And the awareness of how they differ is becoming increasingly important as the Not for Profit sector looks towards sustainability and ongoing success.
In September 2021, responses provided to a survey on Social Finance (commissioned by Dublin City University) highlighted “Grants” as the default financial support considered by the sector when asked about matters relating to “Social Finance”.
The early results of this research brought into sharp focus the need to increase awareness across the Social Economy in Ireland of, and clearly differentiate between, “Social Finance” on one side, and “Grant Support” on the other.
At its simplest, “Social Finance” is a form of financial credit, provided to those entities demonstrating both, social impact arising from their activities, but also a capacity to repay. Whilst we must be careful not to diminish the importance of the former criterion, it is the capacity to repay which sets this support apart from Grants, themselves widely available within the Social Economy.
“Social Finance” remains outside that competitive environment usually evident across “Grant Funds”. The latter will inevitably comprise a finite amount of support, dedicated towards a restricted variety of purposes, with applicants often prioritised over one another in terms of impact measurement and, social return on investment.
Conversely, Social Finance will deal with all proposals on their own merits. The revolving nature of repayable credit means that usually, limitations on access to capital need not be considered. Any restrictions on quantum are more likely linked to a finance provider’s appetite for risk, and based on historic experience within a specific market.
Grants have an important place in the Social Economy. Some examples include, seed funding for untested start-ups with potential to scale, underpinning non-income generating community services and, as co-funding for infrastructural development where enhanced social impact is apparent.
Social Finance can be viewed as the “next step”, where community of interest buy-in has been proven, where income streams are established, and where an ambition for self-determination applies.
Its future is in its multiplicity of impact. Whilst the Grant is disbursed once in the hope of leaving impact, Social Finance enters a circular economy aiming to leave a legacy.
Social impact bonds are an innovative financial instrument that puts private funds to work to help solve social problems. It represents a monetary influx for social projects and gives investors an opportunity to support social issues and turn a profit all at the same time. In effect, social impact bonds are proof that social progress can also be financially rewarding.
At its core, social impact bonds have three interest groups: outcome payers, social service providers (usually not-for-profit organisations but can also include purpose-driven businesses), and investors. Social impact bonds are ultimately outcome-based contracts between an “outcome payer” and a purpose-driven organisation that aims to achieve a desired social outcome. A socially motivated investor will then provide the financial capital needed to deliver the service.
The mechanics of a social impact bond at a basic level are quite simple. The investor which is usually a financial institution will provide upfront capital to the chosen service provider who will then deliver services focused on the outcome payer’s chosen social outcome goal. Targets will be agreed between the outcome payer and investor, if these targets are met the investor will be returned their initial investment with a return that increases as the outcome achieved increases. If the targets are not met the investor will not receive the investment back and will essentially make a philanthropic donation. Outcome payers are often government bodies but can also include aid organisations and philanthropic foundations. They work with investors and service providers to set objectives, timelines, and payment levels and will only release funds when specified targets are met.
The design of a social impact bond as outlined above offers the involved interest groups several advantages. In the case of the service provider, they are immediately provided with a large amount of funding to deliver a social service or intervention. This financial boost affords them the flexibility and means to provide their service according to what will achieve the best outcome while also promoting experimentation and innovation. In the case where a philanthropist is involved, they can act as either an investor or outcome payer and benefit in both cases. A philanthropist that acts as an investor has the potential to earn a significant return on investment if outcomes are met which will, in turn, afford them more money for future grant-making ventures. In the instance where a philanthropist assumes the role of an outcome payer, their funding is directly related to targeted outcomes generating focus and dynamism amongst delivery organizations.
Social impact bonds represent a new wave of impact philanthropy tools that have the innovative potential to turn traditional philanthropy and grantmaking on its head. Social impact bonds and their impact to date have proven to have the potential to act as a catalyst for the attraction of private capital to scale the efforts of not-for-profit organizations and purpose-driven businesses.
We are delighted to invite you to participate in a short workshop and follow up on Thursday 5th May from 16:00 until 17:15.
We have been working hard on our Social Finance project and believe we have something that might be of interest to you. This ‘model social finance product’ requires your input and expertise. If you are able to come along to find out more there are two ways you can sign up.
In conjunction with SocialFinance.ie, Community Finance Ireland will host three information workshops to equip your organisation with all the tips necessary to make a successful application for Social Finance with us.
These 45 minute sessions will be hosted virtually on Zoom by our Social Finance experts on the following dates:
We are busy lining up some workshops in the coming weeks starting this Friday 5th November with a packed out ‘Organisational structure, form status and potential relationships with group structure’
We still have two workshops coming up on the 12th and 26th November: ‘Nature and extent of relationships with social finance providers and credit unions’ & ‘Social impact reporting and investment readiness’
If you are a social enterprise and interested in giving us your views, don’t hesitate to reach out to hello@socialfinance.ie
In July 2020, the EU’s Taxonomy Regulation entered into force. This is a classification system which establishes a list of environmentally sustainable economic activities: climate change mitigation/adaptation, transition to a circular economy etc. This created a legislative framework which would provide the market with necessary confidence on environmental performance and help investors and companies to plan and report on the transition.
Linking this to social finance, a recent mandate was introduced to advise the EU Commision on possibly extending the structure towards more of a social taxonomy which would contribute towards social objectives, such as business ethics, governance, access to healthcare, equality/non-discrimination etc. This would allow these social objectives to be acknowledged as a key element of future sustainable investing – which aligns with the concept of social finance. The ideas for these objectives can be seen below:
In recent times, there is pressure for those investing to take into consideration social issues when choosing their investment, as a lack of consideration about these topics carries a special risk – which includes possible contribution to climate change/breaches of human rights laws, malpractice of board members and failure to comply with fiduciary duty in tackling social issues. The taxonomy regulations are a strong example about how theories such as social finance need framework and legislation in order to be successfully put into practice. If the EU taxonomy pivots to prioritize the aforementioned social objectives, this will create a great opportunity for social finance to grow its resources and be able to have more of an impact across the sector.
