Social Finance Explained

Social finance is a way of investing in the world that goes beyond just making a profit. It's about using money to create positive social and environmental impact.

At its core, social finance is about creating a more equitable and sustainable world. This is achieved by investing in projects or organizations that address social and environmental issues.

Social finance can take many forms, including impact investing, social entrepreneurship, and community development. These approaches aim to create positive outcomes for people and the planet.

By blending financial returns with social impact, social finance can help drive positive change and create a better future for all.

Social finance has its roots in 20th-century neoliberal economics, specifically in the ideas of the free market's role in society.

The concept of social finance first emerged in the 1970s in the United States as an innovative approach to solve social problems while creating economic value.

In 1977, the Community Reinvestment Act in the United States provided the impetus for financial institutions to invest in underserved local regions and marginalized sectors of the economy.

This led to the creation of community development financial institutions that deployed significant amounts of capital in affordable housing, renewable energy, and financial inclusion across the United States.

Some scholars argue that social finance has its origins in Islamic finance, practiced by sharia-compliant Islamic economies in the 1960s, characterized by socially responsible investment.

The social finance ecosystem is composed of four key groups.

Deloitte member firms help design and launch innovative financial instruments that align with clients' impact investment objectives. They've conducted feasibility studies to calculate the true economic cost of exclusion and truancy in England, Wales, and Scotland.

A UK organization is working with Deloitte UK to develop a Social Impact Bond (SIB) in the education sector in Glasgow, which is just one of many SIB initiatives the firm is supporting globally.

Payment for success products incentivize innovation and allow governments to pay only if the initiative is successful, breaking the traditional trade-off between financial and social gain.

In social finance, the market structure is made up of four key groups that work together to facilitate investment in socially beneficial initiatives. These groups are investors, social enterprises, social finance institutions, and intermediaries.

Investors, such as retail investors and high-net-worth individuals, provide the initial and primary source of capital in social finance. They can also include pension funds, charitable foundations, and private foundations.

Social enterprises, like the Bill and Melinda Gates Foundation, represent the demand for investment in social finance. They absorb the capital invested by investors and reinvest it in various socially beneficial initiatives, delivering twin social and financial returns on investment.

Social finance institutions act as financial intermediaries by linking the supply and demand of capital. They raise funds from investors, pool these funds, and redistribute them to social enterprises that have a strong track record of effective social service.

Intermediaries, including regulators and service providers, facilitate and oversee the connections between the first three groups.

Deloitte is helping companies develop innovative financial instruments that align with clients' impact investment objectives. These instruments can incentivize innovation and allow governments to pay only if the initiative is successful.

A UK organization is working with Deloitte to develop a Social Impact Bond (SIB) in the education sector in Glasgow. Deloitte conducted a feasibility study calculating the true economic cost of exclusion and truancy in England, Wales, and Scotland.

Companies are now jumping at the opportunity to develop business solutions that supercharge growth and improve social outcomes. This is breaking the traditional trade-off between financial and social gain.

Deloitte's Social Finance team collaborated with the World Business Council for Sustainable Development (WBCSD) to explore strategies for companies to bring innovative and impactful new offerings to market. This collaboration is helping companies to innovate and make a positive impact.

Deloitte's experience in sustainability and leadership in advancing financial and non-financial reporting has helped build a strong ecosystem for social finance. The team has supported initiatives focused on enhancing transparency and reporting practices worldwide.

Social investment funds pool funds from investors to provide not-for-profit organisations with "patient working capital" (funding with a longer-term repayment schedule), such as the Social Innovation Fund, which awards grants of up to $10 million per year.

The Social Innovation Fund is a well-known example of a social investment fund, and its grants are awarded through a competitive process to organisations with strong track records of effective social service.

Impact investing involves developing and managing investments that generate positive outcomes for people and communities, as seen in the work of Social Finance.

Impact investing has been shown to return substantial dividends to investors, which bodes well for social impact giving and other forms of financial investment.

Social finance is also involved in microfinance operations, which provide loans to low-income individuals for business or education initiatives, improving their income and quality of life.

Microfinance operations have expanded to include savings programs and insurance, keeping premiums and interest rates low to protect vulnerable populations.

Social Finance works with the public, private, and social sectors to create partnerships and investments that measurably improve lives, through its core activities of impact investing, impact advisory, and the social finance institute.

The Social Finance Institute shares first-hand learnings and best practices to catalyze social impact in the field, helping to maximize the human and ecological benefit of each investment.

Social impact bonds, also known as Career Impact Bonds and Social Impact Bonds, entail an investor or group of investors putting forth funding for a socially beneficial initiative and assessing the results, with the government returning a portion of the money saved to the investors.

Total capital raised for Career Impact Bond and Social Impact Bond projects in which Social Finance is serving or served in an intermediary role is a significant amount, although the exact figure is not specified.

This project was funded by the Government of Canada's Investment Readiness Program, demonstrating the involvement of government in social finance initiatives.

Corporate responsibility is a crucial aspect of social finance, and it's often compared to corporate social responsibility (CSR). Proponents of social finance argue that it provides a more direct way to address social challenges, whereas CSR is more focused on the fringe. In fact, Othmar Lehner, Associate Professor of Social Enterprise at the University of Oxford Saïd Business School, states that social finance enterprises prioritize social objectives as the first goal of their capital allocation strategies.

Leading scholars in the field of social innovation, such as Stephen Sinclair, Neil McHugh, and Michael Roy, question the need for social finance, citing existing frameworks for CSR in capital markets. They argue that social finance draws capital away from productive investment opportunities and exacerbates allocative inefficiencies caused by excessive government regulation.

Social finance is not a replacement for CSR, but rather a complementary approach that can provide greater direct investment in addressing social challenges. According to Jed Emerson and Alex Nicholls, social finance can 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.

Here are some key differences between CSR and social finance:

In summary, social finance is a distinct approach that prioritizes social objectives and provides a more direct way to address social challenges. While CSR is an important aspect of corporate responsibility, social finance offers a unique solution for organizations looking to make a greater impact.

The social finance industry is facing some significant challenges that need to be addressed in order to maintain its growth rate. One of the main headwinds is 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 are all contributing to this issue. Retail investors, in particular, are believed to have the most demand for social finance, but they are being left out.

The industry has matured, but at an uneven pace, with regulatory developments lagging behind. This has exposed its self-regulatory capacity, highlighting the need to strengthen governance mechanisms and develop sophisticated intermediaries.

To address these challenges, the role of government will be crucial. Sustainability strategist Coro Strandberg proposes six public policy changes, including legislative reform, tax incentives, capacity building, community investment, regulatory reform, and formalised sustainability plans.

Here are the six proposed policy changes in detail:

By implementing these policy changes, the social finance industry can overcome its current challenges and continue to grow.

Social finance is all about finding innovative ways to fund your organization's mission. To do this, you'll want to diversify your funding sources and access capital that aligns with your values.

Limited financial track record, high transaction costs, and lack of accessible social finance products can hinder your efforts. However, a clearly defined social or environmental mission, visionary governance, impact measurement, and access to social finance products can facilitate the adoption and success of social finance.

Hybrid organizations, which combine for-profit and nonprofit activities, can increase organizational resilience by generating sustainable solutions that drive positive impact while ensuring financial viability.

Here are some key takeaways from the research:

Measuring impact is crucial for organizations to report on their success and make informed decisions. Recognized performance measurement and reporting standards enable organizations to report on their impact, return, and risk profile.

Deloitte member firms support clients in implementing rigorous, yet practical impact evaluation and reporting practices. They leverage deep experience with global financial and non-financial standards setters and ratings organizations.

Investors face challenges in comparing investment opportunities due to the lack of comparable, transparent, and independently verified tools. Deloitte is a pioneer funder of B Lab's GIIRS and provides third-party desk and on-site reviews for companies and funds seeking a GIIRS rating.

Impact measurement is essential for organizations to understand their social and environmental impact. It helps them to identify areas for improvement and make data-driven decisions.

A Monitor Deloitte team helped develop a roadmap to help a field-builder scale and mainstream its activities alongside the global impact investing market. This highlights the importance of impact measurement in driving organizational growth and success.

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