4 An external evaluator measures success rates as pre-defined by SFI and the outcome payer. SFI: Innovating Social Change with Impact Capital

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1 SFI: Innovating Social Change with Impact Capital The value of the Social Impact Bond (SIB), also known as the Pay -for-success model, is its unique ability to find mutual benefit for investors with different risk profiles, recruit an assortment of service providers for comprehensive interventions, make embarking on social initiatives financially attractive, and provide governments with critical insight on effective service provision. In essence, SIBs are a performance based contract between social service providers, investors, governments and other stakeholders. This contract stipulates that private capital that is invested in a specific social service program will be returned to investors by the government, or another stakeholder, only if predetermined social outcomes are achieved. Social Finance Israel (SFI) is the first and only non-profit in Israel driving the flow of capital to address social issues with this innovative financing tool. SFI engages and educates policy makers, non-profits, financial institutions and the private sector on harnessing the economic benefits of tackling a range of social challenges, including housing, unemployment, chronic illness, education and criminal justice. As the pioneer in Israel, SFI aspires to expose new industry actors to SIBs, and their potential to solve social issues while generating financial returns. Since its inception in 2013, SFI has successfully launched two Social Impact Bonds, the first to reduce dropouts among Computer Science students in higher education, and the second to prevent the onset of type 2 diabetes among at-risk pre-diabetics. Outcomes-Based Philanthropy: Guarantee the Impact of Every Dollar Outcomes-Based Philanthropy (OBP) optimizes charitable giving by shifting the focus of charitable giving to verified outcomes. Traditionally, philanthropic grants are made to fund social programs beforehand, requiring philanthropists to bear the risk of funding an ineffective program. OBP, on the other hand, shifts the focus of these funds towards measured outcomes, i.e. quantifiable indication of the improved circumstances of beneficiaries. Also known as Pay-For-Success, this model empowers charitable givers to deploy funds if, and only if, intervention programs succeed in achieving predetermined outcomes. 1 Raising capital from impact investors Investors 5 Optimize philanthropic funds by shifting charitable giving towards verified outcomes Outcome Payer Operator 2 Operator receives funding in advance 4 An external evaluator measures success rates as pre-defined by SFI and the outcome payer Measurement Participants 3 Funds are utilized to recruit participants and implement the intervention 1

2 The model operates in five stages. A motivated outcome payer (OP), e.g. a philanthropic organization, wishes to create a measurable social change, and selects a social issue aligned with its vision. At this stage, Social Finance Israel (SFI, see Appendix A) assists the OP to identify and define specific outcome(s) that accurately indicate the success of an intervention program. Funds are then raised from impact investors to finance an evidence-based intervention that is designed by SFI based on thorough research. Then, investor funds are transferred to the service provider(s) to implement the intervention in the target population. Following program activities, an independent evaluator verifies the achievement of the outcomes that were previously determined by SFI and the OP. Finally, for each predetermined outcome that was achieved, the OP issues payments to investors as a return on their investment (See Appendix B). Outcomes-Based Philanthropy: A Win-Win-Win Outcome Payer: Rather than funding social programs in advance, with no guarantee of outcomes, the OBP model offers 100% security that charitable gifts are being allocated towards a positive social outcome. In contrast to traditional philanthropy, where the giver is responsible for funding inputs and determining the appropriate reach of a program, OBP empowers philanthropic organizations to set a price for the outcomes they desire as a result of the program, and to use donor funds only when those outcomes are achieved. The OBP model offers philanthropic outcome payers complete security that donor funds will not be used in cases of failed implementation. With ƒfinvestors financing the intervention, a program that failed to achieve desired outcomes will require no payments from the philanthropic OP, resulting in financial loss to investors. This enables philanthropic organizations to utilize donor funds with a 100% efficiency rate, making for highly appealing feedback to donors on the impact of their gifts that every dollar donated made an impact. Investors: Until recently, social initiatives were funded solely by government and philanthropy. An OBP enables a new type of funder to promote social change, by offering them the prospect of financial returns. Moreover, in case where philanthropy takes on the role of an impact investor, this model radically improves traditionally insufficient practices of social impact evaluation. Service Provider(s): The service provider, e.g. an NPO, has fund security and can focus on their core competency, effecting social change. During program implementation, SFI oversees and participates in enhancing the service provider s methods and technical capacities, working to ensure that outcomes are achieved. Target Population: The OBP model is unique in that it binds financial incentives to a proven, measured, social change. The greater impact that is created, the greater returns are for investors, incentivizing all participants interest to enhance their efforts. This translates to unprecedented, in-depth analyses that result in best practices that can be used in future interventions or in government programs 2

3 Design and Structure of Outcomes-Based Philanthropy Although SFI takes full responsibility for the design and creation of the model, steps are taken by the OP to offer them greater agency. First, a social issue is chosen by the outcome payer. The issue area could be unemployment, education, or social welfare, all issues that have been successfully probed for SIB feasibility. SFI will support this decision with data, research and its local network. Then, SFI will provide a thorough feasibility study that analyzes the root causes of the social issue and defines effective intervention methods. Finally, SFI structures an intervention plan based on the data. Only after this analysis will the outcome payer and SFI be able to define what constitutes as successful outcomes. Afterwards, financial modeling and selection of a service provider are done by SFI. The service provider is chosen by virtue of their capabilities and is usually a local non-profit. After the model is complete, SFI begins fundraising, pitching to impact investors. As this is the final step, investors have a lesser influence on the shaping of the intervention model. Outcomes-Based Philanthropy: Staying in The Driver's Seat Philanthropic organizations can assume one of two financial positions in the OBP model, either paying for success as an OP or financing the intervention as an impact investor. On one hand, investors bear the financial risk of implementation failure, but are entitled to returns in the case that the desired outcomes are achieved.. On the other hand, an OP is to an extent the owner of their Pay-for-Success initiative, in that the OP dictates the social mission and defines the outcomes that constitute program success. It is our position at SFI that philanthropists are best suited to be an OP, as this position offers them superior control in securing desired outcomes. 3

4 Appendix A: Social Finance Israel Social Finance Israel (SFI) began in 2013 as a not-for-profit with the aim of delivering measurable social outcomes, through development and deployment of financial and social innovations. SFI is part of the Social Finance Global Network, the world s leading group of purpose-driven financial intermediaries. The company is chaired by Sir Ronald Cohen and led by CEO Yaron Neudorfer. SFIs team is comprised of professionals with diverse backgrounds and extensive experience within the public and private sectors, investments, and social research. Our board of directors reflects the hybrid nature of our activities, consisting of 1 st tier professionals from the business sector and the social sector, offering their vast experience in cultivating the organization. Services and Activities Developing social impact bonds Creating other innovative financial vehicles Advisory Services for foundations, government, and NPOs Market Education through research, communications, and advocacy Data analysis and impact assessment Social Impact Bonds A Social Impact Bond (SIB), the financial structure the Outcomes Based Philanthropy model is based upon, is a financial instrument that raises funds from the private sector in order to fund prevention programs and support social causes. The funds are used to implement effective service programs, whose social performance is assessed to determine financial returns. These payments are made by outcome payers, in proportion to the successfully achieved social outcomes. SFI is a founding member of the Social Finance Global Network, advancing the global market for Social Impact Bonds through its advisory services arm. In Israel, SFI is the only organization with a successful track record of developing and deploying SIBs. Since its inception, SFI has successfully launched two SIBs: Reduce Drop Out Rates from 1. Higher Education 1 (computer science) 2. Tackling Type 2 Diabetes 600 $2.1M 2250 Computer Science Capital Raised High Risk Pre-Diabetes Students Dropping out adversely affects employment opportunities, and is more prevalent among students from marginalized groups. Reducing dropout rates also creates financial value for academic institutions, which is harnessed to provide returns to investors as well as benefit the institutions. $5.4M Capital Raised Type 2 Diabetes is a chronic disease that affects around 10% of the world s population. Complications from diabetes significantly impact the lives of individuals, their families and communities, while creating a burden for healthcare budgets. Our project will serve as a proof of concept for implementing lifestyle interventions that result in reduced medical expenses and welfare allowances, with the ultimate aim of spurring a nationwide intervention. 4

5 We are examining various other issues, and plan to launch more SIBs in the future: Development Stages: Improving K-12 Math for Bedouins Prisoner Rehabilitation Early Detection of Colorectal Cancer Feasibility Stages: Reducing car accidents with fatal injuries Employment for the unemployed Elderly Poverty reduction among single-parent families Tackling Loneliness Among the Elderly Worldwide SIBs Market The first SIB was issued in 2010 by Social Finance UK, a sister company to Social Finance Israel. This SIB dealt with reducing recurring crimes of discharged prisoners. In light of the program's success, the British government decided to expand the activity to the entire British prison system in the UK. Since the launch of the first SIB, the market for SIBS has been growing continuously, and today there are 89 SIBs in 19 countries. 34 SIBS BY SOCIAL ISSUE 33 SIBS BY COUNTRY Workforce Development Housing / Homelessness Child & Family Welfare Health Criminal Justice Education & Early Years Environment & Sustainability Adults With Complex Needs United Kingdom United States Netherlands Australia Canada Portugal Japan Israel France Finland Sweden India S. Korea Germany Belgium Switzerland New Zealand Peru Austria Advisory Services We work with non-profits, philanthropic foundations, social enterprises, financial institutions and socially motivated investors looking to develop a social-financial vehicle that creates opportunity and value in their field of interest. Social Finance Israel will consult and assist partners in: Impact Strategy & Impact Investment Framework Support organizations in defining their mission and theory of change for their impact investing activity. Measurement Methodologies and Measurement Tools Refining and testing of measurement concepts for projections, real-time reporting, and post-activity assessments for investor and funder reports. Measurement services include economic evaluation of program impact, government and municipal spending on social issues, and projected savings due to a proposed intervention or product introduction. Investment Readiness Devising operational models to achieve social outcomes and supporting clients through due diligence by investors or government tenders. Feasibility of Vehicles and Deal Structuring Consulting clients on a variety of creative new solutions to mobilize capital toward solving social issues. 5

6 Market Education As a pioneer organization in the Israeli market, SFI aspires to expose new players and partners to the SIB model and its potential to improve society. SFI continues to engage and educate policymakers, not-for-profits, and industry entities regarding the benefits of SIBS and other new social investment vehicles. SFI promotes its activities to the general public as well, increasing awareness for social impact investing and SIBs in particular. Unique Advantages to Philanthropy Our activities and services offer philanthropy the opportunity to put impact first in an innovative way, as we are dedicated to mobilize capital to drive social progress. Primary advantages of supporting our work are: Shift Funding Towards Prevention Create Best Practices Encourage Efficiency, Measurement and Focus on Outcomes Enable Innovation in the Public Sector Foster Collaboration Evergreen Venture Philanthropy 6

7 Appendix B: 'Pay-For-Success' Two Case Studies Type-II Diabetes Prevention 20M Shekels (5.2M$) were raised from 14 social impact investors (foundations, HNWI, financial institutions). Funds are used to finance the service provider, B-Well, which works with 2,250 pre-diabetic participants. Subject to measurement and evaluation, an execution report is submitted to the outcome payers, which in this case are two HMOs, Clalit and Leumit, and The National Insurance Institute. The outcome payments are then transferred to the 14 initial investors, as a return on their investment. Reducing dropouts in higher education 8M Shekels (2.1M$) were raised from 3 social impact investors (foundation, HNWI, financial institution). The investment is made to finance the service provider, Aluma, which works with 600 students at risk to drop out. Subject to measurement and evaluation, an execution report is submitted to the outcome payers, which in this case are two higher education institutes, Haifa University and The Tel-Aviv Jaffa Academic College. The outcome payments are then transferred to the 3 initial investors, as a return on their investment. 7