Opinion
Impact investing makes public funds work smarter – and the government should pay only when results are achieved
"Governments need to integrate impact investing as an essential part of their public reporting and oversight systems. At the same time, companies and corporations should include in their financial reports clear indicators that allow the extent of a company’s contribution to society to be measured," writes Sir Ronald Cohen.
The world is facing an unprecedented economic and social crisis. Governments are spending vast sums on various programs, yet this public expenditure does not always translate into genuine improvements in individual well-being. This makes the case for advancing impact investing and results based public spending both compelling and urgent. These are not slogans, they reflect the reality we live in and an urgent call to action.
Models of public spending based on results, in which governments raise private capital to deliver public services and grant investors a return only if genuine social improvements are achieved, can provide an answer to the economic and social inequality facing nations. Across Europe, and in Israel as well, governments are struggling with growing deficits and mounting debt. Defense, healthcare, welfare, and the transition to green energy are consuming an ever larger share of public budgets, and the pressure will only increase as populations age and artificial intelligence transforms the labor market. In this reality, the old methods can no longer suffice. A new model of public spending is needed, one that delivers greater value for every unit of taxpayer money.
The current models perpetuate inefficiency and strengthen, even amplify, the sense of alienation citizens feel toward their government. People see how their public funds are being used, yet they experience little meaningful change in their lives. The direct result is a decline in public trust and in the democratic system, proving just how essential a fundamental change has become.
The remarkable news is that this model is not merely a theory but one that has already been successfully tested, costing roughly half as much as traditional government commissioning. In 2010, we launched the world’s first social impact bond in the United Kingdom, designed to reduce reoffending rates among young prisoners. The capital was provided by private investors, and the government committed to paying them a return only if recidivism rates declined, with the government’s payment rising in proportion to the level of success achieved.
The result? Not only a clear reduction in crime rates, but also significant savings for the public system, returns for investors, and reduced risk and cost for the British Treasury. For the first time, a model emerged in which the interests of society, government, and investors were aligned within a single shared framework.
Since that initial pilot, the model has expanded at an impressive pace. Today, more than 300 social impact bonds and development impact bonds are operating across over 40 countries and in eight different policy areas, including education, healthcare, employment, and housing. This global expansion demonstrates that the model is an established and effective tool, not a passing experiment.
The social impact bonds launched in the United Kingdom have already proven their worth, delivering significant social outcomes and saving the government millions of pounds. But this is only the beginning. The market for ESG and impact investment funds has surpassed 40 trillion dollars, yet without a standardized method for measuring impact, much of this potential remains untapped. This is where the International Foundation for Valuing Impact (IFVI) comes in, developing a global framework that translates social and environmental contributions into clear financial metrics, much like the GAAP standards used in financial reporting.
The capital markets are also ready for the challenge. In 2023, the social investment market in the United Kingdom was valued at around 10 billion pounds, while the global market has already reached two trillion dollars. Of this, about 700 billion dollars are invested in bonds and loans where interest rates are reduced if the company or government meets social and environmental targets.
The most recent example is the Better Futures Fund, a one billion pound pay for social improvement fund, half of which is financed by the central government and the other half by local authorities and philanthropic foundations. The fund aims to improve the future of around 200,000 children and young people in the areas of education, employment, and crime prevention, with the potential to expand fivefold and influence additional fields such as homelessness reduction and vocational training. This innovative model demonstrates how partnerships between government, local authorities, philanthropy, and private venture capital can drive real-world change, a model that deserves to be adopted in Israel through the creation of a national Impact Partnership Fund to address challenges such as school dropout, youth employment, and homelessness reduction.
This model brings together, for the first time, the interests of all parties within a shared framework. By adopting impact investing, it will be possible to measure and value the social and environmental contributions of companies alongside their financial profits, and to transform the way economic decisions are made at both the national and global levels.
The solution lies in the hands of governments. I call on the G20 nations to take the lead in adopting and implementing results based payment models and to require companies and investors to integrate impact investing into their practices.
Is it possible? Without a doubt. We have already proven that it is. The real question is whether we will have the courage to scale it up.
If the answer is yes, we can create a new kind of economy that advances society, protects the environment, and secures a sustainable future for generations to come.
To turn this vision into reality, we must act now. Governments need to integrate impact investing as an essential part of their public reporting and oversight systems. At the same time, companies and corporations should include in their financial reports clear indicators that allow the extent of a company’s contribution to society to be measured.
If we take these steps, we can shape a new paradigm that aligns profit with purpose, business with society, and the present with a better future for generations to come.
Sir Ronald Cohen is a venture capital investor, philanthropist, and pioneer in impact investing. He serves as the founding president of Social Finance Israel.
