Beth Coates, Financial Manager at the Canadian Alternative Investment Cooperative, gave a seminar at the “Connections to Revitalize Communities” event sponsored by CCEDnet Ontario on June 8 in Toronto, ON. The following is adapted from her presentation.

Mission Based Investing and Social Capital have been receiving a lot of press and interest lately. According to data collected by the Canadian Social Investment Organization (SIO), there is a total of $4.45 billion in impact investing assets available in Canada. The Canadian Task Force on Social Finance recommended that foundations invest 10% of their assets in impact and mission-related activities. Before we can move from broad statements and recommendations to actual practice, however, we need to firstly ensure that we are talking the same language, understand the sector’s constraints, define desired outcomes, and agree on the players and their roles. In order to do this, 5 key questions need to be answered:

• What is a social enterprise?
• How does social investing fit within an organization’s overall mission?
• What is the financial vs. social return?
• What is the role of government in this sector?
• What are the capital requirements of the sector?

• What is a social enterprise?

Enterprising Nonprofits defines social enterprises as “Business ventures operated by non-profits, whether they are societies, charities, or co-operatives. These businesses sell goods or provide services in the market for the purpose of creating a blended return on investment, both financial and social. Their profits are returned to the business or to a social purpose, rather than maximizing profits to shareholders”. This definition is not universally shared – mission-based investors are going to have to develop their own definition. The definition becomes the agreed vision which will drive the rest of the decision making process.

• What are the capital requirements of the sector?

“Local Ventures Need Millions Invested to Tackle Social and Environmental Problems” was the headline that accompanied the release of the Social Finance Census. The report goes on to say that $170 m is required to meet this need. We need to dig deeper into this assumption that capital is the only major barrier to success. Is this the only barrier or is the issue more complex?

• What kind of capital is required (grants, equity, loans)?
• Are there capacity and cultural issues in the sector also at work?
• What kinds of projects and organizations are most likely to succeed?
• How does social investing fit within an organization’s overall mission?

There are a number of hard questions that an organization will have to consider before it can set up a framework to make investment decisions. These are:

• What mission objective is met through social investing?
• Why does social investing make sense for this organization?
• Is there a conflict with other objectives?
• What resources is the organization willing to put towards social investing?
• Have all the opportunity costs been well considered?
• Does the organization have the capacity to make solid investment decisions and manage its investments?

• What is the financial vs. social return?

This is perhaps one of the most difficult and yet key questions, since it relates to the definition of “return”. Most foundations and charities use their endowments for the express purpose of generating income to fund their core activities. The role of the investment committee is very clear – maximize financial return. Mission-based investing, however, introduces other goals into the mix. A number of questions therefore need to be asked regarding how much financial return the investor is willing to forgo to meet other objectives and what measurements are in place to assess attainment of these objectives:

• Are the right tools in place to measure and analyze investment risk?
• What is the minimum financial return acceptable to the organization?
• What is the expected social return?
     How will it be measured?
     How will it further the organizations strategic objectives?
• What will be the impact on the organization if financial and social return objectives are not met?

• What is the role of government in this sector?

These questions need to be seen in the larger context of what the general role of government. Is it to:

• Subsidize transaction costs (Grants)?
• Create a market (Securities Regulation)?
• Improve returns (Tax Credits)?
• Lower Risk (Guarantees)?
• Provide Capacity Building (Sector training)?

We have to be honest and ask the hard questions: where are these resources going to come from, and will this have an impact on government financing of the sector directly? Are we pulling vital resources out of the sector to reward investors?

• What is needed next?

1. Agreed definition of Social Enterprise
2. In depth understanding of the sector’s capital/capacity requirements, what capital can and can’t do for the sector, including an analysis of potential negative outcomes
3. Investors who are clear on their objectives and have realistic expectations on risks and rewards
4. An agreed role for government.

I am confident that the process of resolving these issues will play a significant role in furthering the impact investing movement in Canada.

Photo credit: http://www.flickr.com/photos/a_ninjamonkey/3294014627/

Share:  

• 
• 
• 
• 
• 
• 
•