Budget 2012: A $500m Opportunity for Impact Investing?

Whether it’s in a classic movie, a great TV show, or a 450+ page government budget paper, I love a good one liner. If you are a public policy wonk interested in impact investing, you would have loved this tantalizing line from the federal budget, referring to a major investment in venture capital: “In the coming months, the government will consider how to structure its support…”

The line was referring to a $500 million commitment for venture capital financing:

To help increase private sector investments in early-stage risk capital, and to support the creation of large-scale venture capital funds led by the private sector, Economic Action Plan 2012 proposes to make available $400 million for venture capital activities. This will increase the amount of funding available for growth-oriented innovative firms while focusing resources on those that are likeliest to become global leaders. In the coming months, the Government will consider how to structure its support in order to incent private sector investments and management of seed ancd large-scale venture capital funds.

In addition, Economic Action Plan 2012 confirms the previous commitment to make available an additional $100 million to support the venture capital activities of the Business Development Bank of Canada to support its venture capital activities.”

There is a clear alignment with the government’s motivations and the enterprise focus of impact investing. Let’s take a look at the federal government’s rationale for their new commitment:

The global economy is changing. Competition for the brightest minds is intensifying. The pace of technological change is creating new opportunities while making older business practices obsolete. Canada’s long-term economic competitiveness in this emerging knowledge economy demands globally competitive businesses that innovate and create high quality jobs.

Professor Michael Porter, head of Harvard University’s Institute for Strategy and Competitiveness, would argue that ventures integrating impact and focused on creating shared value will have the greatest potential to be globally competitive, to create new opportunities, and to create new jobs:

In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community…The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges…The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy.

The concept of shared value recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firms—such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches—and as a result, increase their productivity and expand their markets.

Major governments have already recognized this alignment, and they are working to direct investment capital towards impact:

  • Big Society Capital in the United Kingdom, a £600 million institution capitalized from dormant bank accounts and equity investments from major banks that invests in social investment finance intermediaries (SIFIs). These are organisations that provide appropriate and affordable finance and support to social sector organisations that are tackling some of our most intractable social problems.
  • The US Small Business Administration’s Impact Investment Initiative, a $1 billion fund which that partners with investment fund managers and private investors to channel much-needed capital to small business concerns throughout the United States, focused on place-based (low-income communities) and sector-based (clean technology and education) investments. (Note: This initiative is also a part of Startup America, which has a clear focus on impact investing.)

Canada already has experience with directing impact capital to social economy ventures through the sector-leading organization, Le Chantier de l’économie sociale. In 2005, the federal government made a $22.8 million commitment to la fiducie, the trust fund managed by Le Chantier that makes investments providing targeting infrastructure and working capital for Quebec nonprofit and cooperative enterprises.

These Canadian, American, and British precedents offer a strong basis for the federal government to expand its venture capital mandate to ensure there is focus on impact investing.

Why is this important?

Over the coming months, if we take the budget line at face value, we might have an intriguing opportunity to shape the federal government’s venture capital strategy in order to open up an additional pool of capital for impact ventures and funds. The federal government could dedicate a portion of the funds for impact investing, or ensure eligibility criteria for the available capital is open to impact investing funds. A five (5) per cent allocation from the available pool would translate into $20 million injected into the Canadian impact investing marketplace.

We do not wish to play a shell game. Hopefully, some of these funds will be made available to existing market leaders like Sustainable Development Technology Canada (SDTC).

If we are successful, it would allow the government to be a major player in the development of the impact investing marketplace, incent further private capital into impact investing, and direct more capital towards impact ventures that are solving our most pressing social and environmental problems.

[We’ve got some work to do over the coming months. Think about what you can do to help support this agenda.]

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