Social finance and impact investing – fad or game-changer?

publication date: Jun 26, 2013
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author/source: Shehezerade Hirji

If you are new to the not-for-profit or charitable sector, you might think that a new wave is taking hold in the sector. If you are a seasoned practitioner, you will likely look at the social finance and impact investing with a “wait and see” approach to assess whether this is an enduring trend or a passing fad in the sector.Shehezerade Hirji photo

Creativity has always been a part of the sector and social entrepreneurs have invigorated the sector on an ongoing basis. More recently, since the 1990’s, we have seen an infusion of entrepreneurial energy through “venture philanthropy,” social enterprise development, and adaption of financial and investment models and tools towards social and environmental outcomes.

What we are currently experiencing in the sector has the potential to dramatically and permanently alter the structural DNA of the sector. The melding of the traditional social and financial worlds is accelerating at a breathtaking pace at one level – particularly in the US, and at a slow and steady clip at another. The terms “social finance” and “impact investing” denote two areas of significant activity and increasing traction. 

Background

Social finance in the Canadian context was squarely placed on the map through the Report of the Canadian Task Force on Social Finance in 2010. The Report’s recommendations were intended to “ignite the development of an investment marketplace dedicated to addressing Canada’s social and environmental challenges.”

The Report recommended that federal and provincial governments, foundations, and institutional investors take actions to unleash new sources of capital; develop needed support infrastructure, intermediaries and policy; and build the pipeline of entrepreneurial ventures with social and/or environmental impact.

Social Finance is defined as an approach to managing money that delivers social and/or environmental benefits, and in most cases, a financial return. It encourages solutions at a scale that neither purely philanthropic supports nor traditional investment can reach.

All investments, of course, have an impact. Impact investments, in the way these are being referenced in the sector are “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return. Impact investments can be made in both emerging and developed markets, and target a range of returns from below market to market rate, depending upon the circumstances.”

Trends are here to stay

Three major trends in this area point to a lasting evolution that is under way. These include:

1. Investment in the development of the field of social finance/impact investing

Whether through the work of SIG at MaRS in Toronto, focused on fostering a culture of continuous innovation, or Vancity’s Impact Lending and Investing framework, these are very practical approaches in integrating positive social, economic and environmental impact throughout the investment.

For example, Vancity uses a variety of tools (loans and other financing, grants, partnerships, learning and networking events) to support local, natural and organic food. It supports local producers, processors and manufacturers, wholesalers and distributors, the retail/food service sector, and waste management businesses. These could work in either the for-profit or charitable sector. The businesses supported generate their own positive social, community and environmental benefits through an expanded suite of financial and other tools.

The Government of Canada has waded into this area through exploring new instruments such as Social Impact Bonds.  A call for concepts on tackling challenges such as homelessness, youth crime, chronic poverty, skills shortages, and unemployment has attracted over 150 concepts that can be tested and funded through Social Impact Bonds.

HRSDC is moving toward funding arrangements, such as pay-for-performance agreements and matching taxpayer dollars with non-government contributions to extend the impact of not-for-profit organizations. Concepts submitted include “a school for entrepreneurs and business people for the homeless” and “social performance derivatives.” You can read more here.

2. Structural changes that enable the creation of new types of hybrid entities.

These entities are neither for-profit nor not-for-profit in the traditional sense. Canadian examples abound (Bullfrog Power, for example).  British Columbia has introduced the Community Contribution Company, a new form of a taxable corporation that can be used to do business and generate profits, with a 40% cap on dividends paid out to investors, to enable more capital to remain within the social enterprise, with the ability to flow unused revenues to qualified entities. Similar legislation has been tabled in Nova Scotia

Annual community reporting must include how the Community Contribution Company has manifested its social, cultural, or environmental goals (which must be embedded in its articles of incorporation). 

3. Availability of “product” for those interested in pursuing this type of investment

In Canada, Resilient Capital provides investors the opportunity to participate in a fund that generates a financial return and supports social enterprises. Intermediaries are emerging to bring together those who want to fund or invest and those who seek investment capital.

The Community Forward Fund Assistance Corporation is a Canadian nonprofit that makes loans to, or arranges financing for, nonprofits and charities. It is trying to close the gap in access to patient, working capital and provides bridge loans for the sector for small- and medium-sized organizations. Purpose Capital is another emerging intermediary. As well, under development is the Toronto-based Social Venture Exchange, similar to a financial stock exchange, except that the products listed have been screened to meet social and environmental impacts, while also generating a return on the investment. Similar exchanges exist in Germany, the UK, Singapore and Brazil.

While the field has evolved somewhat differently in the US, it is worth nothing that Global Impact Investing Network currently manages 50 funds with over $2 billion of impact investments in over 30 countries around the world. Impact investing in developing countries has been focused on five sectors – housing, water, health, education and financial services.

Many possible views

One important consideration in assessing what impact social finance and impact investing may have on your work is to ask this question from a variety of lenses. Donors, for example, now have additional tools to use (investing for a return in addition to an outright donation, if this way of giving interests them.)  A foundation, as well as making grants, could now invest some of its endowment funding outside traditional financial markets and into social ventures that generate positive social and environmental returns while also receiving return on the capital invested (providing the investment meets the “prudent investor” rule). A charity can now perhaps access a wider pool of capital to finance its programs and activities but risks losing some outright gifts in the process.

This chart captures some of the implications for different stakeholders:

Hirji chart

The University of Fredericton now offers an MBA in social entrepreneurship, and the University of Waterloo offers a graduate diploma in social innovation. These will lead to new hybrid ways of thinking about and tackling social and environmental challenges. We are in for exciting times ahead!

Barrister and solicitor Sheherazade Hirji has served as acting CEO, VP of grants, and director of learning and evaluation at the Ontario Trillium Foundation and founding executive director of the Royal LePage Shelter Foundation, where she transformed a corporate charitable impulse into a national strategy to support women’s shelters and violence prevention. As Hirji+White Consulting, she was part of a philanthropic consulting team serving families, corporations, and public and private foundations. Most recently, she was VP, client services at Tides Canada.

She can be reached at hirjis@rogers.com.  



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