In my first post we looked at some of the challenges involved in developing a social finance portfolio, managing its risks and measuring its returns. Both of these posts are based on the white paper titled “Enabling Social Innovation through Development Impact Investing”, co-authored with Frances Westley and Olaf Weber.

Developing an investment portfolio is a challenge. It involves taking a diverse set of investment opportunities, comparing them to each other, and estimating the potential returns and risks involved in each. Once you’ve done all this, you then have to decide which you will put your money into, which can be an additional challenge if the entrepreneurs requesting investment need a minimum amount to get their projects of the ground.

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“There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. These are the things we don’t know we don’t know” – Donald Rumsfeld

Opening with a quote from the former US Secretary of Defense probably seems like an odd start for a blog post about social finance, but I like its framing of a key problem in social finance: how can you best manage what you don’t understand?

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Can we compare apples and oranges? This question is central to understanding the limits of – and opportunities in – developing standardized impact measurement systems. Often when making a difficult choice someone will toss out the old trope that two projects are too different to compare, that, “It’s like comparing apples and oranges.” Of course, we compare apples and oranges all the time when we go to the grocery store and see apples are $2/lb and oranges are $3/lb. That is what a unit of account is: a single measure that lets us compare unrelated items, and it is one of the most basic functions of money. However, non-financial impacts - intrinsic to impact investing - don't have a single unit of account.

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Four days ago I took a plane from the cold, snowy Waterloo Regional airport to visit warm Vancouver for the Social Innovation and Social Finance 2011 Tour. One day after the conference, I awoke to the sight of snow on the ground in BC. Since I seem to have taken some of our weather out here, I am wondering if we can take some of this province’s social ecology back to Ontario.

For three days SiG, Causeway, Ashoka Canada and PLAN hosted a group of social entrepreneurs, social financiers, public servants, and academics. Participants explained their role in the development of a system of social financing and entrepreneurship on Vancouver Island and the Lower Mainland that is unique in English Canada. The ongoing shift of the Vancity Credit Union’s $14.5 billion in assets under management towards impact investments, in particular, stood out as an enabler of social innovation both inside and beyond the credit union.

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Many charities have been able to demonstrate more creativity and client-focus than their equivalent government programs. There is a competitive dynamic in this sector stemming from the ease with which donors will withdraw their support from ineffective organizations, and this allows the sector as a whole to adapt, innovate and experiment far more effectively than governments. That is important to note, but beside the point in a government vs. charitable sector debate.

Governments are not experimental, and then they shouldn’t be. What makes them rigid, inflexible and bland also keeps them accountable. Where the interplay between the public and charitable is fruitful it is because the charities can perform the experiments which provide the evidence governments need when adopting new programs and reforming old ones. In that sense, the charitable sector is where the public sector innovates.

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Social finance is growing on the fringes of the Canadian financial sector. I, like most contributors to SocialFinance.ca, see an opportunity for transformational change here.

However, I do think it’s important to highlight a few of the fundamental differences between social finance and profit-only finance because we’re still building these institutions. Get this wrong and we will put too many resources into building institutions that don’t really “fit” the sector, and too few resources into the institutions that do.

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