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Social
Finance Peer Review
According
to Krlev, Münscher, & Mülbert (2013), social finance is a current trend
that is intended to change the dismissive way of thinking towards
impact-oriented thinking. This is especially the case in the third sector which
comprises of corporate social responsibility and social entrepreneurship Krlev
et al. (2013). There has also been a push by policymakers and governments to
ensure that private activities also generate other benefits to the general
population in other ways other than the traditional revenue related benefits
(Lazzarini, 2018). McGowen (2004) states
that while in general giving is increasing, the overall number of donors is on
the decrease, and this is in spite of social finance gaining interest in the
last few years. This can be attributed to Social finance projects and proposals
lacking funding as investors view them as being risky and having low returns on
investments( Moore, Westley, & Nicholls, 2012). In addition to that, donors
have shifted in their style of carrying out social finance and impact
investments in general by interacting directly with the private sector (O'Flynn
& Barnett, 2017).
The
main characteristic of social finance is the intention to have an impact rather
than actually having an impact Barber et al. (2018). Social finance has also
the characteristic of being double bottom line by offering social impacts to
the society as well as profits Barber et al. (2018). Social finance in general
should have a deliberate attempt of solving, social financial and environmental
issues and bringing their benefits (Cornée, Jegers & Szafarz, 2018). Cornée
et al. (2018) further add that social finance arises when social funders are
able and are willing to relinquish some of their returns for social benefits
but emphasizes on constant monitoring and efficient selection mechanisms. This
is because social finance offers entrepreneurial solutions to problems facing
the society (Barber, Morse & Yasuda, 2018). It is also important to note
that some projects can be counterproductive when they have high screening and
costs and the probability of various random social outcomes Cornée et al(2018). Barber et al. (2018) states that the
principles of impact investing are: supporting companies that benefit the poor,
choosing of a high impact cause, supporting entities in uncrowded markets,
working in efficient markets while expecting some form of financial sacrifices,
solving problems that are neglected by other investors and working in areas
where one can or has gained information or network advantages over other
investors.
The
incentive to invest in social finance projects which is the profit also lacks in
social finance projects based on research by Barber et al. (2018). Despite this, the investors are still
motivated by social prestige, the general concern for the community, and social
identity, Cornée et al. (2018). The beneficiaries on the other hand benefit
from material gains and intrinsic motivators such as self-esteem. The success
of social entrepreneurship depends on accountability standards, transparency
and screening Cornée et al. (2018).
In
essence, social finance is a much better way of dealing with poverty compared
to philanthropy (McGoun, 2004).This is because it helps in reducing or
eradicating poverty, economic crisis, unemployment, and inequality among other
social and financial problems facing the world today. Cornée, Jegers &
Szafarz (2018) state that a better understanding of social finance helps in
enriching the economic theory and gives a better understanding of the little
known phenomena that is social finance. Wilson (2012) further suggests that
social finance is a gateway of providing fair services to consumers who are
vulnerable in the society such as low-income earners. Social finance also helps
in poverty alleviation, catering for disadvantaged groups, promotion of ethical
trade and social needs such as education, healthcare among others as emphasized
by Cornée et al. (2018). ..
Weber
and Duan (2012) recommend research in the benefits of measuring the impact of
social finance, challenges in measuring social finance and the benefit of
social finance compared to grants and donations. Other areas that also need
further research include embedding social finance in management, assessing
investments in other ways other than social impact such as efficiency,
sustainability, relevance etc., the effectiveness of intermediaries, the impact
of social finance on the wider market and an analysis of the relationship
between the different levels of returns which include social, financial and
environmental (O'Flynn & Barnett, 2017). Furthermore, other societal
functions of social finance should include the political and cultural aspects
Krlev et al. (2013). In addition, there is a discussion on the effectiveness of
social entrepreneurship in dealing with and curing social ills Krlev et al
(2013). With the growing interest in social finance, there has been an
increased interest in social finance measurement (So, I., & Staskevicius,
2015). The increased interest in social finance measurement is being driven by
the need for accountability and effectiveness in terms of the investments being
made Krlev et al. (2013).
Social
finance and impact investment measurement is a child of the growing tendency of
using economic principles and other rationales in assessing entities and
projects that are socially oriented according to Krlev et al (2013). This
pushes the general topic to the benefits of social finance rather than theories
on the field’s origin and classification. Its primary theoretical background is
the cost-benefit analysis which also considers the wider social circumstances
and different aspects of the impact et al. As the name suggests, another
framework for social finance and social return on investment analysis is return
on investment and cost accounting which has a financial and accounting origin
(Olsen, 2003). Olsen (2003) states that the return on investment is used as a
measure of a company’s success and as a metrics of comparing entities in the
same industry or that have the same level of risks. In addition, the management
uses the return on investment as an item to be maximized in addition to other
metrics, and as a reflection of an entity performance. It is in this same
respect that the metrics can be applied to social enterprises in determining
its performance against social and environmental aspects by framing the costs
against the benefits (Olsen, 2003). Cost accounting entails determining and
summing up the cost of products or activities (Kamala, Struwig, Bornman,
Boersman, Vermaak, McGill & Taylor,
2015). In this sense, the social cost refers to the expense incurred by an
entity or project in carrying out the social project or investment (Olsen,
2003). Cost accounting involves the classification of costs, interpreting the
costs and analyzing the results and is a measure of the operating efficiency of
an entity, Kamala et al (2015). The main use of cost accounting is to aid in
managerial decision making. It is crucial in reducing wastages, setting up the
prices, ascertaining the cost, cost reduction, helping with cost estimates
among other benefits Kamala et al (2013). Cost-benefit analysis as the name suggests
involves equating the costs against the benefits. With the cost-benefit
analysis models, one can also put monetary assignments to non-tangible items
which otherwise would have been analyzed using qualitative techniques. Another
key element of cost-benefit analysis and costs, in general, is the opportunity
cost. This is a quantifiable allocation of opportunity foregone (Laurance,
Peletier-Jellema, Geenen, Koster, Verweij, Dijck &Kuijk, 2015). The
economic theory is another field in which social finance has been derived -
this is in relation to the allocation of limited resources among alternatives
(Cornée et al., 2018). Lazzarini (2018) also points out to the adoption of
management concepts in social finance such as how managers use organizational
resources to meet both social and institutional needs. Furthermore, social
needs and challenges have been intertwined with business needs and challenges
especially on the management which shows a dependency (Lazzarini, 2018).
Socially
finance consists of a number of social-oriented financial activities such as
impact investments, social banking, charitable banking, banking services, and
advice to excluded individuals and crowdfunding platforms (McGoun, 2004). Some
of the data used to measure social finance include data on low-income
beneficiaries, rural-urban breakdown, employment creation, tax paid, access to
products, job sustainability, companies’ value addition, company turnover
growth, etc. (O'Flynn & Barnett, 2017). This is in addition to governance
and a focus on the business model (Lazzarini 2018). Generally when coming up
with social finance projects the emphasis should be on outcomes and not
outputs, prices versus quality, the costs and benefits to the intended market,
how much the market is crowded and the historical marginal approach and the
normal growth approach based on the research by Barber et al. (2018). In
addition, one should focus on the counterfactual, think based on the margins,
consider all the costs and focus on the average and not the typical
performance. This is further emphasized by Lazzarini (2018) who emphasized on
identifying casualty which refers to who originated the impact, comparability
and the costs involved in social finance projects.
To
measure social finance and its impact, there is need to have a continuous
monitoring and evaluation method. This is as a results of the data-driven
decision making approach that has been adopted by the various parties involved
(O'Flynn & Barnett, 2017). The methods of measuring and collecting data for
social finance and impact investments can be broadly classified into four
categories. This includes rating systems which focus on internal operations,
output measurement, directly assessing the social impact using quantitative and
qualitative analysis and assessment as part of doing business which encourages
the integration of management (O'Flynn & Barnett, 2017). So & Staskevicius (2015) Categories the
methods into expected return which is a cost-benefit analysis, theory of change
and logic which focuses on the process up to the intended social impact,
mission alignment method which measures the execution and its alignment to
mission and goals and experimental which measures the impact of the investment
against the status quo. The expected return method is measured using the social
return on investment, the theory of change model is measured using the logic
model, the mission alignment model is measured using scorecards or social value
criteria and the experimental method is analyzed using RCT, historical
baseline, pre/post test, regression discontinuity design and differences in
differences (So & Staskevicius 2015). In addition, an alternative method of
assessing a social finance project is the use of best alternative charitable
option which measures the impacts of investments against available alternative
to choose which option is better than the rest Krlev et al. (2013).
Thus
for proper measurement an integrated model is recommended depending on the size
of the social finance project and the stage in which the impact investment is
in. This is because most of the methods in the field focus on the individual
characteristics of entities and projects rather on the social benefits Krlev et
al (2013). This includes organizational capacity assessment, stakeholder
analysis, and sustainability ratings. In addition to that, there are
standardized tools developed and available for the measuring of social finance
and impact investment. This includes Impact Reporting and Investment Standards,
Global Impact Investing Report System, proposals by the United Nations social
development goals, B Lab Certification among others. The shortcoming of this
method, however, is the issue of casualty which they do not address (Lazzarini
2018)
Social
finance aims to accord a social investment and its benefits a monetary
relationship Krlev et al (2013). This is in addition to the use of qualitative
and quantitative values to measure softer impacts of the social investments
such as the social values. To measure social finance one has to consider
components such as the impact, financial return and the risks (Weber &
Duan, 2012). One of the methods of measuring the impact of social finance and
social banking is through the use the social return on investments. The social
return on investments has seven key principles. According to Weber and Duan
(2012). This include stakeholder involvement, impact to be achieved, value of
the things that matter, material facts, use of appropriate benchmarks and
standards, transparency and use of verifiable results. In addition to that, the
key concepts that need to be understood include the inputs, outputs, outcomes
and the impact of the social investments. Banke-Thomas, Madaj, Charles, &
Broek (2015) suggests that the use of social return on investments is
advantageous as it is capable of measuring broader socio-economic outcomes. In
addition, social return on investments can be used to access the monetary
value, whether the investment is worth venturing in, value potential, welfare
benefit and impacts of the investment in terms of social, economic and
environmental. Furthermore, it caters
for future value, theory of change and stakeholder engagement. In calculating
the social benefit one has to take into account the net present value, social
return on investment ratio and the payback period. It is also advantageous as
it caters for priority setting, resource allocation, building relationship with
stakeholders and forming an accountability framework for the management
(Banke-Thomas, Madaj, Charles, & Broek, 2015). Banke-Thomas et al. further
points the steps in social return on investments as establishing the scope and
key stakeholders, mapping outcomes, evidencing outcomes, establishing impact,
calculating the social return on investment and finally reporting and
embedding. Krlev et al (2013). acknowledge that the use of social return on
investment is just a stepping stone to allow for more discussions on practical
application and academic discussions. In addition, the measurement of social
finance can be used as a basis of rewarding managers for their superior social
outcomes or in choosing among alternatives (Lazzarini, 2018).
Some
of the challenges in measuring social finance includes the limited resources to
do the measuring, conflicts with business and investment, the data to be used
in measurement, defining the impact, selecting the relevant metrics, in
capturing intangible results and the lack of standardization in measurement
(O'Flynn & Barnett, 2017). The lack of funding resources for social finance
activities by the social financers is further emphasized by Cornée et al.
(2018). A challenge in the use of the
social return on investment is the ambiguity on the stakeholders that impact
the ambiguity Krlev et al. In addition, Krlev et al. argue that there are soft
outcomes that are hard to measure such as individual well-being and
independence. This is in addition to a large number of diverse organizations
and the use of economic principles which might seem unfit in measuring social
aspects, projects, and entities. The social finance measuring field is also
relatively new which leaves a lot of variability in its measurement leaving
little room for comparison among entities and organizations (Pathak &
Dattani, 2014). In addition, there is a lack of data from many companies and
there are also varies measures of an entity’s success. Social finance might
also displace another impact investor, finding an impact investment project or
company might be hard and it’s also hard to have additionality especially in the
large public stock markets Barber et al. (2018).
Olsen
(2003) identifies the steps in calculating the social return on investments in
5 steps. These steps include: Quantifying non-financial impacts, translating
the financial impact into monetary terms, summing up all social cashflows in
the time horizon in question, and discounting the cash flows into present
value. In addition, Olsen (2003) includes varies guidelines and standards in
measuring social finance. The guidelines are as follows: inclusion of positive
and negative impacts, inclusion of impact on all stakeholders, the impact
should be directly attributable to the entity, avoidance of double counting,
impact should be directly and uniquely influenced by the business in question,
quantifying and monetizing that is logical in the context, include numeric
metrics, address the risk factors, carry out sensitivity analysis and the
inclusion of an ongoing analysis.
Possible research
questions
1.
What are the problems associated with
social finance measurements?
2.
How can you reconcile economic and
social dynamics in impact investment analysis?
3.
How to choose a social finance project
based on the perceived impact
4.
Which is the best tool to use in social
finance impact analysis?
5.
Is Social return on investment an effective
tool of measuring social finance investments/ impact investments?
6.
What are the issues in social finance
measurement?
7.
Which is the most Effective way of
measuring social finance investments.
8.
What are the impacts of social finance
investments?
9.
Which methods are currently being used
to measure impact investments?
10.
How to measure impact of social finance?
11.
Can you combine social finance measuring
tools for effective measurement of the impact?
Reference
Barber, B. M., Morse, A., & Yasuda, A. (2018). Impact
investing. Available at SSRN 2705556.
Banke-Thomas, A. O., Madaj, B., Charles, A., & van den
Broek, N. (2015). Social Return on Investment (SROI) methodology to account for
value for money of public health interventions: a systematic review. BMC
Public Health, 15(1), 582.
Cornée, S., Jegers, M., & Szafarz, A. (2018). A Theory of
Social Finance.
Kamala, P., Struwig, J., Bornman, M., Boersman, R., Vermaak,
M., McGill, M., ... & Taylor, P. (2015). Principles of Cost
Accounting. OUP Catalogue.
Krlev, G., Münscher, R., & Mülbert, K. (2013). Social
Return on Investment (SROI): state-of-the-art and perspectives-a meta-analysis
of practice in Social Return on Investment (SROI) studies published 2002-2012.
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global environmental impacts of rapid infrastructure expansion. Current
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McGoun, E. G. (2004). Form, function, and finance:
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Moore, M. L., Westley, F. R., & Nicholls, A. (2012). The
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O'Flynn, P., & Barnett, C. (2017). Evaluation and
impact investing: A review of methodologies to assess social impact(No. IDS
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Pathak, P., & Dattani, P. (2014). Social return on
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91-104.
So, I., & Staskevicius, A. (2015). Measuring the
‘impact’in impact investing. Harvard Business School.
Weber, O., & Duan, Y. (2012). Social finance and
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institutions, corporations, investors, and activists, 161-180.
Wilson, T. A. (2012). Supporting social enterprises to
support vulnerable consumers: the example of community development finance
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197-213.
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