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Social Finance

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DEFINITION of 'Social Finance'

Social finance typically refers to investments made in social enterprises including charitable
organizations and some cooperatives. Rather than a charitable donation, these investments take
the form of equity or debt financing where the investor seeks both a financial reward as well as a
social gain.

BREAKING DOWN 'Social Finance'

Modern forms of social finance can also include some segmentsmicrofinance

segmentsmicrofinance, specifically small
loans to small business owners and entrepreneurs in less developed countries to enable a better
standard of living for them. Lenders expect to earn a return on their loans in addition to helping
improve social outcomes.
Social impact bonds (also known as Pay for Success Bonds or Social benefit bonds)are a specific
type of bond that acts as a contract with the public sector in where an obligation is made to pay for
improved social outcomes and that result in public sector savings.

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Social Enterprise

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An organization that is directly involved in the sale of goods and services to a market, but that also
has specific social objectives that serve as its primary purpose. Social enterprises are not volunteer
organizations in that they operate as an enterprise by selling in a market, and can be registered as
for-profit or non-profit. Profits are principally used to fund social programs.

BREAKING DOWN 'Social Enterprise'

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SocialFinance

BREAKING DOWN 'Social Enterprise'

Social enterprises exist at the intersection of the private and volunteer sectors. They seek to balance
activities that provide financial benefit with social goals, such as providing housing to low income
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families or job training. Funding is provided primarily through selling goods and services, though
they may also receive money from grants. A social enterprise operates differently than a typical
company because profit-maximization is not the primary reason for existing.

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Social Impact Bond - SIB

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A social impact bond (SIB) is a contract with the public sector or governing authority, whereby it
pays for better social outcomes in certain areas and passes on part of the savings achieved to
investors. A social impact bond is not a bond
bond,, per se, since repayment and return on investment are
contingent upon the achievement of desired social outcomes; if the objectives are not achieved,
investors receive neither a return nor repayment of principal. SIBs derive their name from the fact
that their investors are typically those who are interested in not just the financial return on their
investment, but also in its social impact.

BREAKING DOWN 'Social Impact Bond - SIB'

Rationale of Social Impact Bonds

Social impact bonds tend to be risky investments, as they are entirely dependent upon the success
of the social outcome. Unlike normal bonds, social impact bonds are not affected by variables such
as interest rate risk,
risk, reinvestment risk,
risk, or market risk.
risk. However, they are still subject to default and
inflation risk.
risk. It can be hard to determine the success of social impact bonds, as they are based on
social impact, which is often not quantifiable and it's hard to measure success. There are many more
variables than regular bonds, which are comparatively easy to measure because they are based on
hard data. For this reason, it's hard for social impact bonds to get government funding.
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