What is Social Finance?

Social finance is a field that helps dispel the idea that capitalist aims and social progress are incompatible. For individuals interested in pursuing an education in the financial sector that also benefits human communities or the environment, this unique application of economic knowledge and investment acumen is ideal. However, the above definition is a broad approach that does not address the complexity of the field. The article below offers greater clarity and answers some of the most pressing questions prospective practitioners may have.

Not Just About Giving

Many groups and companies seek to make a positive social or environmental impact. This can include businesses that donate a portion of profits to designated charities, but these companies are usually not directly involved in social finance (SoFi) because the business itself is not focused on social impact. These companies still seek to maximize profits, often at the expense of human or ecological factors.

So how do SoFi specialists work to help organizations or charitable institutions be more effective? What are these organizations and how do economic analysts engage with their missions to affect change? It’s the investors who practice this form of finance, even though companies or charities focused on social or ecological enrichment are actively working to meet their goals.

Individuals who work to bridge these two groups—investors and companies both interested in creating decisive action or change—are often also interpreters of some of the more complex forms of investment. They assist clients with options that responsibly divest monies, and also often reap profit, in endeavors that further socially positive growth.

For example, SoFi specialists advise investors who are seeking the maximum social impact with some regard for returns. Money should work, but it need not be employed in a zero-sum game or other exploitative design. Charities and non-profit organizations rely on investors donations and grants, but different types of corporate groups offer benefits to investors both in the form of cash and social equity.

Further Investment Strategies

While these experts work closely with appropriate entities and investors, there are a couple of other types of investment that are also considered a social venture. The Center for American Progress discusses some of these options, which includes social impact bonds. Social impact bonds, which aren’t bonds at all, entail an investor or group of investors putting forth funding for a socially beneficial initiative and assess the results. Those results are then evaluated regarding how much money the project saves the government. Upon completion of the project, the government returns a portion of the money saved to the investors, which in some cases is a sum at or above market return value.

Microfinance operations go where traditional banks fear to tread. Initially, this term only referred to loans made to low-income individuals for business or education initiatives. Through this process, investors improve the income and quality of life for marginalized or socially vulnerable individuals and groups. However, today, the term has expanded its purview to encompass both savings programs and insurance, keeping premiums and interest rates low to protect vulnerable populations.

Impact investing has been shown to return substantial dividends to investors. This bodes well for social impact giving and other forms of financial investment since it implies that monetary profit and social benefits need not be opposed aims. Social finance is the wave of the economic future and will require experts with both acumen and a determination to maximize the human and ecological benefit of each investment.