Social finance is a category of financial services which aims to leverage private capital to address challenges in areas of social and environmental need. Having gained popularity in the aftermath of the 2008 Global Financial Crisis, it is notable for its public benefit focus. Mechanisms of creating shared social value are not new, however, social finance is conceptually unique as an approach to solving social problems while simultaneously creating economic value. Unlike philanthropy, which has a similar mission-motive, social finance secures its own sustainability by being profitable for investors. Capital providers lend to social enterprises who in turn, by investing borrowed funds in socially beneficial initiatives, deliver investors measurable social returns in addition to traditional financial returns on their investment.
Consensus has yet to be established on a formal definition of social finance due to lacking clarity around its scope and intent, however, it is said to include elements of impact investing, socially responsible investing and social enterprise lending. Investors include charitable foundation, retail investors and institutional investors. Notable examples of social finance instruments are Social Impact Bonds and Social Impact Funds.
Since the 2008 Financial Crisis the social finance industry has been experiencing a period of accelerated growth as shifts in investor sentiment has led to greater demand for ethically responsible investment alternatives by retail investors. Mainstream sources of capital have entered the market as a result including Deutsche Bank which, in 2011, became the first commercial bank to raise a social investment fund.
New research in the field calls for increasing the role of government in social finance to help overcome the challenges which the industry currently faces including the struggle to produce desirable returns for investors, high start-up and regulatory costs, neglect from mainstream banks and lacking access to retail investors. Proponents of social finance argue that until these gaps are addressed, mass participation in social finance will be prevented.
Origin
The history of social finance has its origins in 20th Century neoliberal economics and the ideas that it proposed, such as an emphasis on the role of the free-market in society. The concept itself first came in to use in the 1970s in the United States where it emerged as an innovative approach to solve social problems while creating economic value. The appeal to government was clear: access to swathes of private capital to fund social programs at a time of deep austerity and retrenchment of state programs under neoliberal politics. In 1977 in the United States, the Community Reinvestment Act provided the impetus for financial institutions to invest in under-served local regions and marginalised sectors of the economy, furthering state transfers of wealth to the private sector. This spawned a plethora of community Development Financial Institutions which deployed significant amounts of capital in affordable housing, renewable energy and financial inclusion across the United States. Furthermore, many prominent foundations including the Ford, Rockefeller and MacArthur Foundations have actively invested their endowments in a manner that aligns with this practice of mission-related investing.
Some scholars contest that social finance has its origins in Islamic finance, which was practiced by the sharia-compliant Islamic economies of the 1960s and which is characterised by socially responsible investment.
Market structure
The social finance ecosystem is composed of four key groups. These include: