I was fortunate to be featured in a recent article on social finance from Charity Village. In the conversation with Karl Noseworthy, which formed the basis of the article, I touched on the role of social finance as it related to the funding challenges that nonprofits face, the potential roles of corporations and hybrid organizations, some of the key trends around social capital markets, and the role of an online platform to influence social change.

Read the full article at the source, or below. And thanks to Charity Village for continuing to feature social finance as an emerging theme in the nonprofit arena.

The emerging importance of social finance in today’s society

By Karl Noseworthy
September 17, 2009

In today’s business world, whether it be a nonprofit or for-profit organization, there is an abundance of new ways to operate. There are people who see a declining trend in the need to maximize profit at all costs. Many believe there are better approaches to running an organization, ways that can benefit more than just their own pocket and the pockets of their investors. One such individual is Karim Harji, manager for partnership development at Social Capital Partners, a senior research associate at Carleton University, as well as cofounder of socialfinance.ca

Understanding the concept

If one were to look up social finance, the first thing they would notice is that it has many definitions. Harji defines it as "intentionally using finance where the intent of the investor is to generate some sort of blended value return," adding that the concept of blended value encompasses most of what social finance is about. "This is not necessarily a trade-off between economic, social, and environmental values; it distinguishes what different kinds of combinations can be created."

When asked how social finance relates to social enterprise, Harji explains that one of the uses of social finance is to provide capital for social enterprises. "For me, social enterprises can be for-profit as well as nonprofit organizations." He sees the variety of ways to incorporate social finance as a spectrum. "One end of the spectrum is philanthropy, such as traditional grants. At the other end are pure market type transactions. Philanthropy is a complete negative return for an investor, as all of the money is being given away, whereas pure market type transactions may have market or above market rate returns." He also points out the different possibilities along that spectrum. "There are investors who are willing to take low market returns for a more positive social outcome. There are also many creative ways to give out grants, like allocating 80% grant and 20% loan."

Trends and challenges

Given all the possibilities to do good, it's not surprising that Harji is seeing trends that indicate the need to start thinking in terms of how to be more creative in using finances for social outcomes. "For instance, [right now] there are more people than available jobs," he explains. "One solution is that social enterprises, whether they are for-profit or nonprofit, can actually target and recruit people who face employment barriers."

Indeed, social finance has the potential to become an important aspect of business in Canada. "Many corporations are not satisfied anymore with simply writing a cheque," he says. "They want to be more involved in grantmaking. They want to be hands on and have the ability to leverage more of their assets. Corporations also want to get their employees involved because of benefits surrounding employee retention and recruitment."

Case in point, the partnership between Habitat for Humanity and the Home Depot. "This is a classic example of how corporations are being smarter about their money," says Harji. "Nonprofit organizations need money. However, if [the company] instead provides volunteers from their own stores to either help or teach people to build houses, they are able to contribute. As well, Home Depot can provide building materials. This way they can leverage assets within their company for a social mission."

Awareness of social finance may be growing in Canada, but it does not come without challenges. As Harji states, "One of the challenges that I've seen is issues around language and definitions. There is a tendency to get too preoccupied with those. Another challenge is the hesitancy for some nonprofits to embrace the concepts around social finance." Specifically, he explains that "the system tends to promote an excessive reliability on grants. There will be organizations that will always need grants to succeed. Social finance is not about attempting to cut everybody's long-term grant funding and try to shift them into a corporation. That is why grantmaking is at one end of the social finance spectrum and it will continue to be in Canada."

Social finance’s premier event

One of the premier international events for social finance is the Social Capital Markets conference, or SoCap09, that was held in San Francisco in early September. Harji was at the event, which focused on three main themes: metrics, collaboration, and the role of government as an enabler. "In terms of metrics, we discussed how to think about them, how to agree on what should be measured, and then how to measure them. From an international perspective, there are some standards that have been proposed about how to measure the impact of social finance or investing in blended value enterprises." With regard to collaboration, Harji feels more creativity is needed around how to structure and align the expectations of different types of partners. On the role of government as an enabler, "we probably expect the government to do too much in Canada," he says. "The importance revolves around identifying what the government’s role is in moving this agenda forward."

Aside from the main topics, another very important subject for Harji is understanding what the demand side of social finance is in Canada. "We know that there are investors that give grants, loans, etc. But we are not sure what opportunities exist and in what form capital can be provided." Another topic was the issue of intermediaries. "We have people willing to provide investment and we have groups that need investment. In the private sector, there is an entire industry that is dedicated to matching demand and supply. However, in social finance, such an industry does not exist. Personally, I think it’s about building the correct incentives for those intermediaries to get involved. Thinking about how to structure this is an important next step for social finance."

Opening minds to fresh ideas

Social finance has its concepts, trends, and platforms to move it in a forward direction. However, there is still a missing piece and that is how to get information across to people. Harji believes that online is the best method to get his message out. "The online world is where I feel I can contribute the most. This was one of the motivations for starting socialfinance.ca (an online platform for the community of people and organizations that are actively trying to advance the development of a social finance market space in Canada). I was getting to the centre of the conversations around social finance and building a network. I felt that for many of the conversations I either wanted to have or I was already having, there was no platform to continue on." In terms of the goals of the site, Harji had this to say: "The first goal is basic education and awareness of what social finance is and what it means. We also want to point out who is actually active in it." Another point of the site is to "build a base of knowledge on what’s happening both in Canada and internationally...and soliciting questions from investors, from social enterprises, and also from intermediaries, he explains. "Then we are getting experts to give answers to them. This is an area where we want to be targeted and action oriented."

However, the focus of educating the public about social finance has to start with young people. In order to do this, Harji believes that "all you need to do is go to any university campus today, even to the business schools, and talk to them about social finance and social enterprise. There are young people right now starting up businesses that have double or triple bottom lines and they do not see that there is a trade-off between them." Harji feels that many young people understand that "you can start out and manage a business without trading off your values. Your values can still be a part of the business you want to build. This is a very different mindset from everything that has been traditionally taught. The issue that is now facing us is finding a way to teach young people to understand the economic, social and environmental trade-offs and then how to maximize benefits in all areas of social finance."

Karl Noseworthy is a freelance writer from Newfoundland who currently resides in Kitchener, Ontario. He can be reached at karlnoseworthy@hotmail.com.

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