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Making Impact Investment Opportunities Real in Canada
There has been a great deal of recent discussion on impact investing: the zen-like space where investments have a financial return and demonstrated environmental or social impact. Some may tell you that these opportunities exist just beyond the misty mountains of Pandora, in the lush, green Shire where Frodo and Bilbo Baggins play hacky sack.
In response to some of these critics and to build literacy and understanding at a local level, we need to make impact investing a bit more tangible.
Impact investing opportunities are very real, with living, breathing models in place around the world. Accordingly, there is tremendous potential for local success through our social venture exchange project. We are currently exploring the how, but this may give a first glance of what is possible.
There are at least three basic types of potential impact investment product types that could be available on the exchange: bonds, debt and/or equity funds, and stocks. (covering two of the main asset classes: fixed income [bonds] and equities [stocks]). These products would allow new capital to flow to non-profit and for-profit social ventures in the form of debt and equity. This helps us meet our key objectives: attracting new capital for social ventures so they can achieve improved social and environmental outcomes.
One of the simplest and effective means of obtaining debt financing for new capital is through a bond. For those needing a bit of basic background on bonds, the full definition (as derived from the good folks at Investopedia.com) of a bond is:
A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate (coupon). Bonds are used by companies and governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
Real World Examples of Impact Investing via Bonds: Affordable Housing Bonds and Impact Bonds
Bonds are also an effective (and increasingly used) means of providing financing for projects/work with positive environmental and social outcomes, particularly related to housing and community infrastructure. For decades, governments in the US, UK and a number of northern European countries have utilized public housing bonds to finance the repair and construction of affordable housing units.
In the United States, the bond types are have been known as Housing Authority Bonds, “…issued by state or local governments to help finance the construction or rehabilitation of affordable rental housing. Under certain programs, the proceeds from Housing Authority bonds may also be used to help low-income individuals and families purchase a home. The interest received by investors in these bonds is generally exempt from federal, state, and local income taxes.” This investment mechanism was first developed in the late 1930’s, pushed by New York Mayor La Guardia as a revolving state fund. They are typically issued by local public housing authorities and secured by the net rental revenues. They may or may not be guaranteed by the state or federal government.
An example of this bond type can be found in California. As a result of a referendum in 2006, the state issued a, “…$2.85 billion affordable housing bond to produce an estimated 118,000 housing units, 2,350 homeless shelter spaces, and infrastructure projects that help infill housing development such as water, sewer, parks, and transportation improvements.” One example of a program funded through this bond issue was CalHome, a program designed to enable low and very-low income households to become or remain homeowners.
More recently, innovators in the UK have begun to develop Social Impact Bonds. These bonds are a contract between a public sector body and Social Impact Bond investors, in which the former commits to pay for an improved social outcome. Investor funds are used to pay for a range of interventions to improve the social outcome.
As obtained from the Social Finance (UK), a description of the pilot bond issue is as follows:
During the Peterborough Prison pilot, experienced social sector organisations, such as St Giles Trust, will provide intensive support to 3,000 short-term prisoners over a six year period, both inside prison and after release, to help them resettle into the community. If this initiative reduces re-offending by 7.5%, or more, investors will receive from Government a share of the long term savings. If the SiB delivers a drop in re-offending beyond the threshold, investors will receive an increasing return the greater the success at achieving the social outcome, up to a maximum of 13 per cent.
In addition, innovators in Australia have developed a Social Impact Property Fund to, “…to provide wholesale investors with direct exposure to risk managed properties accommodating community sector organisations that make a positive social contribution to their communities. The target return on the fund is 5.5 per cent.”
Our Context: How Could this Apply Locally
In Ontario, we could follow a similar path and create (or advance the development of) public or social housing bonds. We already know that there have been bond issues by affordable housing providers in Ontario, including the Toronto Community Housing Corporation’s recent bond issue of $200 million. There is also a clear need for repair and retrofits to existing housing stock, as well as the construction of new units to meet the demand for affordable housing in Ontario.
There are at least two key questions that would need to be answered before this opportunity could be realized. First, who is the guarantor for the investment? In the case of the Toronto Community Housing Corporation, it is the largest affordable housing provider in the province, within the largest municipality in the country. It would appear that one or both back the bond. Second, how can we further incent investors to put capital into these kinds of bonds? It is possible to make them tax exempt bonds, as they have in some states, but some consideration would need to be made on the cost effectiveness of this strategy (public purse cost of tax exemptions for individual and institutional financing ) versus the provision of capital by the state (interest cost for provincial or federal government).
2. DEBT AND/OR EQUITY FUNDS
Beyond bonds, another investment product type that is possible for impact investing in Canada is debt and/or equity funds. Debt and equity funds are also very popular financial instruments for investors and investees as a means of pooling investment capital and opportunities. For those needing a bit of basic background on funds (again, thanks to Investopedia.com), the full definition of debt and equity funds are as follows:
Debt Fund An investment pool, such as a mutual fund or exchange-traded fund, in which core holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.
A mutual fund that invests principally in stocks. It can be actively or passively (index fund) managed.
Real World Examples of Impact Investing via Funds: New York City Acquisition Fund and Bridges Social Entrepreneurs Fund
The NYC Acquisition Fund provides local and not-for-profit developers with bridge financing to acquire private property for the construction and preservation of affordable housing. The $200 million NYC Acquisition Fund provides local and not-for-profit developers with a financial mechanism to acquire private property for the construction and preservation of affordable housing. Up to 30,000 rental, homeownership, and supportive housing units will be created or preserved through the ALF over the next ten years.
The fund guarantee pool consists of $8 million in Battery Park City Authority revenues and $32 million from various foundations, including Ford Foundation, Robin Hood Foundation, Heron Foundation, MacArthur Foundation, Rockefeller Foundation, Starr Foundation, New York Community Trust, Gimbel Foundation, Open Society Institute, among others.
Senior lender debt of up to $190 million is available from major banks and financial institutions such as JPMorganChase, Bank of America, Citibank, Deutsche Bank, Fannie Mae, Wachovia, HSBC, North Fork, Mizuho, Merrill Lynch, Signature, and M&T. The banks have provided $160 million in senior debt indexed to the prime rate, and the impact first investors (City of New York, Ford Foundation and Rockefeller Foundation) have funded $40 million in low-interest subordinated loans.
Loans are made for up to three year terms and the interest rate is approximately prime minus 40-60 basis points. For-profit developers can receive loans of up to 95 per cent loan-to-value ratio and non-profit developers can receive loans of up to 130 per cent loan-to-value ratio. There are also cash equity and minimum recourse requirements.
The Bridges Ventures Social Entrepreneurs Fund is an innovative financial solution that is tailored to the needs of social enterprises. The fund invests in the form of equity-like capital, which shares the risks but also the returns of social enterprises. Investments are coupled with hands-on advice and support to help social enterprises realise their potential. The Fund has already made investments in local ventures, such as Call Brittania.
What is interesting is that this type of investment is paired with the necessary advice that smaller, start-up ventures require to build their business. The fund model seems to part of the answer to the question of absorptive capacity of capital. (ie. If there was more capital supply in the space, do social ventures have the absorptive capacity to use the capital to build their operations and their commensurate ability to achieve improved social and environmental outcomes). This is particularly important in our context, given that there seems to be a large number of start-up/small ventures that require capital; however, it is very difficult to get larger investors interested in such small deals (let’s say sub $1 million for argument’s sake) because of the due diligence (and therefore time) required as well as perceived/potential risk.
Our Context: How Could this Apply Locally
In Ontario/Canada, we could certainly consider the development of a similar fund model. Imagine [Insert your favourite bank name here] and/or Social Innovation Generation Social Ventures Fund? This type of fund would be in line with the provincial government’s proposed Social Venture Fund, which was originally proposed a few years ago. Originally, the concept was for the province to begin as the sole investor. However, moving forward, as with the UK’s Bridges Social Entrepreneurs Fund, private investors could also come on board to increase the potential pool of capital. In addition, in terms of process, the ventures could apply for capital (debt) through the fund sponsor (perhaps jointly managed by a bank and the enterprise catalyst/advisor?) to an established maximum amount. These ventures could include ventures from consulting firms in the fashion industry that focus on improving the labour and environmental standards of suppliers to start-up print companies that produce zero-impact business cards.
This would have a number of key advantages. For example, a large potential pool of capital investing in a number of social enterprises would increase the scale of investment, making it reasonable for larger investors to get on board. In addition, it would allow smaller entrepreneurs improved access to new capital for growth. Given the nascent nature of a large subset of the social enterprise sector in Ontario, this would be extremely advantageous and necessary for growth.
Beyond these potential models, these products could also be set-up in Canada as sectoral funds in the social and environmental sectors. For example, there could be a social fund focused on poverty reduction, training and education ventures, and/or an environmental fund focused on energy, waste reduction, and water ventures.
In addition, consideration could even be given to creating an ETF (exchange traded fund. This would allow bonds to be traded like stocks, thereby increasing potential liquidity. More study would be necessary on the potential of this product type.
The third investment impact investing product type in Canada could be stocks. They are an easily understood investment vehicle that many Ontarians hold as a part of their investment portfolio. For consistency’s sake, let’s look at the basic definition of a stock:
A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
Real World Examples of Impact Investing via Stocks
There are presently no examples of impact investing via stocks or shares in corporations. There are a number of stocks that are considered ethical or socially responsible according to negative screening processes (ie. no tobacco, no weapons, no nuclear energy).
There are a number of projects that intend on listing stocks that generate both a financial return and have demonstrable social and/or environmental impact in London (London Social Stock Exchange), Singapore (Impact Investment Exchange Asia) and Nairobi (Kenya Social Investment Exchange ).
The necessary infrastructure to determine whether companies (and therefore their shares) are achieving social and/or environmental impact and financial returns is in its early stages of development. The B Corporation (or benefit corporation) assessment and certification system would allow an investor to know that a company has an entrenched social mission (within their incorporated statements) and they meet established, “…comprehensive and transparent social and environmental performance standards.” There are already 285 B Corporations with $1.1 billion in revenues. Arguably, a company that meets the B Corporation standard with share capital could be considered an impact investing stock. Beyond B Corporation, the development of the Global Impact Investment Ratings System (GIIRS) also presents an excellent platform to determine whether funds or stocks have demonstrated positive social and/or environmental impact.
Our Context: How Could this Apply Locally
As described above, there are systems that are in place or in development that could be applied to designate impact investment shares. For-profit ventures would need to meet established standards via the B Corporation designation or a GIIRS ratings threshold. As an investor, if they had publicly available shares, you could buy stock in a company like CleanFish, DripTech, or Green Light Apparel. Think of the positive impact of your portfolio with these types of stocks in the mix.
So, we now have a better sense of what impact investing opportunities could look like locally.
Imagine the possibilities for our province and our nation.
We could help provide affordable, comfortable shelter for low-income families in Ontario through new housing projects. We could help start-up or growing small businesses make our communities more sustainable through green products and services, from solar panels to cleaning supplies. We could secure the sustainability or provide a platform for growth for larger, for-profit social ventures so they can scale their business and their ability to provide solutions to social and environmental problems at a local, regional or global level.
We think there is a great deal of potential for good investments in a better world.
But these are just initial thoughts. Let us know what you think. Feel free to email if you have comments, questions and/or ideas.
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Ammara Niyaz MBA Graduate, Schulich School of Business, York UniversityAmmara Niyaz MBA Graduate, Schulich School of Business, York University
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