Cross (ICRC) recently set up a humanitarian impact bond (HIB), which is based on the SIB structure, to further expand its physical rehabilitation programme and transform the way vital services for people with disabilities are financed in conflict-ridden countries.
Tobias Epprecht, head of the HIB initiative, says that while philanthropic capital is growing, it is not an unlimited source of funding. “As problems get bigger and needs constantly increase,we need to see how we can diversify our sources of funding,” he tells Personal Wealth.
However, he stresses that this does not negate the need for philanthropic funds, which are still the main source of the ICRC’s annual budget of US$1.7 billion. “Philanthropic funds are the only way to finance certain needs. For example, in acute emergencies or natural disasters, you won’t have time to set up impact bonds and structure them because you need the money now.”
The ICRC has raised CHF26 million (RM110.9 million) via the HIB. The funds will used to build and run three physical rehabilitation centres in sub-Saharan Africa. The scheme, which will be running in Nigeria, Mali and the Democratic Republic of Congo over five years, is expected to help rehabilitate thousands of people.
The HIB, like the SIB, is technically not a bond but a private placement where repayment and return on investment are dependent upon the achievement of desired outcomes. “A large portion of ICRC’s investments come from government funding. We constantly have to see how we can diversify our funding beyond government donations,” says Epprecht.