Social Impact Investing: A Primer | by Kristen Pue

For most people, the world of finance, and especially social finance, can seem arcane, possibly even a bit like the famous underpants gnomes business plan from South Park: money is, seemingly, produced from nowhere. But social finance is actually not as complicated as it appears. Moreover, it is an increasingly popular way to fund social programs in Canada and around the world.

In Canada, charities and non-profits deliver many important social goods. Canada has historically had a large voluntary sector, responsible for about 7% of our GDP. This has traditionally been driven by philanthropic giving – which is why we also have a relatively well-developed coordinated giving sector, with more than 2,000 active grant-making foundations.

However, Canada has recently seen the rapid expansion of social finance in addition to traditional giving. Social finance may already comprise as much as $290 million. This is perhaps why Tim Jackson, one of Canada’s two representatives on the G7 Social Impact Investment Taskforce, said that “Canada is leading the second wave” in social finance.

Canadians that are interested in philanthropy should understand how social finance works. This article is a primer on social impact investment.

Social Finance

Impact investing is one area of a broader category called social finance. Social finance, in essence, uses the structures and generates future savings for government through reduced demand for government services, expectations of finance in the business world and injects a social dividend. Social finance emerged from recognition that access to capital can be a powerful tool of social advancement. Just like businesses, charities and non-profits also need capital to start up, expand operations or replace old equipment. As well, individuals often need access to capital to pull themselves out of poverty. Microfinance, lending to social enterprises, community investing and green bonds are all examples of social finance.

Social Impact Investment

Social impact investment is social finance involving impact measurement, which is an increasingly popular way for charities and non-profits to prove that their activities are benefiting recipients. The traditional way that charities evaluated their programs was by measuring outputs – for example, how many parents attended workshops on parenting styles or how many inmates received job training. Impact measurement aims to demonstrate that these outputs produced good social outcomes. So, the charity that runs workshops for parents of children who are in out-of-home care could measure social impact by how many children have been restored to their homes by the relevant social work department. For a charity that provides job training to inmates, the appropriate social impact might be measuring how much this service reduced recidivism as compared with baseline levels of recidivism for those not receiving the service. The most famous tool of social impact investment is a social impact bond.

Social Impact Bonds

A social impact bond is not actually a bond. It is an innovative financing tool used by governments to fund social programs that bear an initial cost but promise future cost savings, such as preventative health programs that reduce demand for government health services by keeping people healthy. The first social impact bond was a program to help prevent ex-prisoners from reoffending implemented in 2010 in the United Kingdom, but there are currently at least 40 social impact bonds in design or implementation phase worldwide, reflecting growing interest among governments in this tool.

Here is how they work. Investors agree to fund a charity or non-profit to undertake a range of preventative programs that are targeted at making a social impact. This social impact will result in cost-savings for government by reducing the demand for government services. For example, a preventative program which targets methods to reduce alcohol use could reduce costs for health services. Governments agree to pay investors if those social impacts are attained, based on metrics that are agreed upon beforehand by all involved, and under the logic that this payment in effect derives from the savings that the social impact produces.

Conclusion

Social impact bonds, as one type of social impact investment, are receiving a lot of attention. But this is just one part of the much broader arena of social finance. From microloans and community lending to green bonds and other tools, social finance is emerging as a complement to traditional giving. The Canadian market for social finance is as much as $290 million right now, but if foundations are able to undertake impact investment this could grow much larger, perhaps as much as $46 billion.

Banner photo courtesy of lendingmemo.com on Flickr

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