Social Impact Investing

SOCIAL IMPACT INVESTMENT: BUILDING THE EVIDENCE BASE
Box 3.1. Financing challenges for social enterprises
Access to capital is vital to the creation and development of social enterprises. Social enterprises are usually financed
by a combination of market resources (e.g. the sale of goods and services), non-market resources (e.g. government
subsidies and private donations or investments), and non-monetary resources (e.g. volunteer work).
Grant financing, whether from governments, foundations or others, may be required at an early stage of development
and can be reduced as social enterprises build scale and market capacity. However, in some cases, secure long-term
funds may be needed, for example, in certain sectors in which social enterprises are not able to become self-financing
but whose activities provide public benefits and/or reduce public costs.
For social enterprises that are to obtain additional financing, a diversity of private market financial products that
correspond with the life-cycle of social enterprises (from start up or even pre-start up, to consolidation and growth) is
needed. One of the key financial products used by most mainstream enterprises is bank loans. However, in most
OECD countries, social enterprises have difficulty obtaining access to credit. Traditional financial institutions generally
refuse to lend to social enterprises because they do not meet their established client criteria and are not seen as
offering sufficient guarantees. Consequently, they must seek new financial partners or reduce their development
ambitions.
OECD countries are seeing the emergence of a number of new financial instruments and actors to support social
enterprises, together with broader investment criteria for existing financial actors and behavioural shifts among actors
already engaged in supporting civil society initiatives (Noya, 2009). Interest and activity in social impact investing,
which focuses on proactive investment choices aimed at supporting social enterprises that can have a strong social
impact while seeking some financial return, is growing and can contribute to the scaling and growth of social
enterprises.
Source: OECD/EU (2013).
3.7 A recent survey showed that business model execution and management is seen by investors as
the highest risk to their investments in social ventures (Saltuk et al, 2014). As with traditional businesses,
some new ventures will fail to achieve their goals. The reasons for failure of these ventures can vary from
management, strategy or funding to regulatory and administrative barriers. However, reports have shown
that social enterprises do better and fail less than for-profits because they are built on real problems and
(unfortunately) the market is there and growing.
3.8 Social impact investors, as well as targeted policies, can play a role in improving the
effectiveness of social ventures (Jackson and Associates, 2012). Social impact investors can help social
delivery organisations by providing not only financing but perhaps more importantly, support on strategy,
management and growth (Bannick and Goldman, 2012). Helping social entrepreneurs grow their ventures
to scale is the key to maximizing impact (Koh et al., 2012). The success of social impact investment is
reliant on the long term sustainability and performance, both social and financial, of the impact
organizations, for-profit and not-for-profit, in which the investments are made (Bannik and Goldman,
2012).
3.9 Investment readiness remains a key issue for social ventures in many countries. Enhancing the
investment readiness and business capability of these organisations is important to enable them to access
SII (HM Government, 2011). Creating more investable social ventures will require improving financial
skills in the social sector as well as developing a better understanding of risk and how to price it (Brown
and Swersky, 2012).
3.10 The UK launched a GBP 10 million strategic fund, the Investment Contract and Readiness Fund,
to help social enterprises secure capital. The Fund helps with investment readiness and enables social
ventures to access new forms of investment and compete for public service contracts. Grants between
GBP 50 000 and GBP 150 000 are available to social ventures which go on to raise at least GBP 500 000
© OECD 2015 25