Funding Social Change: Get the gist on the future of Social Financing

Types of Social Financing

A variety of financial models fall under the umbrella of Social Financing. What they all have in common is the goal of achieving a social dividend while simultaneously generating an economic return.

Figure 1: Institutions with primarily social goals are on the left of the spectrum. Institutions with primarily financial goals are on the right. Examples of social financing are between the two.

Figure 1 - Text version
SOCIAL SOCIAL FINANCE FINANCIAL
  • Non-profit organization
  • Family Foundation
  • Social Sector Program
  • Religious Institution
  • Social Purpose Business
  • Social Entrepreneur
  • Social Impact Bonds
  • Social Investments Funds
  • For-profit Business
  • Stock Broker
  • Corporate Bonds
  • Commercial Bank

Social Impact Bonds

Social Impact Bonds (SIB) are a subset of Pay for Success (PFS) funding—an innovative funding model that drives government resources toward social programs that prove effective at providing results to the people who need them most. SIBs are specifically an arrangement between a government agency and an external organization. The terms of this arrangement are outlined in a pay-for-performance contract—an incentive payment system based on job performance metrics. Oftentimes, the terms pay for success, pay for performance, and social impact bonds are used interchangeably.

A government agency will outline a social impact it wishes to achieve such as reducing the number of juvenile delinquents or increasing the number of students matriculating to college. Then, the external organization (a private investor, business, philanthropic organization, etc.) agrees to provide the finances required to achieve the specified impact.

If the impact is achieved, the government agency pays the external organization a pre-determined sum as outlined in a pay-for-performance contract. If the impact is not achieved, the external organization receives no payment.

SIBs transfer the financial risk of running a program away from the government to external funders. Even though the government agrees to pay upon the achievement of a particular outcome, SIBs are designed to save the government money since they will pay only for successful programs. Furthermore, the philosophy behind SIBs encourages a focus on evidence based programs that have a high likelihood of success and scalability.

In 2010, one of the first SIBs was issued in the United Kingdom. The goal of the program was reducing recidivism rates of short-term prisoners. In 2012, the first SIB to take place in the United States was announced with a goal of providing rehabilitation services to youths incarcerated on Rikers Island (Social Impact Bonds Gain Momentum in the Criminal Justice Field).

Social Investment Funds

Social Investment Funds (SIF) use finances collected from a variety of investors to provide loans, mortgages, lines of credit, and working capital to non-profit organizations. Investors are then repaid, with interest, over a specified time frame.

Headquartered in California, RSF Social Finance is one example of an organization that offers SIF. Since 1984, they have solicited funds from investors to provide more than $275 million in loans to social enterprises. RSF maintains a 100% repayment to its investors at levels comparable to those paid by traditional bank certificates of deposit (RSF Social Finance: About: Our Story).The funds that are loaned to non-profits via SIFs feature terms that are more lenient and forgiving than those offered by traditional lenders like banks. This is important because for non-profits, finding reliable funding can be a challenge.

Social Entrepreneurship and Social Purpose Businesses

Although there is no official definition, many would describe a social entrepreneur as someone who utilizes an entrepreneurial skill set to achieve social goals. Certain social entrepreneurs operate for profit businesses that, in addition to generating financial returns, aim to achieve positive social outcomes. A well-known example of such an individual is Blake Mycoskie, the founder of Toms Shoes, a for profit company that uses its revenue to provide shoes, medical care, clean water, and other services to the world’s impoverished.

In 2012, Washington State created a new business classification called Social Purpose Corporation which allows for profit companies to formally include social goals and considerations into their articles of incorporation (Social Purpose Corporations One Year Later). This could signal a wider acceptance of social entrepreneurism and lead to the creation of similar business classifications in other states and countries.