For several years in France, the importance of sustainable and environmental issues has pushed the development of responsible logic at the heart of many investment strategies. The creation of the SRI (Socially Responsible Investment) label in 2016 as well as the multiplication of labeled investment vehicles, clearly illustrate the desire of investors to make responsible and sustainable investments. In this context and at the initiative of the government, the Responsible Impact Contract, an innovative financial mechanism, has emerged in the French economic and social landscape.
It is no longer just a question of investing in assets that limit their negative impact on the environment and society, but of directly supporting structures engaged in the general interest. Although few banking players have rallied around the subject to date, the current government commitment and the recently completed call for projects should probably provoke renewed interest.
An innovative financial structure from the United Kingdom
The first Social Impact Contract (CIS) was launched in the United Kingdom in 2010. For the government, this involves financing by a private investor an innovative associative project in the form of a bond, the return of which will be directly indexed to the success of the project. The CIS is structured around four actors: the association which launches the project (within a well-established framework and in particular with quantifiable performance indicators), the private investor who advances the funds, the ministerial or governmental body (this can be a fund created especially for this purpose – “a Payout Fund”) which remunerates the investment if the objectives are achieved, and an independent evaluator, responsible for measuring the real impacts and quantifying the results. If the project fails and if the objectives defined in the contract are not achieved, the investor may lose his entire investment. In addition, the remuneration in the event of success corresponds to a fraction of the budgetary savings made by the State thanks to the achievement of objectives. In 2010, the United Kingdom structured the first “Social Impact Bond” (or CIS) by launching a project on the reintegration of prisoners incarcerated in Peterborough. The committed budget is 8M € and the objective is to reduce recidivism in a given population by 7.5%, between 2010 and 2015. Lhe success criteria are largely exceeded: the recurrence rate drops by 9% and the investors, fully reimbursed, obtain a return of 3%.
Rapid global growth and progressive support from the State in France
Building on this initial success, the British quickly brought many projects to fruition and other countries, notably the United States, were quick to emulate them. To date, according to the global database of the French Impact Invest Lab platform, there are 169 CIS in 31 countries, for a total investment of 470 million dollars. France, far behind the United Kingdom and the United States, is struggling to make it a public policy tool in its own right. A first call for projects in 2016 enabled the first contracts to emerge, on projects committed to social issues such as mobility, professional integration or the fight against dropping out of school. To date, 9 contracts have been implemented, three of which were financed by BNP Paribas. The bank has made CIS a recognized expertise and combines the mandates of structurer and investor in 10 contracts around the world. In 2019, the High Commission for Social and Solidarity Economy and Social Innovation entrusted Frederic Lavenir, president of the Association for the Right to Economic Initiative, with the mission of drawing up recommendations in order to encourage the recourse to the CIS, to simplify it and to launch a dynamic of development. In his report, the latter identifies several areas of opportunity, and in particular proposes to give an institutional framework to the financial structure in order to make it more easily understandable with the development of a “standard” contract, but also to create a center. skills and above all, as in the United Kingdom, to demonstrate a proactive government commitment by launching a “performance-based payment fund”.
The growing interest of investors comes up against the challenge of valuation
As early as 2014, in their “Choosing Social Impact Bonds” report, the Bridges Ventures fund (specialist in impact investments and currently investor in 14 CIS) explains that CIS have original features that differ from other impact investments and make them particularly attractive. In particular, they make it possible to support entrepreneurial projects that directly tackle targeted social issues, but the alignment of the parties involved ensures that all the stakeholders are working in the same direction. Moreover, although in France in most of the CIS, at least half of the amount financed is conditioned on reasonably achievable objectives, it remains a particularly risky instrument. Investors are wondering about their potential return but also more concretely about how to value the asset in their portfolio. According to feedback published by BNP in December 2019, the maximum internal rate of return of CIS does not exceed 5.5%, which makes it, if we look at it, unattractive in the face of risk. to which we expose ourselves. The emergence of this type of product is therefore the illustration of a real shift that is taking place, towards a vision of profitability that integrates impact criteria.
While the issue of risk remains a major obstacle, customer interest in this type of product is clearly present. Following the recommendations of the Lavenir report in 2019, and in the light of numerous studies conducted around the world, the work carried out to clarify the structure of the CIS (the development of the “standard contract”) as well as the launch of the “Payment Fund to results ”(operational since the first quarter of 2020) should undoubtedly support the development of CIS. The three calls for projects, the first of which was initiated at the end of 2020, clearly illustrate the commitment of the French State. They will finance innovative solutions on the circular economy or even innovations that meet the challenges of equal economic opportunities. By the end of 2021, we should be able to observe whether new French banking players will have been able to go beyond the logic of profitability alone to commit to serving others.