07 April 2021

RBF: Impact Bond

Impact bond
Author/Compiled by
Hannah Wuzel (cewas)

Executive Summary

With rising awareness of global challenges such as climate change, an increasing number of investors is keeping an eye on incorporating environmental, social and governance (ESG) criteria into their portfolios. Impact bonds are starting to emerge as one of many ways for them to do so.

An impact bond typically involves a private investor, a service provider (in this case, a water enterprise), and an outcome funder (usually a governmental agency). The private investors provide up-front capital [to enterprises] for social services and are repaid by the outcome funder if the agreed-upon outcomes have been achieved (GIZ, 2020). This way, the outcome funder, instead of focusing on activities and input, pays only for certain desired outcomes, while the private capital bears the risk.

When applied as an instrument to finance enterprises, impact bonds allow an entrepreneur to receive investments to create impact during a certain transitory period of time and attract investors that are impact driven. Since the investor’s financial return is tied to the created impact, the investor incentive is aligned with the enterprise’s social mission. For investors, enterprises’ ability to effectively deliver on the desired impact is therefore of key importance for this investment instrument, even if they are not meeting financial returns expectations.

We can generally differentiate between two types of impact bonds, determined by the nature of the outcome funder: Development Impact Bond (DIB) in the case of the funder being a government, a model more prevalent in high-income countries, and Social Impact Bond (SIB) in the case of external donors such as a foundation or aid agency operating in low- or middle-income countries. Due to the focus on positive outcomes to interventions, impact bonds are also often referred to as “pay-for-success” financing.

When is an impact bond a suitable investment option?

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Impact bonds can be an interesting investment option to pursue if your project is oriented towards the benefit of people and planet but may be a bit too daring to appeal to governmental or traditional development donors, who tend to invest into traditional development projects. If you can convincingly argue 1) how your intervention would help the outcome funder achieve the predefined impact more efficiently compared to traditional input-based activities, 2) add a sustainability component to an eager private investor’s portfolio and 3) include a solid monitoring and evaluation strategy composed of measurable milestones, then you’re well-equipped to take on impact bonds.

If you qualify for impact bonds as a financing option along the above lines, you need to make sure suitable impact bonds exist or that you can jointly work with willing investors and funders towards setting up a suitable bond. This can be a key obstacle, given that most projects funded through impact bonds are inherently bespoke and may frighten investors off or make the costs unjustifiable to both them and the outcome funder. Good news: Increasingly, Environmental Impact Bonds (EIB) are gaining prominence! And even first WASH oriented Impact Bonds have been setup (see further below).

The following (non-comprehensive) characteristics and implications provide you with an overview to analyse the pros and cons for this investment instruments:

Enterprise Lifecycle

Mid- to later-stage enterprises and organizations


Larger contract sizes preferable due to high set-up costs

Pay-back period (Maturity)

Upon the end of the contract period, once a pre-defined outcome has been reached, the investor will be reimbursed with a profit by the outcome funder. The enterprise has no pay-back responsibilities

Use of funds

Mostly unrestricted

The following table summarises some key characteristics of an impact bond and implications you should consider:


What does this mean for your enterprise?

Impact bonds are more flexible than traditional (grant) contracts.

All parties entering into an impact bond accept that unforeseen circumstances may influence the journey towards the desired outcome, granting you more freedom to adjust your activities if things don’t go as initially planned.

An investment is only recovered if the outcome proves successful.

If you find the right investor, you can access donor resources that would otherwise remain out of reach, because the outcome funder will only be required to pay if all goals have been met. Be prepared for scrutiny: funding and repayment are not guaranteed, you thus need to deliver top-level social services in order to reach the desired outcome.

Outcomes and their measurement mechanisms need to be clearly defined.

Especially with projects focused on behavioural change (e.g., tackling open defecation), it is not always easy to measure whether a desired outcome has been reached. There needs to be mutual understanding between all parties how outcomes will be measured and evaluated, and the logic to tie together activities, output and outcomes (aka the theory of change) must be sound.

No equity is acquired and there is no board representation.

You can continue to manage your enterprise without having to engage and manage a(nother) shareholder.

Key features

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  • Impact bonds allow private investors to get involved in impact-oriented activities: The investor provides upfront funding to a service provider, such as an NGO or (social) enterprise, with the objective of reaching aforementioned desired outcome. If successful, the investor will be refunded and offered a return by the outcome funder.
  • Impact bonds aren’t a singular financing instrument, but rather a combination of impact investment, results-based financing and PPPs (public-private partnerships) (GIZ, 2020). Three main parties are involved: an investor, a service provider, and a final outcome funder.  
  • Environmental, Social and Governance (ESG) criteria are key to measuring the success rate and outcomes of financed projects.  

Tips to build your investment case as a young water-related enterprise

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Basic requirements

In order to convince investors and outcome funding entities to come together to support your project through an SIB or DIB, you need to be able to demonstrate:

  • Having a streamlined operation showing that you understand how much it costs to achieve the desired outcome and have the capability to meet the targets within a relatively short timeframe.
  • That your enterprise is experienced in creating impact and has already been successful by showing a track record of achievements.
  • Having a bullet-proof impact management system in place and will be able to track and ensure that desired outcomes of your project are being achieved – which also makes a certain amount of flexibility a prerequisite. This is arguably easier when it comes to environmental indicators (e.g., amount of water saved in irrigation, percentage of stormwater reused), but more complicated for social indicators.

For the following tips, we combine the case of the Cambodia Rural Sanitation Development Impact Bond, being the first DIB in the WASH sector with a fictive example.

CASE EXAMPLE: The Cambodian Rural Sanitation DIB is a partnership between the Stone Family Foundation, iDE and USAID, with the aim to achieve 1,600 open defecation free (ODF) villages—in line with the Cambodian government’s national strategy. The reasoning behind this DIB was partly based on the successful history of iDE’s to support the uptake of latrines over a period of almost 10 years. Building on longer term cooperation between the Stone Family Foundation and iDE, the DIB structure helped focusing on outcomes rather than inputs, providing iDE with more flexibility to adapt its approach to achieve results.

It is important to note that income achieved through impact bonds is not fixed, as is the case with bonds in the traditional sense, but depends on the outcome. This translates to a relatively high risk for the investor and means that the service provider must be able to demonstrate a stellar track record and a strategy for success. Under the DIB setup, the Stone Family Foundation’s investment is 100% at risk and USAID will only make outcomes payments when a village achieves ODF status. This is why trust (often built through longer term and well-maintained relationships) into the ability to deliver the envisaged impact is key for such investments. (HADLEY, S. 2019)

The Turkana Water Outcomes Facility is another water sector specific impact bond being setup in Kenya between Social Finance, Oxfam, and the Turkana County Government. The Facility will repay Turkana County when – and only when – there are reliable and sustained water services that people are prepared to pay for. In this case, performance metrics, to be measured over a two-year period, are centered on infrastructure reliability (total uptime of a water point, # of days required to repair water points, systems delivery capacity). The setup makes this impact bond very attractive for enterprises working on water infrastructure maintenance. (CONVERGENCE, 2021)

Leveraging your impact profile to access Impact Bonds

Due to the nature of impact bonds, which require extensive and costly set-up periods and crystal-clear structures, impact bonds are not always suitable for early-stage enterprises. As in the case of the Cambodia Rural Sanitation Development Impact Bond, impact bonds are sometimes realized in follow-up to earlier stage grant investments. If you cannot show a solid track-record yet, keep in mind that service providers in impact bond setups hardly do it all alone – if you’re at an earlier stage of your company’s life cycle, consider partnering with more mature entities and thus bringing enough fire power to the table to show to investors that you can get the job done. You should therefore explore impact bonds if…

…you have an innovative solution that might not attract traditional grant financiers

You’ve got a project sketched out that aligns perfectly with a governmental or donor entity’s policy priority in your region of implementation, such as a brand-new water-saving device for small-scale farmers. But your technology is new and perhaps somewhat unorthodox, and donors have been slow to adapt to progress, and continue to build on tried-and-tested traditional methods. As your up-front funding comes from private investors, the risk is decreased significantly for the outcome funder, who might be highly risk-averse due to bureaucracy-heavy organizational characteristics (think about your local government – not really who you would associate with a daring, out-of-the-box mindset, right?). However, investors, too, may see more benefit in funding proven models, so this largely depends on finding the right counterpart with an appetite for risk and trying new approaches. This is why it can be challenging to set the right level of return between the outcome funder and the investor, and it is important that you know how much it costs to create the desired outcome. In the Cambodia Rural Sanitation DIB, the Stone Family Foundation’s investment will be repaid with ‘a modest return’, but only if results are achieved. More commercial investors are likely to have higher return expectations.

Note that in many cases, the evaluation of the outcome to your intervention will be conducted by an external entity, or through a combination of in-house and external specialists. Make sure you have a solid understanding of how the evaluation will be conducted and that you fully grasp the language and indicators that will be deployed. Always keep an eye on this throughout the project’s implementation phase to make sure that no information gets lost later on. Ideally, the indicators should help you manage your operation better than being an additional reporting exercise.

… you are open to working collaboratively towards shared goals

When entering an impact bond, you as the service provider will often not be expected to “go in alone”. A typical working scenario could look as follows: a donor, such as an international aid agency (in our example USAID), has worked out an outcome they would like to see in a specific scenario, such as achieve 1,600 open defecation free (ODF) villages—in line with the Cambodian government’s national strategy (in the case of the Cambodia Rural Sanitation DIB) or increased use of sustainable agricultural water-saving technologies by small-scale farmers in the Jordan Valley, which will lead to less pressure on water resources in the region. In the case of Cambodia, iDE could build on a strong and locally rooted network. If you are an entrepreneur and the expert on water-saving technologies but with limited experience in the Jordan valley, you might want to consider partnering with another (or several) service providers with complementary expertise, such as a local community organisation with close ties to the farmer community, to make sure you can best reach your beneficiaries. Together, you can then muster up enough leverage to convince a socially minded investor with the right wallet size to invest into your project. Don’t just look at your investor as a wallet, though – they can likely provide expertise on contractual and performance management questions from previous experience.

Also, before getting to work, you need to conduct a thorough stakeholder mapping to gain an overview of who else is operating in your target market and how you can potentially join forces with them or at least complement one another’s work.

… you can justifiably influence a situation for the better that wouldn’t have just improved by itself over time, and can contribute to the prevention of future high-need intensive services

When aiming to lock in an impact bond, you need to be able to argue convincingly why it is worth pursuing this financing model rather than something more traditional. Part of this is of course being able to demonstrate that your intervention will lead to positive outcomes that couldn’t have otherwise been achieved, while keeping in mind that there are circumstances when an outcome-based financing model might not be appropriate (such as in the aftermath of disaster where urgent relief measures are required). In order to demonstrate this, it is important that you are working with a clearly defined, objective target group. You also need to convince the final donor that your intervention will save them money and resources in the long run, by preventing behaviour or practices that will become costly later on if left unattended.

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