A Guide to Social Impact Investing

Are you ready to rethink traditional investment strategies? Social impact investing could be the key to doing well while also doing good. Wenjue Knutsen, adjunct associate professor at Smith School of Business, explains that social impact investing lets investors create positive change in the world without compromising financial returns.

What differentiates this type of investing from other forms is that “social impact investing focuses on the intention. It’s an active pursuit of a social mission, so it’s a core activity,” Knutsen says. But that doesn’t mean the bottom line is forgotten, she adds. “Conventional investing has one bottom line, which is profit, and social impact investing has to have both a profit line and a social mission pursuit.”

In this video, Knutsen unpacks social impact investing, shares who social impact investors are and explores the government’s role in developing the social finance market.

“People are very attracted to doing well by doing good,” she says, noting that some investors are even willing to accept below-market returns when the social impact is substantial.

Knutsen also explains two major steps taken by the Canadian government to develop a social finance market, having introduced the “Investment Readiness Program” to help social purpose organizations prepare for external funding and contributing to social finance funds with the goal of leveraging this money.

“The goal of the government is to use $700 million to leverage $1,400 million [$1.4 billion]. They want each dollar to leverage two dollars from the private market.” 

Transcript

[Music playing]

What is social impact investing?

00:08: Wenjue Knutsen: Social impact investing describes the practice of allocating capital, investing in activities that are aimed at achieving social mission and a profit goal together. Sometimes we call that blended return. Compared to other social financing tools under the big umbrella of social finance, social impact investing has a focus on primarily private market strategies, such as private debt and private equity, venture capital and real assets. But social impact investing focuses on the intention. It’s an active pursuit of a social mission, so it’s a core activity. Social impact investing [is] compared to conventional investing, obviously. Conventional investing has one bottom line, which is profit, and social impact investing has to have both a profit line and a social mission pursuit.

Who are social impact investors?

01:19: Wenjue Knutsen: Social impact investing can be perceived as more risky and, in terms of financial return, could be, let’s say, a little less possibly below market returns. For example, traditionally social missions are pursued by not-for-profit organizations, right? They’re called not-for-profit for a reason because pursuing social goals is not profitable, right? Now with new emerging business models, social innovators are hoping to combine both the mission pursuit with private mechanisms together, but that entails some risks. There is risk-adjusted return, but there is also, [what] we call “concessional return”, and “the concessional investors,” who would accept below-market returns, because for those investors, if the social good is achieved largely enough, they are able to forego some of the financial returns.

People are very attracted to doing well by doing good. So how nice to have your cake and eat it too, right? I think we have to think about who are those investors. They are high-net-worth individuals, so they have wealth, and they would like to create change, such as Bill Gates. The second one is community foundations, right? The grant-making institutions, they are charitable organizations, and they are looking for investing or granting to different organizations to achieve social purpose. And third would be more of a developmental financial institution, such as a credit union. Credit unions provide banking with a social purpose.

What is the government’s role in developing the social finance market?

03:19: Wenjue Knutsen: Social enterprise, or this kind of blended return pursuit, always has issues with financing. That’s where the government could help. I think Canada has two major steps that the federal government has contributed. One is this new program called [the] Investment Readiness Program, to help, let’s say, a social purpose organization to get ready for pick-up beyond their own. 

The Social Finance Fund is repayable capital. So, the government is putting in $700 million for fund managers [to] eventually reach a social purpose organization to help their venture pursue a social mission alongside profit.

The goal of the government is to use $700 million to leverage $1,400 million [$1.4 billion]. They want each dollar to leverage two dollars from the private market. In that way, we will develop a social finance market in Canada. And the term we call it is “ecosystem” because in this social finance market there are many players, right? There is the government, there’s a social purpose organization, there is a fund manager. There is a private equity firm that might be interested in pursuing a social mission. There is a consultant who wants to help. With social purpose organizations, there are all kinds of actors, so it takes time and takes money to sort of start the development of the social finance market.