Social Policy Bonds: an overview in 600 words

Social Policy Bonds in 600 words Policy as if outcomes mattered

Social Policy Bonds are a radical new financial instrument designed to inject market incentives into the achievement of social and environmental goals. These can include:

Social Policy Bonds would be backed by either government or by the private sector. They would not bear interest and would be redeemable for a fixed sum only when a targeted social or environmental objective has been achieved and sustained.

The bonds would initially be auctioned for whatever price they would fetch. Thereafter they would be freely tradable at all times until redemption. People would buy and sell Social Policy Bonds just as they do normal bonds and shares. The price of Social Policy Bonds would be higher the closer the targeted objective is to being achieved. As the objective became less remote, the price of the bonds would rise. It is this increase in value that generates the incentive for bondholders not just to hold bonds, but to do something to help achieve whatever is the targeted objective.

If government backs the bonds, then the effect of a bond regime is to contract out the achievement of social and environmental goals to the private sector. Government would still specify the objective, and would still be the ultimate source of finance for their achievement.

However, private individuals or companies could also back Social Policy Bonds. Wealthy individuals, rather than give to charity, could issue bonds redeemable when a particular social objective that they favour has been achieved.

Whoever issues bonds, they would not prejudging how their targeted objective is to be achieved. That would be left to bondholders, who would have powerful incentives to minimising the cost of achieving the specified goal. If they were inefficient and failed to achieve the goal, then their bonds would fall in value, increasing the incentive for more efficient investors to purchase the bonds and do what they can to achieve the objective.

The market for Social Policy Bonds would generate valuable information about the total and marginal costs of achieving social goals. Apart from their cost-effectiveness, they would also inextricably link rewards to outcomes. Unlike current government programmes, which reward activities, people, or institutions, Social Policy Bonds would reward bondholders only when they have successfully achieved the specified objective.

Social Policy Bonds, by targeting specified outcomes would also be more transparent than current policies. As well, social and environmental goals are often more stable than the best ways of achieving them: scientific knowledge and technology, for instance, are always changing, and policies that specify ways of achieving goals can become obsolete overnight by awareness of new scientific relationships. Social Policy Bonds, however, would specify only the particular target - not the way of achieving it. So, for example, a bond regime would target climate stability, rather than alleged causes of it, such as greenhouse gas emissions. (And even if these emissions do cause climate change, cutting them may not be the best way of achieving climate stability.) A bond regime would reward only the most efficient solutions to climate change or any other social or environmental goal, rather than what are currently thought to be the best solutions.

Social Policy Bonds therefore could improve the efficiency, transparency and stability with which public and private sector social and environmental goals can be achieved.

© Ronnie Horesh

If you would like to read more about the Social Policy Bond concept and its applications, further papers are available via the Social Policy Bonds home page. For longer treatments, click on "books and ebooks".