The-role-of-Social-Finance-source-author

Social finance is a category of

financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...

which aims to leverage private capital to address challenges in areas of social and environmental need. Having gained popularity in the aftermath of the 2008 Global Financial Crisis, 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 ca ...

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 lacking 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 investing, 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 ...

socially responsible investing Socially responsible investing (SRI), social investment, sustainable socially conscious, "green" or ethical investing, is any investment strategy which seeks to consider both financial return and social/environmental good to bring about social ...

and social enterprise lending. Investors include

charitable foundation A foundation (also a charitable foundation) is a category of nonprofit organization or charitable trust that typically provides funding and support for other charitable organizations through grants, but may also engage directly in charitable act ...

retail investors An investor is a person who allocates financial capital with the expectation of a future return (profit) or to gain an advantage (interest). Through this allocated capital most of the time the investor purchases some species of property. Type ...

and

institutional investors An institutional investor is an entity which pools money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include commercial banks, central banks, credit unions, government-linked co ...

. Notable examples of social finance instruments are

Social Impact Bonds A social impact bond, also known as pay-for-success financing, pay-for-success bond, social benefit bond or simply a social bond, is one form of outcomes-based contracting. Although there is no single agreed definition of social impact bonds, mo ...

and Social Impact Funds. Since the

2008 Financial Crisis 8 (eight) is the natural number following 7 and preceding 9. In mathematics 8 is: * a composite number, its proper divisors being , , and . It is twice 4 or four times 2. * a power of two, being 2 (two cubed), and is the first number of t ...

the social finance industry has been experiencing a period of accelerated growth as shifts in investor sentiment has led to greater 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 which the industry currently faces including the struggle to produce desirable returns for investors, high start-up and regulatory costs, neglect from mainstream banks and lacking 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 Neoliberalism (also neo-liberalism) is a term used to signify the late 20th century political reappearance of 19th-century ideas associated with free-market capitalism after it fell into decline following the Second World War. A prominent fa ...

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 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 government or any ot ...

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 swathes 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 financial regulations, standards, norms and products that pursue an environmental objective. It allows the financial system to connect with the economy and its populations by financing its agents while maintaining a ...

'', 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 hel ...

provided the impetus for financial institutions to invest in under-served local regions and marginalised 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 characterised by socially responsible investment.

Market structure

The social finance ecosystem is composed of four key groups. These include: # Investors: Investors, or capital providers, serve as the initial and primary source of capital in social finance. Examples include

, high net worth individuals,

pension fund A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides retirement income. Pension funds typically have large amounts of money to invest and are the major investors in listed and priva ...

s, charitable foundations and

private foundation A private foundation is a tax-exempt organization not relying on broad public support and generally claiming to serve humanitarian purposes. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion ...

s. # Social enterprises: Social enterprises represent the demand for investment in social finance. They absorb the capital invested by group 1, 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 organisations such as the

Bill and Melinda Gates Foundation The Bill & Melinda Gates Foundation (BMGF), a merging of the William H. Gates Foundation and the Gates Learning Foundation, is an American private foundation founded by Bill Gates and Melinda French Gates. Based in Seattle, Washington, it was ...

. # Social finance institutions: Social finance institutions act as

financial intermediaries A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds ...

by linking the supply and demand of capital. They are responsible for raising funds from the investors of group 1, pooling these funds and redistributing them to the social enterprises of group 2. Social enterprises are ranked by profitability and preference is given to organisations with strong track records of effective social service. #

Intermediaries An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In law ...

: Intermediaries facilitate and oversee the myriad of connections between groups 1-3. They include

regulators Regulator may refer to: Technology * Regulator (automatic control), a device that maintains a designated characteristic, as in: ** Battery regulator ** Pressure regulator ** Diving regulator ** Voltage regulator * Regulator (sewer), a control de ...

, 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 ...

Scale of operations

Research reveals that the term social finance is familiar mainly to people working in the niche sector of the financial services industry.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

Global Financial Crisis Global means of or referring to a globe and may also refer to: Entertainment * ''Global'' (Paul van Dyk album), 2003 * ''Global'' (Bunji Garlin album), 2007 * ''Global'' (Humanoid album), 1989 * ''Global'' (Todd Rundgren album), 2015 * Bruno ...

of 2008, however, the social finance industry has been experiencing a period of accelerated growth and institutional uptake. For example, in 2011

Deutsche Bank Deutsche Bank AG (), sometimes referred to simply as Deutsche, is a German multinational investment bank and financial services company headquartered in Frankfurt, Germany, and dual-listed on the Frankfurt Stock Exchange and the New York Sto ...

became the first commercial bank to raise a social investment fund, in 2012

Goldman Sachs Goldman Sachs () is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered at 200 West Street in Lower Manhattan, with regional headquarters in London, Warsaw, Bangalore, H ...

floated Social Impact Bonds in the USA 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-GFC popularisation of social finance is the subject of extensive academic research. Social theorist Bill Maurer explains it as the result of shifts in investor sentiment in the aftermath of the Financial Crisis. 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 Financial Crisis 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 GFC came and went at a time when social finance organisations were beginning to develop track records that demonstrated their market feasibility. Geobey and Harji, in their anecdotal study of social finance in the post-GFC United States, document similar findings in the North American case. In their study, which synthesises interviews with executives from North American social finance organisations, confirms that demonstration of commercial viability by current actors in the North American social finance market since 2008 has proven themselves to mainstream financiers, enabled the scaling up of operations, 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 who ...

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 In finance, an asset class is a group of financial instruments that have similar financial characteristics and behave similarly in the marketplace. We can often break these instruments into those having to do with real assets and those having ...

of financial investments among the likes of stocks and bonds. Several unfavourable trends have also become apparent, however, including uneven uptake across the ecosystem, and key challenges remain including the struggle to produce desirable returns for investors, high start-up and regulatory costs and lacking 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, also known as pay-for-success financing, pay-for-success bond, social benefit bond or simply a social bond, is one form of outcomes-based contracting. Although there is no single agreed definition of social impact bonds, mo ...

(SIB). SIB’s 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 down the line. Investors provide upfront 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 SIB’s 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 co ...

health care Health care or healthcare is the improvement of health via the prevention, diagnosis, treatment, amelioration or cure of disease, illness, injury, and other physical and mental impairments in people. Health care is delivered by health profe ...

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, SIB’s 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 nonprofit organization (NPO) or non-profit organisation, also known as a non-business entity, not-for-profit organization, or nonprofit institution, is a legal entity organized and operated for a collective, public or social benefit, in co ...

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 com ...

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 the social need of society (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 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 extensive existing

frameworks A framework is a generic term commonly referring to an essential supporting structure which other things are built on top of. Framework may refer to: Computing * Application framework, used to implement the structure of an application for an op ...

that govern

corporate social responsibility Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethicall ...

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. Dr 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 problems in these areas of social need 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 lacking access to retail investors, an area which 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 keep pace with its current rate of growth in 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. six public policy changes to address these challenges. They include: * 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 incentivize or encourage a particular economic activity by reducing tax payments. Tax incentives can have both positive and negative impacts on an economy. Among the posit ...

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'' ha ...

: 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 Regulatory reform concerns improvements to the quality of government regulation. At the international level, the "OECD Regulatory Reform Programme is aimed at helping governments improve regulatory quality - that is, reforming regulations that rai ...

: Create a permissive framework for foundation 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