3 May 2017

Unwrapping the Mysteries of Social Finance


Jerome Lengkeek

For some of us the term social finance is a bit obscure, and sometimes we have some disagreements about what we mean when we use this term. Urban Matters’ new Social Finance Director, Jerome Lengkeek, decodes some of the terminology in this article.

Defining Social Finance

There are a number of different definitions of the term social finance. A Canadian definition provided by the MaRS Centre calls it an approach to managing money to solve societal challenges. Others use the term social finance to describe investment and lending to non-profits, charities, or social enterprises. Most social finance investors expect both a social and economic return for these investments. From a government perspective, the term social finance may spark conversations related to community bonds and social impact bonds which are innovative instruments that help to leverage government spending.

If you have only recently heard this terminology, it is not because social finance is a new phenomenon. Investors of various types have been assisting non-profits and social enterprise with finance for many years. The only reason some are hearing terms like social finance and impact investing for the first time now is because these mechanisms are growing rapidly in popularity as tools to increase social benefits to society. There will always be a significant need for donations, grants, and other similar support for charitable efforts, but recent increased attention to social finance has come about because of a major shift in thinking by private and institutional investors.

Increasingly, people want to invest their money in organizations and ventures that align with their personal values. Donors and investors alike are starting to ask more questions about how their money is being used. In particular, investors are asking where their financial return on investment is coming from, and when unsatisfactory answers are given, these investors are looking for alternative solutions. For example, if an individual is vehemently opposed to the use of fossil fuels and the money they are investing into their RRSP is being used to support the extractives industry, then this becomes a problem and they may start looking for alternative investment opportunities. This trend is giving rise to an increase in local and social investment opportunities as financial institutions and managers respond to customer demands.

A Steady Progression

Over the past decade or so, there has also been a steady progression in the types of investments being made available to investors who are not satisfied with the old answers. Although there have been individual social entrepreneurs and innovators experimenting for many years, large movements in the investment industry show a clear line of development in the wider availability of socially minded investments. One of the earlier signs of this was the widespread emergence of Negative Screen Mutual Funds such as Ethical Funds. The managers of these funds avoided investing in companies involved in certain activities that were deemed undesirable by their investors, such as companies involved in the production of alchohol, tobacco, or armaments. These funds became quite popular for a time, but many investors started to demand a more positive approach focused on investing in socially responsible companies versus simply avoiding the most harmful companies.

This evolving demand was met by specialty funds which targeted investments into companies addressing specific social challenges. These funds invested into sectors like renewable energy or social housing. The latest approach has seen the emergence of very intentional investments with defined and measurable goals or targets to address very specific issues. These have come to be known as impact investments. Impact investing has become a massive global movement. The Global Impact Investing Network (GIIN) now includes giants of the traditional investment industry like Goldman Sachs, J P Morgan and Morgan Stanley. Many of the largest foundations in the world such as the Bill & Melinda Gates Foundation, Ford Foundation and The Rockefeller Foundation have also begun to invest some of their endowments into impact investments.

An array of creative solutions have been developed to find ways to use the power of investment capital to generate social benefits. Some of these include Social Impact Bonds or Community Bonds, venture philanthropy and Program-Related Investments. In parallel with the development of all of these creative social finance solutions, a wide array of improved measurement tools have also been developed to allow social investors to understand clearly what social returns are being generated alongside their economic return on investment.

The Link between Social Finance and Community Social Innovation

As a catalyst for community social innovation, Urban Matters recognizes the critical link between financial resources, social enterprise, and sustainable community development. We understand that meaningful change cannot be achieved without new financial approaches. We have created this position of Social Finance Director to help improve the financial sustainability and maximum impact of the social enterprises that are part of our incubation and acceleration family. As the newest member of Urban Matters’ team of community social innovation specialists, Jerome is available as a resource to help other community impact organizations achieve some of these same objectives.
If you would like to talk to us more about social finance, Jerome would love to hear from you. You can reach him at jeromelengkeek@urbanmatters.ca

Stock photo featuring a group of friends standing beside each other, hugging, with their back to the camera