Social Impact Bonds: tradeability would change everything

I'm not a great supporter of Social Impact Bonds (SIBs), with which I've had no involvement. They came on the scene after my first presentations of Social Policy Bonds and differ in that they are not tradeable. This seemingly minor difference is actually critical, and I've explained why here.

So I agree with most of the aspersions cast on Social Impact Bonds by the authors of the paper excerpted below, which echo my own sentiments expressed here and here. However:

The introduction of a profit incentive fundamentally alters the relationship between the service provider and user. The principal client and dominant stakeholder of any given SIB is its financier, not those who receive the services it finances and whose voice rarely figures into any discussion. The motivation propelling private investment in SIBs is profit or return on investment, rather than assisting or changing the circumstances of citizens in need. ... This does not seem to trouble SIBs’ many proponents, who blandly assume that the interests of private financiers can be aligned with the needs of service users, and who are content to see the changing fortunes of citizens instrumentalized as payment triggers. SIBs thereby transform citizens into commodities....  SIBs exemplify the financialization and privatization of social and public policy; they reduce the rights of citizens both as service users and as a polity. A Critical Reflection on Social Impact Bonds, Michael J. Roy, Neil McHugh, and Stephen Sinclair, 'Stanford Social Innovation Review', 1 May 2018

Social Policy Bonds, being tradeable, can take a very long-term view: they can target goals that will depend on a shifting cast of investors for their achievement. Their goals can be meaningful not only to a clique of financiers, but to the public, who can participate in decisions about which goals shall be targeted and their relative importance. With such transparency about broad social and environmental goals, it is society as a whole who will be the principal stakeholders of a bond regime, and many will also be the direct beneficiaries of such goals as cleaner air, reduced crime rates, or similar large-scale goals that a Social Policy Bond regime can target. 

I also think Social Policy Bonds would not lead to undue profits, as implied by the paper and as could readily be made in a SIB regime. It's true that organisations would make profits if they are successful in achieving the targeted goals - that is, those goals that society wishes to see achieved. But, again, tradeability and the ability to target long-term goals, mean that the identity of service providers, whether those invested in the bonds or their agents, can change over time. (See here, for how Social Policy Bonds could lead to a new type of organisation, whose every activity would be aimed at achieving our social goals.)

And, because there would be no barriers of entry into investment in Social Policy Bonds, any profits would tend to be competed away over time between the bonds' flotation and their redemption after long-term goals have been achieved. There would be profits, but they would not be excessive. I don't agree with the authors of the paper that such profits would transform citizens into commodities, any more than paying teachers or nurses transforms schoolchildren or patients into commodities. 

All that said, I think SIBs could play a positive role if they serve as a stepping stone toward Social Policy Bonds. The danger is that their practical disadvantages might discredit the whole idea of contracting out the achievement of broad, long-term social and environmental goals to a protean cast of motivated investors.

Outlook: scary

Post number 1397, and as good a time as any to discuss policymaking and Social Policy Bonds. On both counts, I think the outlook is gloomy. I'd be less concerned about the fate of the bonds if there were any sign that policymaking were becoming more responsive to ordinary people's wishes and well-being. I don't see such signs, either in the country in which I'm currently based (the UK) or in the wider world. Government agencies and large organisations of every sort - corporations trade unions, universities, religious bodies, charities, etc - work hand-in-hand to further their own goals, which are very often irrelevant to the interests of the people they are supposed to represent, or actually in conflict with them. This divergence is replicated at the supra-governmental level.  

20 May 2024

Members of the Security Council observe a moment of silence in the memory of Seyyed Ebrahim Raisi, President of the Islamic Republic of Iran, aka as the 'Butcher of Teheran'. Source

 

 

The results of this divergence are apparent and disconcerting: 

• increasing inequality of income and (especially) wealth within countries, leading to a loss of faith in government in democracies and autocracies alike,
• extreme polarisation of political factions,
• environmental disasters, in the seas, rivers, climate etc, and
• increasing fears of a nuclear exchange.

Decades of all politicians' ignoring the wishes of ordinary people have led to a pervasive nihilism and learned helplessness as nobody thinks they can do anything to improve things at any level above the local.

The aim of Social Policy Bonds is to inject market incentives into the solution of our social problems. But the first essential element was to articulate and prioritise society's goals. Free, competitive, markets have been manipulated and undermined by big organisations, including government regulatory agencies, but even more crucially, there's little discussion of, or priority given, to society's wishes. Vague suggestions that more economic growth will solve all our problems are made, though even given the narrow definition of growth, as measured (usually) by GDP, the poorest in most western countries have benefited little from decades of it. Politicians, prisoners of their paymasters or their ideology, just don't identify with ordinary citizens.

Realistically, there's almost no chance that anything like Social Policy Bonds will be issued in the near future. There has been some interest in the non-tradeable version (with which I have no involvement) known as Social Impact Bonds or Pay-for-success Bonds, but nobody's made the leap to making them tradeable, which I regard as essential to the achievement of society's goals. My main worry now is about a nuclear exchange. The taboo against threatening use of nuclear weapons has recently been broken; the taboo against their use looks fragile. The other huge challenges - environmental and social - remain, but a sustained absence of a nuclear exchange is a necessary condition for addressing them. My forlorn hope is that some combination of government, NGOs, philanthropists and ordinary people, raise funds that would provide meaningful incentives for people to actually bring about (not simply to 'work towards') world peace. Applying the Social Policy Bond concept to that goal is my suggestion, though I'd welcome any gesture in that direction.

Poor countries have no incentive to deal with climate change

Bjorn Lomborg writes: 

Life for most people on earth is still a battle against poverty, hunger and disease.... Tackling global temperatures a century out has never ranked high among the priorities of developing countries' voters - and without their cooperation, the project is doomed. When the only problem was climate change, Bjorn Lomborg, 'Wall Street Journal', 8 May 2024

Sad, but true. The intense focus on climate change and, in particular, greenhouse gas emissions is, I think, unfortunate, in that it's a global problem that requires global cooperation - which is not happening and is not going to happen. National governments should focus on improving the well-being of the people they are supposed to represent; there are plenty of country-level environmental problems that could be solved without the cooperation of other countries: I'd nominate clean water and air, and loss of habitat as a priority for most developed countries, but others will disagree. 

But climate change, or climate breakdown, and the problems it gives rise to, is serious. I think it should be addressed by Climate Stability Bonds, which would be issued by a supra-national body, and backed by contributions for national governments, NGOs, and philanthropists. A crucial first step would be to define precisely, exactly what we want to achieve. The fundamental question is whether we want to try to change climate, or to mitigate climate-related adverse impacts on human, animal and plant life. I envisage a range of biological, ecological, financial and social measures would be targeted, all of which would have to fall within an approved range for a sustained period before the global climate stability goal would be deemed achieved, and after which bondholders would be paid. Such a scheme would have big advantages over the current approach, which is extremely expensive and achieving nothing at all: I refer (again) to this graph:

'Climate activism became a big public cause about halfway along this graph. Notice any effect?' From Riding the Climate Toboggan, John Michael Greer, 6 September 2023

I have written about the bonds and their advantages in papers linked to here. For the purposes of this discussion, the one relevant advantage is that, once they have deposited their funds into the bonds' escrow account, governments need not try to persuade, cajole or threaten other governments to help achieve our climate change goals: all necessary actions would be undertaken by a shifting cast of highly motivated bondholders, working with each other in ways that we cannot foresee, over the requisite, long, time period. The bonds would set up a system of cascading incentives: bondholders would do what they can to ensure that, when global cooperation is absolutely required, reluctant national governments would have incentives to comply. 

'Flow-trimming': another deception

George Monbiot writes about UK rivers:

I’d been wondering how, when more sewage has been entering our rivers than ever before, some of the water companies have managed to improve the ratio of the sewage they treat v the sewage that pours untreated from their storm overflows into our rivers and the sea. Now we know. It’s called “flow trimming”. Sounds innocuous, doesn’t it? What it means is that sewage is diverted into rivers and ditches upstream of the water treatment works. By reducing the amount of sewage entering the works, the companies can claim to be dealing responsibly with a higher proportion of it. The one reliable pipeline, George Monbiot, 10 May 2024

When goals are narrowly defined, it's easy to get away with stipulating outcomes that do nothing to achieve what society wants to achieve or, worse, that conflict with society's wishes. That's because narrowly defined goals are of little interest to most of us, so are not subject to widespread monitoring. As with much of the regulatory environment, they can be easily manipulated to mislead the public or to stifle competition. 'Flow trimming' is just another example.

My suggestion is that we become more familiar with defining society's environmental and social goals as broadly as possible. So that, instead of meaningless goals such as 'increasing the proportion of sewage entering the plant that's treated', we target indicators that actually are, or are inextricably correlated, with what we want to achieve. So, we should be targeting 'the health all of our rivers', as exhibited by an array of indicators of ecological well being. The benefits of doing so are not limited to making manipulation more difficult: goals that are too narrowly defined can be achieved by shifting problems from one realm to another. So, for example, the goal of reducing the level of several particular polyfluoroalkyl substances (PFAs - better known as 'forever chemicals') in our rivers could be readily achieved by replacing them with an untargeted set of such chemicals. The goal of improving the health of one river could be achieved simply by relocating a source of pollution to a different river a few miles away. 

Expressing our goals in broad, meaningful, terms has advantages other than making our goals less susceptible to manipulation. It makes them more amenable to public participation in their construction and, for many goals, more public engagement in monitoring progress toward their achievement. It means we can more readily formulate long-term goals, so making it easier to optimise resource allocation over time, and providing policy certainty which, again, encourages long-term thinking. 

The Social Policy Bond concept would have these, and additional advantages: it would inject market incentives into the achievement of our social or environmental goals, maximising efficiency as measured, in our example, by improvements in the health of the UK's rivers per pound spent. My work on applying the concept to environmental goals is linked to here.

Sitting on the razor's edge

Concluding her recent book on nuclear war, Annie Jacobsen writes:

Nuclear war is insane. Every person I interviewed for this book knows this. Every person. The whole premise of using nuclear weapons is madness. It is irrational. And yet here we are. Russian president Vladimir Putin recently said that he is “not bluffing” about the possibility of using weapons of mass destruction. North Korea recently accused the U.S. of having “a sinister intention to provoke a nuclear war.” We all sit on the razor’s edge. Nuclear War: A Scenario, Annie Jacobsen, March 2024

Each step along this razor's edge was taken rationally given the incentives on offer, and historical precedent, which tells us that if someone else, enemy or not, has a decisive weapon in their artillery, then we had better acquire one too. These individually justifiable steps have taken us, collectively, to the brink of nuclear exchange. (The term 'nuclear war' isn't really apt, as it's likely the exchange would take place over hours rather than years.) It speaks to the madness of humanity's current condition that we are at a point where our best hopes for nuclear deterrence lie in having leaders who are, or who appear to be, irrational (pdf).

Where do we go from here? The technology to develop and deliver nuclear weapons (which also doesn't sound right - they're not for fighting, they're for killing whole populations) can't be wiped from our collective memory - except by their use, which would wipe out our collective memory and all of humanity and most other life besides.

Under the current system, while the total number of weapons has shrunk, the number of countries that own them has risen. The knowledge and materials needed to build them are widely, and increasingly, available worldwide. There's little to deter state and non-state actors, from doing their best to acquire them.

Numerous actors are making efforts to prevent nuclear proliferation. They aren't, though, rewarded in ways that are linked to their success or otherwise in their mission. This does not mean that they aren't working as hard as they can, nor that they are not sufficiently motivated. It means that they have fewer resources at their command with which to continue with their current efforts and to explore other, perhaps more effective, approaches.

My suggestion is that, with the need for diverse, adaptive approaches, interested governments, NGOs, and others collectively back and issue Nuclear Peace Bonds. These bonds would reward the sustained achievement of nuclear peace, however it's brought about, and whoever helps achieves it. Effectively, the bonds would be paying people to stop other people initiating mass annihilation. It's some way short of ideal, but it is better than where we appear to be heading. Ms Jacobsen continues:

What if deterrence fails? “Humanity is just one misunderstanding, one miscalculation away from nuclear annihilation,” United Nations Secretary-General António Guterres warned the world in the fall of 2022. “This is madness,” he says. “We must reverse course.” How true. The fundamental idea behind this book is to demonstrate, in appalling detail, just how horrifying nuclear war would be.

Another way of subsidising the rich

Environmental policy now seems focused almost exclusively on greenhouse gas emissions. Almost anything that might reduce the net emissions of those gases that are currently thought to be the instigators of global warming is lauded and, indeed, subsidised, regardless of its impact on land use, water quality, child labour, and the viability of public transport.

And inequality. Take Norway, which is...

...constantly being hailed as a frontrunner in the promotion of electric cars. It is true that there has been a real boom of BEV [battery electric vehicle] sales in the country – due to generous government subsidies. However, the overall picture is not so rosy - one might even consider it tragic. Namely, in 2010, there were 2,308,000 cars, while by 2022 this number jumped to 3,105,000 – in a country with a population of 5.4 million. During this period, the number of internal combustion engine (ICE) cars did not decrease at all. ... Many [Norwegians] think that it would have been more useful to invest more in public transport and encourage cycling and walking. Subsidies for electric cars have also increased social inequalities by primarily benefiting the wealthier individuals who usually bought one or more additional cars to the already existing one(s). Electric cars are a dead end, András Lukács Aydan Gurbanova, 'The Ecologist', 16 April

There's something really cynical about this. If we are serious about wanting to reduce our impact on the climate, then we need to enact policies that reduce our impact on the climate. We need also to take into account the negative externalities of our policies, not only on distribution (of income or wealth), but also on the environment more generally. 

My suggestion is that we focus on the outcomes that we want to achieve, rather than the supposed means of achieving them. The fundamental question is whether we want to change the climate, or to reduce the adverse impacts of climate change. We could, for example, aim for a range of social, physical, biological and financial indicators (insurance claims for instance); all of which must fall within an approved range for a sustained period in order for our climate goal to be deemed achieved. The tunnel vision focus on greenhouse gas emissions won't do anything to bring about such a broad range of goals. In fact, despite vast expenditure of bureaucratic energy, technical advances, coercion and subsidies it's even failing to reduce greenhouse gas emissions: 

'Climate activism became a big public cause about halfway along this graph. Notice any effect?' From Riding the Climate Toboggan, John Michael Greer, 6 September

Our scientific knowledge about the impacts of, and optimal solutions to, climate change is constantly expanding, and we need policies that allow for that. My suggestion is that we reward those who achieve an array of meaningful climate-related targets by backing and issuing Climate Stability Bonds. These would stimulate research into, and implementation of the diverse, adaptive approaches that will be necessary to bring about an efficient solution to the climate change problem.

Betting markets and benign manipulation

Zachary Basu writes about the 'explosion of legalized gambling' in the US, which 'has set the stage for a provocative new frontier in the world of risk-taking — betting markets for everyday events, ranging from Taylor Swift streams to hurricanes hitting major U.S. cities.'

Punters...

...can bet on hundreds of real-world events — whether the Fed will cut rates, the high temperature today in Miami, Oscar nominations, the outcome of Supreme Court cases — on Kalshi, the only federally regulated exchange dedicated to event markets.... Some ethics experts have raised concerns about the integrity of betting on natural disasters and other markets tied to human suffering, as well as those that could be subject to manipulation. America the slot machine, Zachary Basu, 10 April

If there were a market that promised huge rewards for successfully predicting, say, a halving of the number of people killed by natural disasters in the US, then you can see how it would be in punters' (otherwise known as 'investors'') interests to do whatever they can to improve US citizens' resilience to such disasters. And that explains how I came up with the idea of Social Policy Bonds: the aim is to reward not so much the successful prediction of future events, but successful efforts to influence future events to the benefit of society. Hence, in this example, Disaster Prevention Bonds.

The Social Policy Bond principle is a beneficial form of the manipulation to which Mr Basu refers, which can manifest itself in the sports world as match fixing. With governments (unsurprisingly) and philanthropists (disappointingly) taking only tiny steps in the direction of rewarding successful achievement of beneficial outcomes, perhaps another approach would be to set up a market with Kalshi for a relatively unambitious goal. Those who stand to lose money from, say, high crime rates in a particular city, such as insurance companies, could bet that crime in that city will not halve in the next five years. Punters on the other side of that gamble, and would be motivated to do all they can to make sure that such a halving does occur. Everybody would gain from this benign form of manipulation. Such is the Social Policy Bonds differ only in that those setting up the bet would aim to reduce all forms of losses, not only those that can be valued monetarily.

Transcending identity geopolitics: Conflict Reduction Bonds

Gideon Rachman asks:

What is it that causes some tragedies and conflicts to command the world's attention and others to pass almost unnoticed?

The tragedies of Ukraine, Gaza and Israel all get far more attention than wars and humanitarian calamities in the rest of the world. ... [L]ast week the UN warned that "Sudan will soon be the world's worst hunger crisis" with 18mn people facing acute food insecurity. It highlighted an ongoing conflict that involves "mass graves, gang rapes, shockingly indiscriminate attacks in densely populated areas" and more than 6.5mn displaced people. War and the rise of identity geopolitics, Gideon Rachman, 'Financial Times', 27 March

The answer appears to be something Mr Rachman calls identity geopolitics. But for my purposes, the 'why' doesn't really matter. A higher priority is, I believe, to target for reduction all deaths and depredations caused by human conflict, impartially; that is, without regard to people's identity, beliefs, or where they live. We have limited conflict reduction resources, and they should be deployed where they can relieve the most human suffering. When thinking rationally and compassionately, I believe most of us would agree. 

One way of doing this would be to issue Social Policy Bonds to target conflict and the results of conflict. The bonds could target conflict in a particular region (the Middle East, for instance), or the entire globe, or (simpler to monitor), nuclear conflict specifically, depending on the source, magnitude and interests of those funding the bonds. I will admit that the idea of issuing bonds targeting something the ancient Greeks and others have deemed an inescapable aspect of human nature seems overly idealistic at first sight. But incentives can direct our goals and behaviour in unimaginably varied directions. Financial incentives, as offered by the bonds, aren't the only way of influencing our behaviour but, if they are sufficiently large and embedded in a very long-term vision, they could attenuate some of the more negative human traits that lead to deadly conflict. If that sounds far-fetched, consider the power of financial incentives to foment conflict: without weapons at every level of sophistication, tragedies of the scale at which we are seeing today would simply not occur. Manufacturers supply weapons in such copious quantities precisely because of the financial incentives on offer. 

The links in the previous paragraph lead to pieces explaining how the bonds would work. In my view, issuing bonds with the goal of peace sustained for several decades would have two huge benefits:

• They would bring about more more efficient allocation of conflict-reduction resources, so minimising the human suffering that conflict brings about, including that measured in terms of deaths, injury, or homelessness.

•  For that reason, people would be more inclined to invest in conflict reduction, in all its aspects, many of which will be innovate and that we cannot anticipate. 

Greater effectiveness of peace making, and more resources devoted to peace making: I think it's worth a try.

Defining and rewarding peace

How do we define 'peace' in such a way it could be meaningfully targeted by such applications of the Social Policy Bond concept as World Peace Bonds or Middle East Peace Bonds? 

It seems difficult at first. Peace, in the sense of absence of open conflict reigns, by definition, in the years before wars break out. But the opening sentence of Liddell Hart's History of the First World War gives a clue:

Fifty years were spent in the process of making Europe explosive. Five
days were enough to detonate it.

A World Peace Bond regime would be targeting long-term peace. Bondholders therefore would be rewarded when they reduce the probability of conflict before it becomes lethal. As with most Social Policy Bond applications, our overall goal will be a set of subordinate goals, each of which has to be satisfied before the bonds will be redeemed. So, one such sub-goal could be to ensure that the 'number of people killed within 24 hours of an act of violence' falls below 5000 for a period of several decades. But this condition would have to be satisfied at the same time as others, such as the lethality of weaponry held by actors. 

With a goal for peace that must be sustained over fifty or more years, metrics that target for elimination the use of deadly violence become more closely aligned with what we actually want to achieve. With such a decades-long outlook, bondholders would have incentives not merely to prevent the outbreak of violence, but also to prevent the precursors to violence. For example: the Cold War ended peacefully, but if World Peace Bonds issued in the year 1950 had targeted a period of sustained peace of just ten years then bondholders would have profited, despite the accumulation of ever more horrific atomic and nuclear weapons, during the period that preceded the Cuban Missile Crisis of October 1962. If the same bonds had been issued with a target of fifty years of sustained peace, then bondholders would have been motivated to reduce tensions, including by such means as reducing the weapons pile-up, or fostering better relations between the US and USSR. A ten-year goal would see the original bondholders making profits while the prospects for peace looked ever darker. A fifty-year goal would have seen the value of their holdings collapse before and during the Crisis.

The point is that rewarding peace sustained for a decades-long period encourages longer-term thinking. By choosing to target a decades-long period of sustained peace, we should do much to eliminate the much less quantifiable - but hugely important - precursors of violence.

Even more appealing as a target would be nuclear peace. A goal such as 'fewer than 500 people killed by a nuclear device within one month of its detonation over a period of fifty years' would be even simpler to define robustly, and could be a top priority for organisations, or philanthropists perhaps, who wish to ensure nuclear peace, but have no means or wish to get involved in achieving it.

Black Out nights, climate and war: the need for verifiable goals

Stephen Bush writes about 'Black Out' nights in the US and UK, which are intended to encourage more black people to attend theatre performances by inviting an 'all-Black-identifying audience'. Mr Bush's opinion about this form of segregation is similar to mine (negative), but he is also ...

...struck by an equally important and more widespread problem: that no one involved either has any idea if the scheme works or any plan for measuring it. Even worthwhile causes need a metric for success (paywall), Stephen Bush, 'Financial Times', 11 March

He concludes:

All of us who criticise Black Out nights because we don't like the principle at stake are also guilty of failing to ask the first question we should pose to anyone doing anything, no matter how worthwhile. And that is: how, exactly, will we be able to tell if you've succeeded or failed?

It's a common failing, and one that is most grievous when it's made by policymakers. My previous post refers to an article written 22 years ago by Stephen van Evera, and I don't think things have improved since then. It's one of the reasons that I have posed Climate Stability Bonds as an alternative to the current focus on reducing greenhouse gas emissions as the sole solution the climate change problem. We can target emissions fairly accurately, but we cannot reliably link any changes in emissions to changes in the things that matter to us. We need to specify exactly what are those concerns, and set up reliable measures of progress towards addressing them, before imposing heavy regulatory and financial costs on society. That's one reason, I believe, that despite heroic efforts (alongside those costs), nothing in the way of greenhouse gas emission has been achieved.

'Climate activism became a big public cause about halfway along this graph. Notice any effect?' From Riding the Climate Toboggan, John Michael Greer, 6 September 2023

It seems that charities and activists are following the government's lead: declaring grandiose, lofty-sounding goals that just happen to be so vague as to resist effective monitoring. Speaking out against initiatives that may well be futile and certainly cannot be shown to be successful, such as Black Out nights or, indeed, agreements to cut greenhouse gas emissions is, in today's politically polarised scene, risky. Potentially even more disastrous for humanity than the climate change circus is the failure to set and reward verifiable goals for eliminating deadly conflicts: wars and civil wars and their consequences. There are well-meaning, hard-working people working for bodies ostensibly aimed at reducing conflict levels, but nobody is in a position to judge how effective are any of their myriad approaches.

A Social Policy Bond regime would not allow policymakers to get away with specifying goals that can't be measured. So, for example, we need to identify what exactly we want climate change policy to achieve. Our goals in that area could be defined in terms of a range of physical, ecological, social and financial indicators, all of which would have to fall within an approved range for a sustained period before the policy would be deemed successful, and holders of Climate Stability Bonds rewarded. That period could be decades long. All of this would be a sharp contrast to today's approach, which has as its sole goal a reduction in greenhouse gas emissions, which even if it were to be achieved, does not speak to the concerns of ordinary people, which is one reason why it has gained no real traction. Similarly, with conflict. Targeting broad, verifiable, meaningful, long-term outcomes, such as sustained period of a more benign climate or world peace would not only be more effective than any current efforts to solve global problems; it would enjoy more public support and hence more buy-in; essential if we are to successfully meet the huge challenges humanity faces, of which climate change and war are two of the most urgent.