What is Social Finance?

What is Social Finance?

What is Social Finance?

I recently did a presentation for an organization on how they could use their money to promote social and economic development in their community.

We ended up discussing in depth a concept called social finance, which in my opinion represents one of the major steps in rethinking our global economy and the active role we could all play in it.

So in the article below, I describe what social finance is and how you could contribute to it.

Social finance is the act of doing business while delivering a positive social and environmental outcome in addition to economic return.

Social finance includes:

1. Microfinance

It consists of providing financial services to individuals, entrepreneurs, and small businesses that lack access to regular services.

Microfinance integrates services like microcredit, microinsurance or microbanking.

Microfinance has played a huge role so far in reducing extreme poverty in developing countries, through the supply of accessible financial services to low-income populations.

2. Socially Responsible Investing

It is the range of ethical investment strategies that promote social and environmental improvements in addition to financial return.

Socially responsible investing is a broad term that can refer to Impact Investing (providing capital to organizations that have a positive social and environmental impact.

This can be done through angel investing, private equity, venture capital or debt). It can also refer to community investing (investing directly into community-based organizations to solve issues like housing, small business creation, education or development).

Sustainable business or green business: It is an enterprise that wants to minimize any negative impact on the environment, society or the economy.

3. Social enterprise lending

Social enterprise lending is done by special organizations that lend money to companies or non-profits dedicated to improving the well-being of society and the environment.

Loans generally have more flexible terms and lower interest rates than the ones provided by banks and other lending institutions.

4. Venture philanthropy

It is the funding of early-stage, high-potential and high-risk startup companies in order to achieve philanthropic goals.

Social enterprises: Businesses with a social mission that is core to their existence, as Digital Divide Date for example. A number of NGOs have transitioned to the social enterprise model in order to stop being dependent on donations.

5. B-Corp certified businesses

Traditional businesses or social enterprises having earned the B-Corp certification as a proof of their commitment to act in the best interest of the communities around them.

6. Socially Responsible Investments (SRI)

Negative screening of funds regarded as having a bad social impact. This is an investment strategy usually available in commercial banks, in which a portfolio will not invest in the tobacco or weapon industry, for example.

7. Impact investing funds

A fund actively seeking opportunities to create social impact while earning money for the fund managers.

While different views exist on impact investing, the most common one is that there should be no trade-off between social impact and financial returns.

The company Leap Frog Investment is a good example of an impact investor.

8. Venture philanthropy funds

Those are vehicles through which some philanthropists prefer to donate in order for their money to have a greater reach.

These funds typically seek to push forward a sustainable revenue-generating approach to businesses having a social impact.

The returns from these investments are not distributed back to the investors but are used to fund other promising social businesses. LGT Venture Philanthropy is one of the leading funds that exist in this category.

What To Do If You Are Interested In Social Finance

Below are some of the things you can do if you are interested in Social Finance.

1. Donate to non-profits that have a proven track record in solving social and environmental issues in your area.

2. Volunteer for microfinance institutions: Microfinance being a relationship-based activity, companies always need people on the ground to interact with their clients and assess their progress.

3. Set up a brokerage account and buy stocks from green or ethical companies you have researched on.

4. Include in your investment portfolio mutual funds or Exchange Traded funds (ETFs) that comprise companies with environmental sustainability, social responsibility, and corporate governance (ESG) practices.

Talk to your financial planner or your broker regarding available solutions within your bank or brokerage firm.

5. Buy shares in a community investment fund: Some investment companies start investment funds that provide capital to social enterprises in exchange for equity.

Investors who buy shares from those funds get a return on their investment depending on how the enterprises perform (like with any other fund) and possibly tax credits.

These funds are generally promoted by non-profit organizations that partner with the fund owners to identify ventures to invest in.

6. Research on how to buy a Social Impact Bond (SIB): Still at an experimental phase in most countries, social impact bonds are bonds that are sold by special organizations to investors in order to raise money for service providers that have been contracted by the government to solve a particular issue.

Those contracts may involve building infrastructure or reducing poverty, crime or obesity.

If the pre-set objective is attained, the government pays the service provider, who then reimburses the investors with interest (i.e. you get your money back).

If the objective is not attained, the government does not pay and investors may lose their money.

About The Author

Meinna Gwet works as a Chief Risk Analyst at the National Bank of Canada. Her specialty is in enterprise risk management for banks and insurance companies.

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