Heart of the Economic Mess in the United States Introduction to Developmental Evaluation

Introduction to Social Finance

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Posted by renjie on Aug 6, 2008 in Featured, Politics & Economics, Social Change, Social Entrepreneurship

Social Finance is an area of finance that I am very interested in and would like to know more about, especially as the trend in the non-profit sector is shifting towards social entrepreneurship and the need to run these organizations like a business, in order to effectively support the social mission and vision of the NGO or social venture in the long-term. Although my (limited) background in Finance from the University of Waterloo comprises mainly of corporate finance, I am intrigued by the notion of social finance, which is essentially finance with a social or environmental mission.

Tim Draimin, founding Executive Director and Senior Fellow of the Tides Canada Foundation defines social finance as:

…the space on the financial continuum between high financial value and no social value returns (e.g. traditional financial investment vehicles) and no financial value but high social returns (e.g. grants)

With social finance, non-profit organizations have access to new forms of capital for their organizations that include: insured or uninsured deposits, senior and subordinate loans, debt-with-equity features, loan guarantees, fixed income securities, real estate mortgages, stock purchases and private equity. However, what distinguishes these investments as social finance is that

… they exists on the spectrum between the +5% return of a conventional fixed income investment and the -100% return characteristic of grants.

With the emergence of social finance also comes the emergence of a new perspective in thinking from funding bodies and donors. From a recent Social Finance Survey Report from CharityVillage.com, many donors are now moving from a strictly grant-based approach towards a more investment-based approach, viewing NGO’s not as charities, but as social investments, and using terms such as metrics, scalability, leverage and ROI when discussing the impact of their social investment. This is certainly good news for social entrepreneurs everywhere: entrepreneurs who combine the passion for social change with the business-minded discipline that is needed to succeed.