Yaron Neudorfer, CEO of Social Finance Israel, pays for success

Social Finance Israel, led by Yaron Neudorfer and his team, has dipped its toe into the water.

Yaron Neudorfer (photo credit: IDAN MAOZ)
Yaron Neudorfer
(photo credit: IDAN MAOZ)
GENERALLY, THE most impactful ideas are the simplest ones. Here is an example.
Ask people who have money to invest (not donate) to mitigate a serious and neglected social problem. Define in advance how you measure success. Monitor the results closely. Pay investors if and when measured success is achieved, in two to seven years.
Indeed, a simple idea − but not at all simple to implement well and wisely.
Two years ago, I wrote about how this idea was gaining momentum in Israel and abroad (“Mitzva bonds,” The Jerusalem Report, June 1, 2015). Now the second mitzva bond or social impact bond has been issued in Israel, to help prevent type 2 diabetes. I spoke with the CEO of Social Finance Israel (SFI), Yaron Neudorfer, about this pioneering project.
Neudorfer worked for the Finance Ministry for 12 years, including in a key position as deputy to the head of the ministry’s New York office, charged with managing Israeli government borrowing in North America. He left to become chief financial officer of the Jewish Agency, where he served for seven years.
The Jewish Agency is the world’s largest Jewish non-profit, with an annual budget of around $400 million. Some 70-75 % of its income is in dollars, but 70% of its expenditures are in shekels. A fall in the shekel price of dollars could have been highly damaging. Neudorfer hedged the risk successfully by locking in present exchange rates with futures contracts.
In 2012 Sir Ronald Cohen recruited Neudorfer to head SFI, the first social investment house in Israel. Sir Ronald is a British entrepreneur who built Apax Partners to become the world’s largest private equity firm, and then became a social bonds pioneer.
The Jerusalem Report
: Many former Finance Ministry officials like yourself leave the ministry to take high-paying jobs in banking and finance. For example, Yair Seroussi, who became Chairman of Bank Hapoalim. In agreeing to head SFI, you have given up considerable wealth. Why?
Neudorfer smiled and noted that there are already over 90 social impact bonds issued, in some 19 countries. He told The Report that SFI Israel can change the world, with a unique plan to confront social issues including what is now a worldwide epidemic. He claims that Israel’s type 2 diabetes prevention bond is the most innovative of the world’s existing social bonds.
“Israel can bring this innovation to the world. The social bond for preventing diabetes is innovative, also because it is ‘mainstream,’” he explained. “That is, it benefits what can be a very large population at risk for type 2 diabetes, whose onset is now around ages 40-50, when once onset of type 2 was only at ages 50-60.”
Diabetes is a metabolic disease in which blood sugar levels become very high. The side effects can be serious – heart attacks, kidney disease, even blindness. There are two kinds of diabetes. Type 1, “juvenile diabetes,” is caused by the body’s inability to produce insulin. Type 2, “adult onset,” is caused by the body’s inability to respond to insulin resulting from obesity and lack of exercise.
Type 2 diabetes is a global epidemic that severely afflicts Israel, too. Writing in a medical journal, Paul Z. Zimet, Monash University, noted, “Is type 2 diabetes the biggest epidemic in history? I believe it is a much bigger epidemic than the Black Death. There are now 415 million people in the world with diabetes.... This is clear evidence to suggest that we have a major global problem with type 2 diabetes.”
According to the Central Bureau of Statistics, Israel has the third highest mortality rate from diabetes among countries in the Organization for Economic Cooperation and Development (OECD). At 5.6 percent, Israel’s diabetes mortality rate is exceeded only by that of Turkey and Mexico. Half a million Israelis over the age of 35 have type 2 diabetes. And 400,000 people are pre-diabetic, showing clear signs they will develop the disease. For those aged 65-84, almost one person in every three is diabetic.
The social and economic costs of diabetes, through loss of work, health care costs, etc., are immense − about 5 billion shekels ($1.4 billion) a year. That sum, for instance, is 25% more than the cost of providing Israel’s disabled with a reasonable monthly stipend, now set at a disgraceful 2,348 shekels ($657), less than half the minimum wage.
The Report: Tell us how Israel’s type 2 diabetes Social Impact Bond works, in detail.
Neudorfer: “We will enroll some 2,250 pre-diabetic high-risk patients, along with a similar control group. The investment in the social bond, about 19.5 million shekels, will pay for an extensive prevention program. A case manager is assigned to each pre-diabetic. They are advised how to change their lifestyle, diet, exercise, etc. They get expert lifestyle and psychological counselling. The program will run for two years.
“Scientifically, we know this works. There is strong evidence that lifestyle changes are more effective in preventing diabetes than medicine or surgery. And the case manager works with the whole family as well.”
Neudorfer noted that experts from several others countries – Poland, Finland, Sweden, Australia – have shown interest in Israel’s diabetes prevention project.
The Report: “If you succeed in preventing type 2 diabetes among high-risk people, relative to the control group, who will pay your investors?” Neudorfer: “Two HMOs (Kupat Holim Clalit and Leumit) and the National Insurance Institute (NII) will pay for positive outcomes according to the level of success. The HMOs will save money on healthcare. National Insurance pays stipends to those with disabilities. Diabetes can disable people and keep them from work. The cost of diabetes for NII can be very high. Prevention will save both the HMOs and NII money.”
Among the blue ribbon investors in SFI’s first social bond are Prof. Ruth Arnon (who discovered Copaxon), Marius Nacht (co-founder of Check Point), Israel Makov (former Teva CEO), the Rashi Foundation and others.
I told Neudorfer about a recent meeting I had with a young Finance Ministry economist, who told me that Israel is drowning in money. Some 1.4 trillion shekels, or almost $400 billion, a third more than Israel’s annual gross domestic product, are under management by pension funds, insurance companies, banks, etc.
The Report: How can we bring a piece of this mountain of money (supply) to help and invest in those who truly and desperately need it (demand)?
Neudorfer: “That is exactly one of the purposes of impact investment, including social bonds. Imagine if one-tenth of one percent (“one pro-mil”) of that 1.4 trillion shekels were invested in social impact investments – just 0.1%! That would bring in 1.4 billion shekels to tackle social issues. A lot of people could be helped a great deal by that sum!
“At a conference, I met the chief investment officer of an Australian pension fund. He told me that 10% of his fund’s investments was invested in ‘social impact.’ He said that as a result, his returns were not any lower compared to other pension funds – but he gained a key competitive advantage because young people who wanted to change the world came to him precisely because of his social investments.”
Neudorfer explained how SFI’s innovative approach can help deal with the Gen Y (millennials) syndrome – the new generation of philanthropists is utterly different from the previous one. A survey of US millennials (those born between 1980 and 1995) showed that some 80% of them were strongly interested in social impact investing. The younger generation demands to see measurable results from their gifts and wants to be directly involved in resource allocation and management. No longer are the millennials willing to accept the model of their parents – write a check and learn once a year, if that, how things are going.
Here are a few examples of how social bonds are grappling with social and economic problems in other countries.
Recidivism (repeated crime): In 2010 the world’s first social impact bond was issued in the UK. It funded a 5 million pound ($6.5 million) program to reduce recidivism in a jail for short-sentence offenders. The goal: reduce repeat offenders by 7.5 %. The actual result was a 9% reduction. As a result, in July, investors got their money back along with 3% annual interest.
In New York City, each jail inmate costs taxpayers $168,000 a year. Keeping even a small fraction of them from returning to jail can save a fortune.
Asthma: A $1.1 m. social bond has been issued in Fresno, California, to reduce rates of asthma in underprivileged communities.
About 20% of Fresno residents suffer from asthma, over twice the national average. Health insurers spend over $5,000 per person annually on emergency hospitalization. The social bond project aims to reduce such hospitalization by 30-40% per year.
Poverty: In Mexico, in Jalisco state, where poverty afflicts 40% of the population, proceeds from Mexico’s first social impact bond will train 1,320 female heads of households to raise their income, savings and assets. After 30 months, if the program hits its target, investors will be repaid with interest.
Immigrants: Forty investors paid at least $100,000 each to fund a Massachusetts pay-for-success social bond to support Jewish Vocational Services (JVS), which helps immigrants from 67 countries find employment and build careers. The bond issue raised $12.4 million. If the JVS project fails to meet its goal, investors will lose their money, because the Commonwealth of Massachusetts will not have to ‘pay for success.’
THE BEAUTY of social bonds for Israel is that it is powerfully rooted in Jewish values. Rabbi Joshua Ratner is a director of JLens, a network of institutional investors who apply a Jewish lens to values-based impact investing. He notes that the Talmud says, at the moment of judgment in the world to come, we are asked not if we prayed or kept kosher, but instead, “Did you transact your business dealings ethically?” On December 5, a Jewish Impact Investing Summit will be held in New York City.
Former Teva CEO Israel Makov, an investor in SFI, once told me the secret of innovation, in nine words: First to imagine, first to move, first to scale. SFI has imagined, and it has moved. Now it needs to scale – grow the idea and expand it globally.
Neudorfer told me about his discussions with Jewish Federations in the US. They have large endowments that pay market returns, in general. Why not invest part of them in social bonds in Israel? You get similar returns, he argues, and achieve strong social impact. Several have expressed active interest.
I was privileged to read a draft of Nobel Laureate Robert Shiller’s book, “Finance and the Good Society” (2012). In it, Shiller dispels the idea that finance is inherently elitist, separating rich from poor, and hence an engine of economic injustice.
“Finance, despite its flaws and excesses, is a force that can help us create a better, more prosperous, and yes, more equal society,” he wrote. “The connection between Wall Street and Main Street is as fundamental for society as is the connection between the brain and the nervous system.”
The world of finance and investment banking has brought massive resources to entrepreneurs and hi-tech, driving much of Israel’s growth and prosperity. Belatedly, that sophisticated world is now bringing its skills and money to meet the enormous social challenges Israel and the world face.
Social Finance Israel, led by Yaron Neudorfer and his team, has dipped its toe into the water. I hope social impact investment and ‘pay for success’ will spread and scale up rapidly. We now understand that doing well and doing good can join hands to change Israel and the world.
The writer is senior research fellow at the S. Neaman Institute, Technion and blogs at www.timnovate.wordpress.com