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A capital idea: New forms of social finance emerge

23 December 2015

A plant grows from a pile of money

Microfinance, impact investing, social stock exchanges, civic crowdfunding … the list of alternative financing methods is growing as the social sector tries to plug the gap between government support and public giving, and as a new kind of investor emerges.

New models of social finance will allow us “to deploy the right kind of capital, in the right ways, to address different types of social and environmental issues,” Dr Pamela Hartigan, director of the Skoll Centre for Social Entrepreneurship at Said Business School, University of Oxford, says.

Emerging innovation in social finance is the focus of Dr Danielle Logue, who has been investigating collaborative finance tools such as civic crowdfunding, social impact bonds and impact investing

Dr Logue, of the Management Discipline Group at UTS Business School, is interested in understanding both the intended and unintended consequences of these new tools.

“Alternative forms of collaborative financing arguably reflect a drive to democratise financial markets,” she says. “We are witnessing the unbundling of age-old financial institutions and systems. But this does raise questions about the role of government and traditional philanthropy in this new marketplace for funding solutions to social problems.”

New models of giving

Australians know the pulling power of a sausage sizzle or cake stall, but civic crowdfunding takes community fundraising to a whole new level.

Online platforms that mimic those already in the startup and creative spaces allow ordinary citizens to direct money to local projects ranging from public parks, playgrounds, and community centres to free public wifi, shared bike networks and rooftop gardens.

StartSomeGood, Neighborly, Citizinvestor and Spacehive are some of the international platforms for this kind of fundraising. They invite individuals, communities and not-for-profits to list their projects and a request for financial support, along with a ‘reward’ for participation (such as a sticker, T-shirt or free publicity).

In its first year, the Australian-grown platform Chuffed helped social cause organisations crowdfund $1 million. After two years the total had reached $5 million from over 1000 social campaigns.

‘This is no longer an online version of
‘passing the hat around’
but a serious mechanism
that is changing the model of giving’

“This is no longer an online version of ‘passing the hat around’ but a serious mechanism that is changing the model of giving and the science of philanthropy,” Dr Logue says. “This opens up a massive retail market for those seeking to fund solutions to community problems.”

Some argue that crowdfunding can never replace the specialist expertise and experience of philanthropic organisations. That may be true, Dr Logue says, “but they will see themselves forced to find a place in this new model of giving that is far more distributed, decentralised and transparent”.

And there are other questions that need to be considered. “For civic crowdfunding, the core question is: what are the unintended consequences of this shift?” she says.

“Is civic crowdfunding pointing out or reinforcing the inability of local governments to meet citizens' needs? What about local communities where citizens don’t have surplus funds to build a new piece of infrastructure? Does this collective action enable the state to back out of providing public services in some areas?”

Impact investing

Another mechanism being used to mobilise capital to address social problems is impact investing, where a new style of investor is looking for places where their money can achieve both a social and a financial return.

Dr Logue says impact investing has emerged partly in response to the growth of social enterprise and social entrepreneurship. Social enterprise is an alternative model to traditional not-for-profits and charities whose operations rely on external funding.

Instead, social enterprises derive most of their income from trading activities. The profits they generate often go back into advancing their social mission. An international example is d.light, which manufactures and distributes high-quality but affordable solar lighting and power products to the developing world, with the aim of eradicating the fire hazard from kerosene lanterns.

Dr Logue’s research has shown strong growth in social enterprises in Australia. Her study of applications to a Westpac Foundation grant program found that 70 per cent of organisations reported having a three or five-year plan to become more commercial. This reflects broader global trends towards commercialisation and professionalisation of the social sector

One form of impact investing is the social impact bond, developed in the UK and trialled here by the NSW Government as the Social Benefit Bond. Private investors buy these bonds, providing capital for programs with social outcomes such as keeping at-risk children out of care by building resilient families.

In the example of at-risk children, if the outcome is achieved the government experiences reduced foster care costs. After, say, five years it can use some of those savings to pay back the bond and provide a financial return to the investor.

In this nascent impact investing market, “we have very different groups on the supply side and demand side who are only starting to learn how to talk to each other,” Dr Logue says. “They will need to agree on measures of return and, ultimately, impact.”

Social stock exchanges

One way of connecting social enterprises with impact investors is the social stock exchange. These exchanges operate just like traditional financial markets, helping to bring together supply and demand, Dr Logue explains.

“On the demand side, social enterprises need to raise capital and market their activities. On the supply side, impact investors need information on where to invest, consistent measures of return – in this case the social return on investment – along with opportunities to build portfolios and to exit their investment.”

In the UK, the Social Stock Exchange showcases publicly listed impact enterprises that trade on the London Stock Exchange, while in Canada the Social Venture Connexion vets “members” on social and environmental measures then provides social ventures with low-cost access to investors.

In Singapore the Impact Investment Exchange supports listing, trading, clearing and settlement of securities issued by social enterprises across Africa and Asia. It also runs programs to assist social enterprises to become “investor ready”.

Does Australia need a social stock exchange? “In Australia, we have a nascent but growing market for impact investing – we have supply of impact investment funds and demand from social enterprises – but we don’t have the social and market infrastructure yet to connect the two more easily and efficiently,” Dr Logue notes.

Ultimately, building new platforms and markets – social or otherwise – takes time, patience and experimentation, she says. It may also require new legal and tax structures. And we will need to ensure that mobilising private capital doesn’t cause governments to shirk their responsibilities in dealing with the social and environmental problems that cannot or will not be addressed by the market.

 

For more information about social enterprise programs at UTS Business School, visit uts.ac/NFP-SocEnt

For more stories, see #think, the official magazine for students, alumni, partners and friends of UTS Business School. 

Image credit - ConsFinance (Public Domain)