What is Social Finance? (Part 2)

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By Lise Birikundavyi

Read: What is social finance (part 1)

In front of depleting natural resources, saturated financial markets and limited economic growth, a new way of doing business has emerged. Notions like sustainable development, circular economy, social capitalism and social entrepreneurship are progressively building their way towards mainstream finance. But what exactly is Social Finance? Hopefully, the definition of its sub-sectors below will answer this question for those who were still secretly wondering what this field is all about.

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.

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.

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.

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.

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.

While the concept of social finance has always existed under different names, this practice has been more formalized and rose in popularity since the past 8 years. Several business schools even offer programs in social entrepreneurship. Would it have to do with Mohammad Yunus winning a Nobel Prize for its Microfinance Institution, the Grameen bank, in 2006? Or with the well-respected investment bank JP Morgan issuing the most cited report on the subject “Impact Investments: An Emerging Asset Class”? Or maybe with the 2008 financial crisis, which led many to conclude that the cut-throat way of doing business was not sustainable and that being oblivious of your surroundings will eventually generate greater social and financial costs?

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