Overview, 600 words

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:

• better health
• universal literacy
• an improved environment
• world peace.

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. Social Policy Bonds' advantages over current policies are most marked when a wide array of diverse, adaptive approaches, not all of which can be known in advance, are going to be necessary to achieve a social goal.

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 market 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 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 raise the funds for their achievement.

However, private individuals, non-govermental bodies 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 need not prejudge how their targeted objective is to be achieved. That would be left to bondholders, who would have powerful incentives to minimise the cost of achieving the specified goal. If they were inefficient and were failing in their efforts to achieve the goal, then their bonds would fall in value, increasing the incentive for more efficient investors to purchase their 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 people, institutions or activities, Social Policy Bonds would reward bondholders only when they have successfully made progress toward the specified objective, and the issuers (government or private-sector) would pay only when the goal has been achieved.

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 over time 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 our expanding knowledge of scientific relationships. Social Policy Bonds would specify only the particular target - not the way of achieving it. It would also focus attention on what society actually wants: so, for example, a bond regime could target for reduction the negative impacts of climate change on plant, animal and human life, rather than climate itself. And it could target those impacts, rather than alleged causes of climate change such as greenhouse gas emissions. A bond regime would reward only the most efficient solutions our social and environmental goals, rather than what are currently thought to be the best solutions.

By encouraging diverse, adaptive solutions, and because of their focus on outcomes, Social Policy Bonds could improve the efficiency, transparency and stability with which broad, long-term, public and private sector social and environmental goals can be achieved.

Further treatments of the concept and its applications can be found via the menus at left and right. A Powerpoint presentation, with notes, is available here.