SIINCs are SIBs 2.0……and likely to be far more successful

At ClearlySo we have never been very enamoured of SIBs. They have always seemed an expensive and labour-intensive instrument, and not of good value to our clients, which is the fundamental test.

On the other hand they have been very intensively supported by government and leading players in the impact investment space. To some extent this proves the point about their lack of fundamental appeal. Surely an innovation so intensively supported would have progressed much more rapidly by this point.

This in no way undermines the monumental contribution they have made to how we think about the possibilities in impact investment. One breakthrough of SIBs, much to the credit of their creator, Social Finance, is that they secured payment by governments to investors based on social impacts achieved. This was an amazing accomplishment.

Fundamentally the problem that needs addressing is one of externalities. When enterprises generate high social impact as a by-product of what they do, society benefits. These benefits could be in the form of governmental expenditure which will no longer be necessary or things we simply enjoy for free, such as clean drinking water. The challenge has been how to capture the benefits of those positive externalities.

SIBs are a complicated way of achieving this, because they require a set of agreements between commissioners, investors, providers, impact verifiers and potentially others along the way. Securing agreement by so many parties is difficult and time-consuming.  There are also fees at several levels. We have consistently argued for using the tax code to “tilt” in favour of enterprises generating positive social externalities as a more efficient mechanism. Such arguments have hitherto fallen on deaf ears.

Social Impact Incentives (SIINCs) are a positive innovation and a logical next step beyond SIBs. Originated by Roots of Impact, a German organisation, SIINCs have been developed in cooperation with the Swiss Agency for Development & Cooperation with a test on high impact enterprises in Latin America. In simple terms, a direct payment is made by an organisation such as a foundation or development agency (“outcomes payer”) to an organisation generating social impact. The need for an independent verifier of outcomes/impact on customers/beneficiaries remains but this is the only necessary complexity. Roots of Impact argue in a recent paper that the SIINC model is highly flexible and adaptable and doesn’t require any agreement except from the outcome payer and the enterprise. The payment increases the revenues of the enterprise and therefore the profitability of the enterprise is enhanced.  Even an agreement with the investor may therefore prove unnecessary, and in any event can be quite a separate/unlinked discussion.

The brilliance of the SIINC model is that it facilitates payments by those who care about positive externalities directly to the enterprise thereby changing their business model. This is a simple, straightforward bilateral agreement, which addresses the inherent complexity of SIBs. The added cost for an independent verifier of impact should be more than offset by the cost savings achieved to governments, for example. As more positive externalities are captured this way capital markets will adapt to the new (payments-enhanced) business models of these high impact enterprises.

SIINCs are a brilliant innovation, a next step in the thinking prompted by SIBs and I congratulate Bjoern Struwer, Christina Moehrle and Rory Tews (all from Roots of Impact) in conceiving this innovation.

My only concern is that as a non-Anglo-Saxon innovation it will fail to get the attention it deserves.