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Social finance is a category of
financial services Financial services are service (economics), economic services tied to finance provided by financial institutions. Financial services encompass a broad range of tertiary sector of the economy, service sector activities, especially as concerns finan ...
that aims to leverage private capital to address challenges in areas of social and environmental need. Having gained popularity after the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, it is notable for its public benefit focus.Organisation for Economic Co-operation and Development.
New investment approaches for addressing social and economic challenges.
''Science, Technology and Industry Policy Papers''. By Karen Wilson, 1 Jul 2014, pp. 41-81.
Mechanisms of creating shared social value are not new; however, social finance is conceptually unique as an approach to solving social problems while simultaneously creating economic value. Unlike philanthropy, which has a similar mission-motive, social finance secures its own sustainability by being profitable for investors.Canada, Department of Employment and Social Development
''Harnessing the power of social finance''.
2 May 2013, pp. 10-26.
Capital providers lend to
social enterprise A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being. This may include maximizing social impact alongside profits for co-owners. Social enterprises ha ...
s, who in turn, by investing borrowed funds in socially beneficial initiatives, deliver investors measurable social returns in addition to traditional financial returns on their investment. Consensus has yet to be established on a formal definition of social finance due to a lack of clarity around its scope and intent;Emerson, Jed, and Nicholls, Alex.
Social finance: Capitalizing social impact.
''Social Finance'', edited by Jed Emerson, et al., Oxford University Press, 2015, pp. 1-45.
however, it is said to include elements of
impact investing Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an a ...
,
socially responsible investing Socially responsible investing (SRI) is any investment strategy which seeks to consider financial return alongside ethical, social or environmental goals. The areas of concern recognized by SRI practitioners are often linked to environmental, ...
, and social enterprise lending. Investors include charitable foundations, retail investors, and
institutional investors An institutional investor is an entity that pools money to purchase security (finance), securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, s ...
. Notable examples of social finance instruments are social impact bonds and social impact funds. Since the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, the social finance industry has been experiencing a period of accelerated growth as shifts in investor sentiment have increased demand for ethically responsible investment alternatives by retail investors. Mainstream sources of capital have entered the market as a result, including Deutsche Bank, which in 2011 became the first commercial bank to raise a social investment fund. New research in the field calls for increasing the role of government in social finance to help overcome the challenges the industry currently faces, including the struggle to produce desirable returns for investors, high start-up and regulatory costs, neglect from mainstream banks, and a lack of access to retail investors. Proponents of social finance argue that until these gaps are addressed, mass participation in social finance will be prevented.


Origin

The history of social finance has its origins in 20th-century neoliberal economics and the ideas that it proposed, such as an emphasis on the role of the
free market In economics, a free market is an economic market (economics), system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of ...
in society. The concept itself first came in to use in the 1970s in the United States, where it emerged as an innovative approach to solve social problems while creating economic value. The appeal to government was clear: access to swaths of private capital to fund social programs at a time of deep austerity and retrenchment of state programs under neoliberal politics.Lehner, Othmar M.
The Architecture of Social Finance.
''Routledge Handbook of Social and
Sustainable finance Sustainable finance is the set of practices, standards, norms, regulations and products that pursue financial returns alongside environmental and/or social objectives. It is sometimes used interchangeably with Environmental, Social & Governance ( ...
'', edited by Gadaf Rexhepi, Routledge, 2017, pp. 35-49.
In 1977 in the United States, the
Community Reinvestment Act The Community Reinvestment Act (CRA, P.L. 95-128, 91 Stat. 1147, title VIII of the Housing and Community Development Act of 1977, ''et seq.'') is a United States federal law designed to encourage commercial banks and savings associations to h ...
provided the impetus for financial institutions to invest in underserved local regions and marginalized sectors of the economy, furthering state transfers of wealth to the private sector. This spawned a plethora of community development financial institutions, which deployed significant amounts of capital in affordable housing, renewable energy, and financial inclusion across the United States. Furthermore, many prominent foundations, including the Ford, Rockefeller, and MacArthur Foundations, have actively invested their endowments in a manner that aligns with this practice of mission-related investing. Some scholars contest that social finance has its origins in Islamic finance, which was practiced by the sharia-compliant Islamic economies of the 1960s and which is characterized by socially responsible investment.


Market structure

The social finance ecosystem is composed of four key groups: # Investors: Investors, or capital providers, serve as the initial and primary source of capital in social finance. Examples include retail investors, high-net-worth individuals,
pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...
s, charitable foundations, and
private foundation A private foundation is a Tax exemption, tax-exempt organization that does not rely on broad public support and generally claims to serve humanitarian purposes. Unlike a Foundation (nonprofit), charitable foundation, a private foundation does no ...
s. # Social enterprises: Social enterprises represent the demand for investment in social finance. They absorb the capital invested by investors, reinvest this money in various socially beneficial initiatives, or social investments, and finally deliver investors twin social and financial returns on their investment. Examples include
nonprofit organizations A nonprofit organization (NPO), also known as a nonbusiness entity, nonprofit institution, not-for-profit organization, or simply a nonprofit, is a non-governmental (private) legal entity organized and operated for a collective, public, or so ...
such as the
Bill and Melinda Gates Foundation The Gates Foundation is an American private foundation founded by Bill Gates and Melinda French Gates. Based in Seattle, Washington, it was launched in 2000 and is reported to be List of wealthiest charitable foundations, the third largest char ...
. # Social finance institutions: Social finance institutions act as
financial intermediaries A financial intermediary is an institution or individual that serves as a "Intermediary, middleman" among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, insura ...
by linking the supply and demand of capital. They are responsible for raising funds from investors, pooling these funds, and redistributing them to social enterprises. Social enterprises are ranked by profitability, and preference is given to organizations with strong track records of effective social service. #
Intermediaries An intermediary, also known as a middleman or go-between, is defined differently by context. In law or diplomacy, an intermediary is a third party who offers intermediation services between two parties. In trade or barter, an intermediary acts ...
: Intermediaries facilitate and oversee the myriad connections between the first three groups. They include regulators, trade groups, and
service provider A service provider (SP) is an organization that provides services, such as consulting, legal, real estate, communications, storage, and processing services, to other organizations. Although a service provider can be a sub-unit of the organization t ...
s.


Scale of operations

Research reveals that the term social finance is familiar mainly to people working in the niche sector of financial services.Maurer, Bill.
The Disunity of Finance: Alternative Practices to Western Finance.
''The Oxford Handbook of the Sociology of Finance'', edited by Karin Cetina, et al., Oxford University Press, 2012, pp. 413-431.
Since the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, however, the social finance industry has experienced a period of accelerated growth and institutional uptake. For example, in 2011
Deutsche Bank Deutsche Bank AG (, ) is a Germany, German multinational Investment banking, investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Stock Exchange. ...
became the first commercial bank to raise a social investment fund, in 2012
Goldman Sachs The Goldman Sachs Group, Inc. ( ) is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many internationa ...
floated Social Impact Bonds in the US, and in 2012 the
European Investment Fund The European Investment Fund (EIF), established in 1994, is a financial institution for the provision of finance to SMEs (small and medium-sized enterprises), headquartered in Luxembourg. It is part of the European Investment Bank Group. It ...
made a direct investment into the UK social finance marketplace. Explanation of the post-crisis popularization of social finance is the subject of extensive academic research. Social theorist
Bill Maurer William M. Maurer (born March 31, 1968) is an American academic scholar of legal anthropology, legal and economic anthropology, economic anthropology. He currently serves as the dean of the University of California, Irvine School of Social Scienc ...
explains it as the result of shifts in investor sentiment in the aftermath of the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
. Social finance, through its innovative approach to solving social problems while creating economic value, has met the need of disaffected retail investors who seek ethical investment alternatives following revelations in the aftermath of the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
of widespread unethical business practices by mainstream corporations in pursuit of profit. As a result, Maurer suggests, mainstream corporations looking to rebuild their reputations are now entering the market, bringing with them significant inflows of capital and investment. One study, which provides a statistical analysis of participation, satisfaction, and retention rates in the European social finance market, suggests that the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
occurred at a time when social finance organizations were beginning to develop track records that demonstrated their market feasibility. Geobey and Harji, in their anecdotal study of social finance in the post-crisis United States, document similar findings in the North American case. Their study, which synthesizes interviews with executives from North American social finance organizations, confirms that demonstration of commercial viability by current actors in the North American social finance market since 2008 has proved themselves to mainstream financiers, enabled the scaling up of operations, and created a "signalling effect" that has attracted new investment and ultimately staved off existential questions that have been asked of the social finance industry. Proponents of social finance Kent Baker and John Nofsinger claim that these trends of
institutionalisation In sociology, institutionalisation (or institutionalization) is the process of embedding some conception (for example a belief, norm, social role, particular value or mode of behavior) within an organization, social system, or society as a w ...
will lead to the legitimisation of the social finance industry, give way to the widespread institutional uptake of social finance, and ultimately embed social finance as a mainstream asset class of financial investments among the likes of stocks and bonds. However, several unfavourable trends have also become apparent, including uneven uptake. Key challenges remain, including the struggle to produce desirable returns for investors, high start-up and regulatory costs, and lack of access to retail investors. Baker and Nofsinger argue that until these gaps are addressed, mass participation in social finance will be prevented.


Examples


Social impact bonds

Of all forms of social finance, the most used and developed is the
Social impact bond A social impact bond (SIB), also known as pay-for-success financing, pay-for-success bond (US), social benefit bond (Australia), pay-for-benefit bond (Australia), social outcomes contract (UK), social impact partnership (Europe), social impact ...
(SIB). SIBs are structured
financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership, interest in an entity or a contractual right to receive or deliver in the form ...
s that raise private capital to fund prevention and early intervention programs in areas of pressing social need, reducing the need for expensive safety net services in the future. Investors provide up-front capital to fund these programs and receive a prearranged amount of money (including the principal plus some financial return) if performance results are achieved.United States, Center for American Progress.
Social Finance: A Primer. Understanding Innovation Funds, Impact Bonds, and Impact Investing.
' 5 Nov 2013.
Funds from SIBs are spent on services like
counselling Counseling is the professional guidance of the individual by utilizing psychological methods especially in collecting case history data, using various techniques of the personal interview, and testing interests and aptitudes. This is a list of c ...
,
health care Health care, or healthcare, is the improvement or maintenance of health via the preventive healthcare, prevention, diagnosis, therapy, treatment, wikt:amelioration, amelioration or cure of disease, illness, injury, and other disability, physic ...
, and detention, with the aim of reducing the need for these services in the first place. Proceeds from the savings are used to reward investors for facilitating the process. Unlike conventional bonds, however, SIBs operate on a pay-for-performance basis, in which bondholders are repaid only if the program’s outcome targets are achieved.


Social investment funds

Social investment funds (SIFs) pool funds from investors to provide
not-for-profit A not-for-profit or non-for-profit organization (NFPO) is a Legal Entity, legal entity that does not distribute surplus funds to its members and is formed to fulfill specific objectives. While not-for-profit organizations and Nonprofit organ ...
organisations with “patient working capital” (funding with a longer-term repayment schedule). The Social Innovation Fund is a well-known example of a SIF. Through a competitive process, it awards grants of up to $10 million per year to organisations with strong track records of effective social service.


Comparisons with other forms of social welfare enhancement

Efforts to create mechanisms to allocate capital for combined social and economic
value creation In marketing, a company’s value proposition is the full mix of benefits or economic value which it promises to deliver to the current and future customers (i.e., a market segment) who will buy their products and/or services. It is part of a ...
are not new.Kramer, Mark, and Porter, Michael.
The big idea: Creating shared value.
''Harvard Business Review'', vol. 89, pp. 2-14.
Mulgan, Geoff.
Measuring social value.
''Stanford Social Innovation Review'', vol. 38, pp. 38-43.
Social finance is conceptually a very different approach to social welfare enhancement, however, in that, by combining the ideas of neoliberal markets (in creating a profit and financial return) with taking care of social needs (in the way that a charity would), social finance secures its own sustainability by being profitable for those who fund these organisations. It is funded by investors, who receive a return on their investment, rather than donors, who forgo their contribution at the time of donation. The ‘ blended’ social and financial returns are a defining characteristic of social finance and distinguish it from related practices, such as not-for-profit investing, charity, and philanthropy.


Comparison with corporate social responsibility

Leading scholars in the field of social innovation, such as Stephen Sinclair, Neil McHugh, and Michael Roy, question the need for social finance given the extensive existing frameworks that govern
corporate social responsibility Corporate social responsibility (CSR) or corporate social impact is a form of international private business industry self-regulation, self-regulation which aims to contribute to societal goals of a philanthropy, philanthropic, activist, or chari ...
in capital markets. Their critical analysis of the efficacy of social impact bonds concludes that social finance draws capital away from productive investment opportunities and exacerbates allocative inefficiencies caused by excessive existing government regulation. Separate studies reaffirm these claims and argue that improved efficiencies are needed before social finance is marketized. Proponents of social finance concede that while its intent overlaps with that of corporate social responsibility, social finance provides a means for greater direct investment in addressing social challenges, whereas existing corporate governance frameworks work at the fringe. Othmar Lehner, Associate Professor of Social Enterprise at the University of Oxford Saïd Business School, states that while traditional financial institutions typically prioritise profitability and regard their societal impact only so much as regulation requires, social finance enterprises set social objectives as the first goal of their capital allocation strategies, channelling investors’ funds directly to organisations that prioritise projects with socially positive outcomes. In his opening chapter in the ''Routledge Handbook of Social and Sustainable Finance'', he proposes social finance as a new source of capital to supplement existing sources, such as charitable donations and philanthropic grants, which have historically been the main source of financing social change, from poverty alleviation to international development and income inequality. Social theorists Jed Emerson and Alex Nicholls reaffirm these claims by suggesting that social finance provides the greater direct investment required to address various social challenges and fill the capital gap that currently exists, given that many social needs have increased in severity, complexity, and scale, while charitable donations are on the decline.


Challenges and future direction

The social finance industry faces several headwinds, including the struggle to produce desirable returns for investors, high start-up and regulatory costs, neglect from mainstream banks, and lack of access to retail investors, an area that is believed to have perhaps the most demand. Furthermore, although the industry has matured, it has done so at an uneven pace across its ecosystem, as evidenced in the United States in particular. While capital flows and trust between suppliers (investors) and demanders (social finance institutions) of capital are improving, regulatory developments have lagged behind. One study concedes that the rapid growth of social finance in the 21st century has exposed its self-regulatory capacity, the need to strengthen governance mechanisms, and the need to develop sophisticated intermediaries to link capital and opportunities. The source suggests that institutional uptake of social finance will be held back by these headwinds and, unless the gaps are addressed, the social finance industry will be unable to maintain its current growth rate into the future. Consensus of experts in the field maintains that the role of government in social finance will be central to addressing the challenges that the sector currently faces. Sustainability strategist Coro Strandberg proposesCanada, Planned Lifetime Advocacy Network.
Exploring new sources of investment for social transformation.
''Social Capital Market Roundtable''. By Coro Strandberg, 13 Mar 2006, pp. 6-8.
the following six public policy changes to address these challenges: * Legislative reform: recast legislation from a for-profit/not-for-profit framework to a sustainable and effective framework *
Tax incentive A tax incentive is an aspect of a government's taxation policy designed to incentive, incentivize or encourage a particular economic activity by reducing tax payments. Tax incentives can have both positive and negative impacts on an economy. Amo ...
s: offer tax incentives to encourage investments in social finance *
Capacity building Capacity building (or capacity development, capacity strengthening) is the improvement in an individual's or organization's facility (or capability) "to produce, perform or deploy". The terms capacity building and capacity development have often ...
: create a framework that permits organisations to build capacity through capital retention * Community investment: create an enabling environment for trustees to consider community investments consistent with their fiduciary duty * Regulatory reform: create a permissive framework for foundations to support social finance * Formalised sustainability plans: negotiate an allocation from the New Deal for Cities for the articulation of environmental, social, cultural, and economic goals into municipal sustainability plans and checklists


See also

*
Social enterprise A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being. This may include maximizing social impact alongside profits for co-owners. Social enterprises ha ...
*
Impact investing Impact investing refers to investments "made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return". At its core, impact investing is about an a ...
*
Microfinance Microfinance consists of financial services targeting individuals and small businesses (SMEs) who lack access to conventional banking and related services. Microfinance includes microcredit, the provision of small loans to poor clients; saving ...
*
Social impact bond A social impact bond (SIB), also known as pay-for-success financing, pay-for-success bond (US), social benefit bond (Australia), pay-for-benefit bond (Australia), social outcomes contract (UK), social impact partnership (Europe), social impact ...
* Socially-responsible investing


References


Further reading

* Canada, Department of Employment and Social Development
''Harnessing the power of social finance''.
2 May 2013, pp. 10–26. * Canada, Planned Lifetime Advocacy Network.
Exploring new sources of investment for social transformation.
''Social Capital Market Roundtable''. By Coro Strandberg, 13 Mar 2006, pp. 6–8. * Emerson, Jed, and Nicholls, Alex.
Social finance: Capitalizing social impact.
''Social Finance'', edited by Jed Emerson, et al., Oxford University Press, 2015, pp. 1–45. * Geobey, Sean, and Harji, Karim.
Social Finance in North America.
''Global Social Policy'', vol. 14, 2014, pp. 274–77. * Kramer, Mark, and Porter, Michael.
The big idea: Creating shared value.
''Harvard Business Review'', vol. 89, pp. 2–14. * Lehner, Othmar M.
The Architecture of Social Finance.
''Routledge Handbook of Social and Sustainable Finance'', edited by Gadaf Rexhepi, Routledge, 2017, pp. 35–49. * Maurer, Bill.
The Disunity of Finance: Alternative Practices to Western Finance.
''The Oxford Handbook of the Sociology of Finance'', edited by Karin Cetina, et al., Oxford University Press, 2012, pp. 413–431. * Mulgan, Geoff.
Measuring social value.
''Stanford Social Innovation Review'', vol. 38, pp. 38–43. * Organisation for Economic Co-operation and Development.
New investment approaches for addressing social and economic challenges.
''Science, Technology and Industry Policy Papers''. By Karen Wilson, 1 Jul 2014, pp. 41–81. * United States, Center for American Progress.
Social Finance: A Primer. Understanding Innovation Funds, Impact Bonds, and Impact Investing.
' 5 Nov 2013. *
What is Sustainable Finance?: The Economist Explains.
''The Economist'', 17 Apr 2018, pp. 23–26.


External links

* {{Investment-management Investment Corporate social responsibility Economy and the environment