Doing Good by Being Profitable

CONTEXT: Social impact projects could be efficiently financed jointly by for-profit investors as well as socially-minded investors, as shown by ‘Investing for Impact’, a 2018 paper.

Social Impact Projects: These are projects that may or may not produce much financial wealth, but are worthwhile investing in for the social good created.

Corporate Social Responsibility:

• Implementation: 

• Mandated 2% contribution: Due to the financial limitation of socially-minded investors, corporations have to contribute out of their profits, for Corporate Social Responsibility.
• Choice of Social Impact: Rather than being a general tax, corporations can choose which cause to support with this mandatory contribution.

• Limitations:

• Nepotistic measures: Corporations are often seen channelling funds to friends and relatives. 
• Need of altruistic managers: The current setup for social impact projects tends to limit the pool of managers.

Benefits of SIGs: 

• To incorporate two diverse types of investors in one scheme:

• Pay-for-success securities: For-profit investors are offered Social Impact Bonds (SIBs), that pay more when social impact measured is high.
• Guarantee against social failure securities: Socially-minded investors are offered Social Impact Guarantees (SIGs), that pay more when social impact measured is low, which will be penalized from for-profit investors, for the shortfall in social good production.

• SIGs in Non-Governmental Organizations (NGOs): Market’s assessment of the NGO for its ability to produce social goods, will help it raise funds.

• Value of SIGs dependent on social outcomes: 

• Only if the projects fail to produce the desired social good.
• They can be either held out of CSR fund or traded in the secondary market.
• A higher SIG price suggests poor performance on social impact metrics.

• Incentivizes for-profit investors in social projects: The for-profit investors partially fund these projects by buying SIBs.

• An incentive to ensure that the project generates the social good as stipulated to minimize the cash payout to SIG holders, leaving a larger cash payout to for-profit investors.

• Nature of payout to SIBs: It is critical, as it aims to minimize payment to SIG holders, ensuring stipulated social good.

Conclusion: A combination of SIBs and SIGs would simplify choosing the most effective executives, who are both efficient and are incentivized to care about social welfare, by tying their cash compensation to attenuation of defined objectives.