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Social Finance

The thoughts expressed in this Guest Opinion are those of the writer and do not necessarily reflect the views of S&P Global.

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As an immigrant in the United States, Andrew Chen experienced and witnessed inequality firsthand in credit markets. Routine financial activities, such as opening a bank account or setting up a mortgage, were daunting challenges for his parents who had no credit histories. Realizing that existing credit systems were not designed to work well for everyone, Chen devoted his career to address this challenge, first as an engineer and eventually as an impact investor. As an engineer, Chen sought to design more environmentally sustainable financial products by accounting structural issues such as market mispricing.

Over time, he noticed similar sub-optimization of systems in economic spaces. Why is there so much inefficiency? Why are there bad price signals? Why are some people not being served? To answer and solve these systemic challenges, Chen transitioned into community development venture-capital work at BlueHub--and today he is the Vice President of Social Investment at Social Finance.

Social Finance is a nonprofit organization dedicated to mobilizing capital with a set of outcomes-based financing strategies known as Pay for Success (PFS) to measurably improve the lives of those in need. Social Finance designs and implement PFS projects such as Social Impact Bonds (SIBs) and Career Impact Bonds (CIBs), which seek to leverage capital markets to create social change. Specifically, the CIB is a unique financing model that not only offers career training and support for low-income students, but also includes wraparound support services to help students graduate and pursue in-demand careers.

Under Chen’s leadership, Social Finance has expanded its influence by launching its UP Fund, a $40+ million pool of impact-investor capital for CIBs that help low-income students secure good jobs in a rapidly changing economy. For Chen, the opportunity to scale impact in this fashion is what initially impelled him to form Social Finance. By moving away from a singular goal of maximizing returns from students’ earnings, CIBs offer another way for students to finance their education. Because not all students are eligible for commercial income-sharing agreements (ISA), Career Impact Bonds offer a life-altering chance to those who are ineligible for ISAs. Student supported by CIBs enter the same programs and classroom as their peers and graduate and find jobs at the same rate, which demonstrates that initial incomes are—at best—imperfectly correlated with abilities.

As Chen and Social Finance look to expand access and use of PFS projects, interest from states has grown; in particular, to these projects stretch the impact of their workforce-development dollars. Social Finance is now reimagining how impact capital can be recyclable for states with a vehicle that is bond-like, low-risk, and yet can make a large social impact in boosting employment.