How would you like to invest in a project that simultaneously provides a needed social service and generates a financial return? Nice idea, but not possible? Not exactly.

Social impact bonds (SIBs) do just that. The concept is simple and powerful: bondholders put money into projects that have meaningful social impact and earn a financial return based on measurable results. While still new, the idea is gaining traction in the United States and England, where this innovative approach to funding social services originated.

It’s an idea whose time has come, says Tracy Palandjian (MBA 1997), founder and CEO of Social Finance, a Boston-based nonprofit established in January to introduce SIBs to the United States. A companion organization with the same name is based in London. With governments here and abroad strapped for cash and philanthropies growing weary of pouring money into projects with little or no measurable result, SIBs offer a new way to address intractable societal problems.

Here’s how the bonds work. Private investors purchase bonds that finance preventive programs run by nonprofit groups. If the programs, such as reducing homelessness or prison recidivism, succeed by meeting measurable targets, governments save money, a portion of which is used to repay the bondholders with interest. If the programs fail to meet targets, the bondholders, not the government, suffer the loss.

The first SIB was launched last September in England to finance a project to reduce recidivism among low-level criminals. If the program reduces reconviction by 7.5 percent, investors recoup their money plus a graduated return that is capped at 13 percent a year.

Sir Ronald Cohen (MBA 1969), Chairman of The Portland Trust and Bridges Ventures and a leading proponent of SIBs, regards them as a new asset class: impact investment. In a recent commentary published by Reuters, Cohen wrote: “Just as hi-tech business enterprise and venture capital, working in tandem, have attracted increasing numbers of talented risk-takers since the 1970s, so social enterprise and impact investment are now attracting a new generation of talented and committed innovators seeking to combine new approaches to achieving social returns. Social enterprise and impact investing, in short, look like the wave of the future.”

Palandjian’s goal is to launch the first U.S. SIB in Massachusetts next year and a handful more in other locations over the following two years, totaling $100 million in impact investments. Social Finance will work with state and local governments to structure and monitor the funded programs. “Social impact bonds have a lot of promise,” says Palandjian. “They clearly demonstrate that social outcomes can be an investable asset.”

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