What Is Social Finance?

Investors are in the financial markets to make profits, no doubt, but some are not willing to compromise on social issues that may be a consequence of investing. Social finance keeps the bigger investment picture in mind and is the practice of investing in socially responsible regions, businesses, and practices. It is also marked by decisions to avoid investing in countries and companies that are not socially responsible but instead have demonstrated some inconsistencies in political, environmental, agricultural, or social behaviors.

Social finance encompasses the extension of funds, whether it be loans, investments, or grants, to initiatives that support responsible actions that will have a positive influence on the world. Financing can take different shapes and can be applied to different industries. As much as the practice of social finance promotes positive initiatives in a region, this type of financing avoids extending financing in places where harmful activity, such as child labor, may occur.

Additionally, social finance can be applied to a country's agricultural system. For instance, a financial institution may only provide financing to regions where organic farming is promoted. The focus may also be on sustainable food behavior, including harvesting in a way that is not harmful to the environment, people, or animals. Also, the hunger needs of a region's citizens must be considered prior to using any agricultural crops for profit by exporting goods.

Socially responsible investing is a component of social finance. Investors large and small may take a stand not to invest in regional economies where there is suspicion that a government may be participating in activities that go against national concerns, for instance, dealing in nuclear arms. Asset managers oversee money on behalf of investors and are permitted to direct that money in a particular fashion based on the strategy of the investment fund. If, however, an investor has money invested with an asset manager who allocates capital to controversial regions of the world, the investor may opt to redirect money elsewhere upon learning about the exposure.

To avoid any surprises when investing, there are investment vehicles known as socially responsible funds that focus exclusively on socially acceptable investments. These funds invest in socially responsible industries, such as renewable energy, and avoid stock investments that are deemed harmful in any way. For instance, a socially responsible fund may include alternative energy exposure but will avoid investing in tobacco stocks because of the harm that secondhand smoke can have on the environment and other people.