Demystifying the sector
2) Social Investment

by Peter Cafferkey | Posted on 19 April 2016

Our regular series of posts demystifying the sector continues as we cast our eye on “Social Investment”. With these we aim to explain the jargon as simply and clearly as possible.

Social Investment has been one of the buzzwords within the social good sector for the last ten years. It’s been seen as a new source of capital for the not-for-profit sector, one with huge potential to inject significant funds to those working to positively change the world.

It’s also been touted as a great way for those driven by social good to have a positive impact, not as a philanthropist, but as an investor.

Investing for social good…

As with many terms within the sector, it’s morphed into something larger, and been diluted along the way. However, at its core, it’s a very simple concept: 

  • Social Investment – the use of repayable finance to achieve a social as well as a financial return.

Different kinds of social investment…

Different types of social investment have developed over the years offering investors who want to achieve a social, as well as financial return, a range of options.

The following kinds of social investment might be of interest to the individual driven to use their funds for social good.

  • Charitable Bonds – Charities and social enterprises can issue bonds as a form of long-term debt to expand business operations. Generally for organisations with a strong, regular cash-flows.
  • Equity Investment – In the UK, these are generally quite rare given how the majority of charities/social impact organisations are incorporated, but it means investment through the purchase of share capital. See also “impact investing” below.
  • Impact Investing – Investments made into companies which generate a measurable, beneficial social or environmental impact, alongside a financial return.
  • Microfinance – Lending of small (hence “micro”) sums to individuals who are excluded from mainstream banking. Normally delivered through a specialised partner or MFI (MicroFinance Institution). Whilst used globally the vast majority is focussed on developing countries.

Social investment for charities…

The financial tools offered to charities who often need to turn to specialist providers are also often described as “social investment”.

These could include providing loan facilities (pre-grant, bridging, working capital, secured, unsecured, etc…) or underwriting facilities to charities who are often turned away from traditional forms of finance.

Philanthropists/Investors are able to support the delivery of this, through what we describe as “recycled grants”. By using a specialist provider such as SharedImpact or CAF Venturesome, charitable funds can be transformed into loans which, once repaid, can be leant out again and again to achieve multiple impacts.

  • Recycled grants – Giving money which can be used again and again for social good.

Another strand of this is in the use of capital to deliver social investment to charities. Savings held in organisations such as Charity Bank or Triodos Bank enable them to lend funds to charities and social enterprises.

Not to be confused with…

There is often some confusion between social investment and the below.

  • Socially responsible investment – Investment strategy that looks to screen potential investments for negative impacts to society and environment.  Could include ‘green’, ethical or socially conscious investment.
  • Social return on investment – A principles-based method for measuring the extra-financial value (i.e., environmental and social value not currently reflected in conventional financial reporting) relative to resources invested.