Using derivative logic to speculate on the future of the social investment market

Abstract

This article pries open the black box of the social impact bond (SIB), the novel financial instrument at the heart of social investment. We discover that concrete information is currently limited and our method is thus more speculative. We address the obfuscation of the nomenclature of the instrument and explore the mechanics of SIBs to suggest that they are not simple bonds but rather also bear properties akin to those associated with derivative contracts. We speculate on possible developments of the market in these bonds by considering the history of some previous financial innovations, namely, collateralized debt obligations (CDOs) underpinned by microfinance loans and the short-lived policy analysis market. Our discussion leads us to reevaluate Goodhart’s law and the ways in which it operates in relation to SIBs. We conclude by suggesting that SIBs' inherent indifference to the underlying state of the world renders them ultimately unlikely to delivery improvements in public services.

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