It’s simplest to think about the social finance ‘marketplace’ as being made up of three interconnected parts: the supply of capital, the demand for capital, and the intermediaries that link supply and demand.
Join us on a short tour of these components in the Canadian context…
The supply of capital
The supply of social finance includes loan funds, equity investment, patient capital, and in some cases, grants that attract new capital to the table or enable a social enterprise to shift to sustained profit generation.
As with traditional investment, social finance investors gravitate to the level and type of return that supports their own unique investment goals. Social finance investors consider the social and/or environmental returns as part of their investment goals.
Traditional financiers… serving the social finance space
A major portion of the involvement of Canadian financial institutions in social finance has been through the lens of socially responsible investing (SRI). SRI is loosely defined as an investment approach that includes non-financial, ethical (e.g. social and environmental) objectives, and negatively screening public equity funds to avoid the support of damaging activities (such as tobacco, pollution, and natural habitat depletion). SRI in Canada amounts to $609 billion and has been growing steadily over the last decade.
According to Thomsen Reuters, 65% of SRI funds outperformed non-SRI benchmarks in 2009 across nearly all asset classes.
Community Development Finance and Credit Unions
Community development finance encompasses initiatives that relate to financing community economic development (CED) and social economy initiatives. According to the Social Investment Organization, there exists a total of $1.397 billion in community investment assets in Canada, an increase from $800 million in 2006.
Caisses Desjardins du Quebec is a founding leader in developing the Quebec social economy. For community-based organizations in Ontario, the Caisses populaires de l’Ontario provides mortgages, operating lines of credit, and bridge financing.
Vancity, Canada’s largest credit union, boasts over 400,000 members and $14.5 billion in assets. It has adopted a leadership role in Canadian social finance by exploring new vehicles to complement foundation funding efforts, and has appointed a Senior Executive of Social Finance to focus on growing this segment of business. Among its related programs is a micro-loan initiative that extends loans of up to $5,000 in working capital; and start-up and growth financing of between $100,000 and $5 million per deal.
Vancity Community Capital is a social finance leader specializing in providing growth capital such as subordinated debt, mezzanine financing, and patient capital to small- and medium-sized businesses and social enterprises based in British Columbia. Since formation over 10 years ago, Vancity Capital has financed over 200 businesses and social enterprises. Loan terms for social enterprises tend to span from three to five years, with each deal ranging from $50,000 to $10 million. A triple-bottom line approach is used to evaluate social finance deals.
Public and private foundations are in the ‘business’ of extending grants to charitable organizations and other qualified donees in order to support social, cultural, or environmental goals. Collectively, Canadian foundations hold close to $34 billion in assets.
Traditionally, a relatively minor portion of the total assets are granted, leaving the endowment or interest-generating portion for traditional investments in order to steward the core assets for future uses.
Increasingly, inspired by the positive impact of Program-Related Investments (PRI’s) in the U.S., Canadian foundations wish to unleash the power of their core capital holdings.
Inspired by PRI’s, mission-related investing (MRI) involves a foundation’s use of its assets (beyond interest earned on those assets) to invest in strengthening communities. Community Foundations of Canada is playing a lead role in collecting best practices and designing systems for MRI, so that as many foundations as possible can participate.
Currently, MRI is in its infancy in Canada, and is still considered to be a niche activity undertaken by a handful of trailblazing foundations. The reasons for limited foundation uptake vary: these include increased due-diligence costs associated with these deals, challenges in properly managing the investment, and the need for better impact measurement. News of Canadian successes is expected to shift this practice from ‘niche’ to mainstream in relatively short order.
Most MRI activity to date has focused on asset building (helping organizations purchase real estate or undertake capital renovations).
The Bealight Foundation is one of the pioneering Canadian foundations engaged in MRI. Bill Young’s blog on SocialFinance.ca, called ‘Foundations Need to Step Up’ is a call to action for more Canadian foundations to embrace this practice.
The Canadian Task Force on Social Finance recommends that Canada's public and private foundations invest at least 10% of their capital in mission-related investments (MRI) by 2020 and report annually to the public on their activity. When this recommendation is fulfilled, it will mobilize $3.4B to align foundation investment with their public benefit mission.
In May 2011 The Community Foundations of Canada launched a Canadian Impact Investing Matrix with over one hundred investment vehicles available to Canadian Investors. The Matrix is an attempt to map out the landscape of investments that achieve both a financial return and a positive social or environmental impact.
Government, mainly at the federal and provincial levels, is a primary source of social capital in Canada – particularly through grants and contributions, plus operating and program subsidies.
Federal government departments that provide access to capital for community investment and the social economy include:
- Industry Canada
- Department of Finance
- Ontario-directed Federal Government Initiative for Northern Ontario
- Rural Communities (FedNOR)
At the provincial level, Quebec has long been a social finance leader through its targeted programs, dedicated financing vehicles and capital pools, and enabling regulatory environment.
In addition to funding programs and projects directly, government has often supported social initiatives indirectly through intermediaries. For example, Community Futures Development Corporations are local organizations funded by the federal government through regional, provincial, and territorial entities to stimulate regional economic development. In Ontario, FedNOR supports 24 independently governed Community Futures organizations to serve the economic and community needs of northern communities. Traditional and social enterprises can apply for business loans even when mainstream lenders have turned them down.
Recently, the Renfrew County Community Futures in Ontario launched a dedicated social enterprise fund.
Little information is available with respect to the activities of pension funds and insurance companies in the social finance space. However, Canadian examples of pension fund investment for blended value returns do exist. The Public Service Alliance of Canada (PSAC) pension fund is an example of a flagship deal.
Required was a capital source that sought market return, plus an intermediary capable of delivering the rate combined with specialized knowledge of the community.
As part of the activation of a $2 million investment in affordable housing in Ottawa, PSAC established a responsible investment policy and identified Alterna Credit Union as its financial intermediary. Alterna then provided PSAC with a guaranteed investment certificate or GIC (a known and guaranteed instrument, representing no risk for the pension fund) at rates comparable to other fixed income investments in PSAC’s portfolio. Alterna linked to the Ottawa Community Loan Fund in order to ensure the best use of the investment for affordable housing in the community. "Engaging Institutional Investors, Tessa Hebb"
Social finance funds
Community Loan Funds
Community loan funds are small loans directed to an underserved population of a community (entrepreneurs, small and medium enterprise, etc.) with the intention of contributing to the wider prosperity of the geographical region.
According to data collected through the Canadian Community Investment Network Co-op, there has been a significant increase in the assets of community loan funds, which grew from $58.7 million in 2006 to $103.3 million in 2008.
The Canadian Alternative Investment Co-operative (CAIC) provides mortgages for community-based projects operated by non-profits and charities, supporting them to own the physical infrastructure that houses their social programs. CAIC has grown to 48 members with a lending pool of approximately $7 million invested across Canada. CAIC extends equity investments and low-interest loans to non-profits, charitable organizations, social and affordable housing initiatives, and social enterprises (corporations or co-operatives). ‘Character’ is given more weight than ‘collateral’ in investment decisions, in contrast to traditional financial institutions.
The Ottawa Community Loan Fund provides micro loans of up to $15,000 to businesses and social enterprises that have experienced challenges accessing loan supports elsewhere. The fund’s purpose is to ‘encourage self-employment, self-reliance, and build a stronger community’.
The Ottawa Community Loan Fund is in the process of developing an unsecured Impact Investment Note (IIN), which pays an investor a fixed interest rate of zero to 4%. Investors subscribe for an IIN and select the interest rate they wish to receive in order to support the positive social impact generated by the IIN proceeds. The aim is to establish a pool of capital worth $10 million to support the development of affordable housing / social purpose real estate and social enterprise in the Ottawa area.
Environmental and Cleantech Funds
Responding to greater awareness and interest in climate change from consumers, businesses, and governments, investment in environmental ventures will continue to increase for the foreseeable future. Unlike investments in social enterprise, there is greater availability of equity and loan financing rather than grants.
The Cleantech Venture Network noted that a total of $640.5 million in Canadian clean technology venture deals were announced between July 2006 and June 2008, an increase from $449 million reported in the two years prior.
The Community Power Fund supports project development activities of Ontario-based community organizations pursuing local renewable energy projects, by providing a number of financing instruments to support community power, including grants, loans, and investment equity. Funded projects include a solar thermal installation in a housing co-op, a First Nation biomass co-generation plant, wind farms, small hydro electric projects, and green energy retrofits.
As a large-scale example, Investeco is Canada’s first environmental investment company. It currently manages over $40 million for over 100 Canadian investors in ventures that support renewable energy, sustainable agriculture, and clean technologies.
Toronto Atmospheric Fund (TAF) has invested $50 million to support innovative social finance deals that address climate challenges, air pollution, and energy use in Toronto. They provide grants, loans, and direct programming.
Renewal 2 is a British Columbia loan fund for North American businesses seeking early stage financing of between $250,000 and $1.5 million. The fund focuses on organic and natural foods, green consumer products, and green building products. This fund focuses on supporting businesses offering everyday products and services in new and innovative ways that help change basic consumption behaviour.
Social Enterprise Funds
A number of social enterprise-specific funds have been established in some of Canada’s major urban centres, with a combination of non-repayable grant and patient loan offerings.
Social Capital Partners (SCP) arranges for growth financing and provides advisory services to social enterprises and businesses that integrate a social mission into their human resources model, thereby expanding career opportunities for disadvantaged people. SCP explicitly accepts a lower financial return in exchange for a higher social return, so interest rates are tied to the level of social hires undertaken by the investee. They also specifically support individuals and organizations involved with social enterprise franchises. SCP provides loans and equity investments of between $50,000 and $300,000.
The Edmonton-based Social Enterprise Fund provides small grants and term loans (including bridge financing) to charities and non-profits, to support the development of social enterprises and affordable housing projects.
The Capital for Aboriginal Prosperity and Entrepreneurship (CAPE) Fund is a $50 million private sector investment fund initiated by the family of the Right Honourable Paul Martin and 21 of Canada’s leading companies, individuals, and international foundations. Equity and quasi-equity investment is made by CAPE in diverse industries and regions, with a view to fulfilling its mission of promoting entrepreneurial values among Aboriginal people. CAPE’s investments range from $1 million to $7.5 million (with most investments in the middle range).
The Fiducie du Chantier de l’économie sociale provides 15-year loans of between $50,000 and $1.5 million for Quebec social enterprises that require financing for working capital, new product launches, equipment purchases, or building acquisition / renovation / construction.
Impact Investing: Capital Opportunities for Social and Environmental Impact, by Phillips, Hager, and North, 2010.
Currently, Canadian foundations are only required to disburse 3.5% of their assets annually, in the form of grants and other charitable expenditures.
Social Investment Report, Social Investment Organization. 2008.
THE WHAT, WHY, WHO, AND MOST IMPORTANTLY, THE HOW OF SOCIAL FINANCE IN CANADA.
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The contents of Your Guide to Social Finance is general in nature, current only as of the date of publication and is provided for informational purposes only. It is not intended to provide professional investment or financing advice. Please consult a certified professional before making any decision regarding your investments and financing.