How to Conduct Successful Social Investment (2024)

Social investment can be a great option for businesses and charities alike. Image credit: Mediamodifier

Many businesses and funds are increasingly concerned with their corporate social responsibility. One of the most effective strategies here is knowing how to conduct successful social investment.

After all, businesses aren’t just money making machines. They’re made up of people, who form a crucial part of their local community. So although businesses need to make a profit, they also want to improve the lives of people in their local area.

This is where social investment comes in. Today, we’re going to cover everything you need to know about social impact investing. Let’s start with the basics.

What is Social Investment?

Essentially, social investing combines the financial returns of traditional investments, with an emphasis on having a social impact. Investors lend money to different organisations, on the condition that it is used towards some kind of social aim.

This helps charities and other third sector organisations to build financial capacity over the longer term, rather than being a source of income as such. Rather, it is a way to help charities meet their funding needs, and develop longer term stability.

Benefits of Social Investment

Of course, social investment offers a range of benefits for investors and organisations alike. The benefits for organisations receiving funding through social investment are a little bit more obvious.

The key thing is that social investment terms tend to be much more forgiving than the equivalent loan from a high-street bank. This can make the repayments much more flexible and affordable, which is naturally important for a charitable organisation.

For businesses, the benefits of social investments are a little bit more counterintuitive.

As mentioned, the key thing here is corporate social responsibility. This is increasingly important for modern businesses, as customers are more and more inclined to buy from companies which share their values, or make an impact in their local area.

Social investments combine both financial and social returns. Image credit: Markus Winkler

What Kinds of Organisations Can I Invest In?

This is where social investing gets a little bit trickier than normal charitable donations. That is, you can only invest in an organisation or project if it actually has the ability to repay your loan.

This rules out a number of different kinds of charities, as only certain third-sector organisations can actually make money to pay back a loan.

The most common kind of social investment involves lending money to social enterprises. These are for-profit businesses which are based around creating a positive impact in their local community.

There are also other kinds of charities which have enough of a commercial element to repay a loan. For example, some non-for-profits also conduct commercial activities and can raise income that way.

What are the Typical Social Investment Terms?

As noted above, social investments typically have more manageable terms than traditional loans. This might mean a lower interest rate, a longer repayment period, or more flexible terms.

To balance the financial aspect of social investing with meeting your social goals, it’s important to recognise that this isn’t purely for profit. While you should still receive a return on your investment, this might not be as high as in a purely commercial investment.

As such, you’ll want to consider setting social terms for your investment too.

This is all about incentivising your partners to get the most possible social impact out of your investment. For example, you might offer to defer some repayments when your partner meets different project milestones, or other KPIs.

The goal here is to ensure that your investments meet both your financial and your social impact goals.

How to Conduct Social Investment Successfully in 3 Steps

Of course, when you want to conduct social investment, it’s important to have a clear framework of the steps you’ll need to take. This is also when you’ll need to think about the kinds of projects you’d actually like to support.

Here are the three key steps you’ll need to take while conducting social investment.

1. Find Organisations Which Match Your Investment Goals

Since social investments are so heavily focused on corporate social responsibility, you’ll need to find organisations which actually align with your business’ core values and social aims.

Corporate social responsibility strategies are only really effective when you genuinely support a cause.

Think about which causes are most important to your employees, your customers and your local community. It’s even better if you can identify a concrete need in your local community, and work with a competent organisation to help and make the maximum impact.

It's important to set clear social and financial goals. Image credit: Isaac Smith

2. Research the Organisation’s Capacity and Expertise

Unfortunately, simply working towards a noble goal is not enough to make a charity deserving of a loan. The reality is that not all charities have the experience or capacity to handle, use major funding, or repay a loan.

As such, you’ll need to have a clear idea of the capacity and resources of any potential charity partners.

This includes whether or not they have the commercial means to repay a loan, as well as a strong track record of project delivery which indicates that they'll have the ability to use your money effectively.

3. Set Financial and Social Impact Terms

You’ll also need to set clear terms for both how your investment will be repaid, and how you will measure the impact of the projects you’re funding. At the level of financial terms, you’ll need to think about the following:

These are the kinds of things you’ll have to think about with any kind of loan. Before issuing a loan, it’s worth sitting down with your charitable partner and coming up with a framework which suits both parties.

In terms of your social goals, things are a little bit more complicated. One way to do this is drafting a change model, and using this to compare your progress against.

Conducting Social Investment

As with any other element of charity financing, social investments are quite a complex field to navigate. As such, it is often helpful to engage experts to guide you through this process. This is true for both investors and charities alike.

At S3 Solutions, we have extensive experience of all elements of charitable finance.