What is Social Finance?

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I recently did a presentation for an organization on how they could use their money to promote social and economic development in their community. We ended up discussing in depth a concept called social finance, which in my opinion represents one of the major steps  in rethinking our global economy and the active role we could all play in it. So in the article below I describe what social finance is and how you could contribute to it.

Social finance is the act of doing business while delivering a positive social and environmental outcome in addition to economic return. Social finance includes:

  • Microfinance: It consists of providing financial services to individuals, entrepreneurs and small businesses that lack access to regular services. Microfinance integrates services like microcredit, microinsurance or microbanking. Microfinance has played a huge role so far in reducing extreme poverty in developing countries, through the supply of accessible financial services to low-income populations.
  • Socially Responsible Investing: It is the range of ethical investment strategies that promote social and environmental improvements in addition to financial return. Socially responsible investing is a broad term that can refer to Impact Investing (providing capital to organizations that have a positive social and environmental impact. This can be done through angel investing, private equity, venture capital or debt). It can also refer to community investing (investing directly into community-based organizations to solve issues like housing, small business creation, education or development).
  • Sustainable business or green business: It is an enterprise that wants to minimize any negative impact on the environment, the society or the economy.
  • Social enterprise lending:  Social enterprise lending is done by special organizations who lend money to companies or non-profits dedicated to improving the well-being of society and the environment. Loans generally have more flexible terms and lower interest rates than the ones provided by banks and other lending institutions.
  • Venture philanthropy:  It is the funding of early-stage, high-potential and high risk startup companies in order to achieve philanthropic goals

So what can you do if you are interested in Social Finance?

Well here are some options I suggest:

1. Donate to non-profits that have a proven track record in solving social and environmental issues in your area.

2. Volunteer for microfinance institutions: Microfinance being a relationship-based activity, companies always need people on the ground to interact with their clients and assess their progress.

3. Set up a brokerage account and buy stocks from green or ethical companies you have researched on.

4. Include in your investment portfolio mutual funds or Exchange traded funds (ETFs) that comprise companies with environmental sustainability, social responsibility and corporate governance (ESG) practices. Talk to your financial planner or your broker regarding available solutions within your bank or brokerage firm.

5. Buy shares in a community investment fund: Some investment companies start investment funds that provide capital to social enterprises in exchange for equity. Investors who buy shares from those funds get a return on their investment depending on how the enterprises perform (like with any other fund) and possibly tax credits. These funds are generally promoted by non-profit organizations that partner with the fund owners to identify ventures to invest in.

6. Research on how to buy a Social Impact Bond (SIB): Still at an experimental phase in most countries, social impact bonds are bonds that are sold by special organizations to investors in order to raise money for service providers that have been contracted by the government to solve a particular issue. Those contracts may involve building infrastructure, or reducing poverty, crime or obesity. If the pre-set objective is attained, the government pays the service provider, who then reimburses the investors with interest (i.e. you get your money back). If the objective is not attained, the government does not pay and investors may lose their money.

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