This blog post is the second in a blog series related to the Canadian Task Force on Social Finance. In this series, Task Force members explore ideas and research that will help to catalyze a robust social finance marketplace in Canada.

Developing a vibrant social finance marketplace with sufficient capital resources is a critical challenge here in Canada, and, for that matter, the rest of the world. For me, there is one obvious source of capital – one that doesn’t require government funding or tax credits and that can play a critical role in developing the marketplace. That source is the investment assets of foundations.

Why are foundations an obvious source of capital?
The total assets of foundations in Canada are approximately $34 billion. Yet very few of those assets are actually deployed in a manner that relates to their mission of doing good. Canadian foundations are only required to donate 3.5% of their capital to registered charities on an annual basis. The other 96.5% of their assets are generally handed over to investment managers who invest that money in traditional investment instruments without a social purpose and with no link to the mission of the foundation.

Surely, no foundation can be satisfied with only dedicating 3.5% of their assets to their mission or purpose. In fact, it’s hard to think of any other organization in the world that only uses such a small proportion of their assets to further their mission. There are opportunities today to earn an attractive financial return and to make the world a better place by investing in projects such as affordable housing, green energy, community loan funds, social purpose businesses and micro-finance. Were they to dedicate even 10% of their assets to such mission-based investments, Canadian foundations would unlock $3.4 billion of capital for mission-based investing.

Are any foundations doing mission-based investing currently?
There are numerous examples of foundations that have successfully implemented mission-based investment strategies, which have allowed them to significantly increase their social impact while still generating attractive financial returns.

In the U.S., one of the earliest adopters and best-documented examples of this approach is the F. B. Heron Foundation based in New York City. As of the end of 2009, Heron deployed $110 million of its $240 million asset base in mission-related investments. It currently has dozens of investments in affordable housing projects, community loan funds, community development venture capital funds and community banks. This is in addition to the $10 million Heron distributes annually in charitable grants. With $110 million invested in mission-related programs, Heron has increased its financial commitment to doing good by more than ten fold. Importantly, it has generated those results without sacrificing its financial return.

In Canada, there are a number of foundations that are moving in this direction. The Edmonton Community Foundation recently created a $10 million social enterprise fund that is lending money to affordable housing projects and to social enterprises. The Hamilton Community Foundation recently announced a $5 million community investment fund. The McConnell Foundation’s board has committed to investing 10% of their assets in mission-based investments. More examples are documented in a report by Coro Strandbergentitled, The State of Community/Mission Investment of Canadian Foundations.

My own small family foundation, The Bealight Foundation, has been actively engaged in this approach since its inception. We have investments in Renewal Partners and Investeco, two private equity funds that invest in environmental companies and social purpose businesses. We have also made dozens of loans to both non-profit and for profit businesses with social hiring programs that provide job opportunities to people facing employment barriers. These loans have earned us an annual return in excess of 6% but more importantly have allowed us to significantly increase our social impact by creating hundreds of jobs for disadvantaged populations. Currently, over 30% of the foundation’s assets are earmarked for these types of investments. We intend to keep increasing that percentage.

What needs to happen in Canada?
Before mission-based investing can become common practice in Canada, three things need to happen.

1. First, foundations have to bridge the divide between the grant-making side of their organization and the investment side. Historically, most have organized themselves in a way that these two are not linked. Foundations hire executive directors to look after grants and rely on an investment committee to select their investments. The result is that most foundations dedicate only a very small proportion of their assets to their mission and miss out on the opportunity to link their investment strategy to having a much greater social impact.
2. Second, the federal and provincial bodies that regulate foundations need to make it clear that they encourage this practice. Currently, through notions like the prudent investor test and certain interpretations of what constitutes private benefit, our regulators have created unnecessary doubt about whether mission-based investing is an acceptable investment approach. Most lawyers will tell foundations they can do mission-based investing, although generally with a few caveats. Our regulators need to make it more clear that this is an investment practice that should be encouraged, as they have explicitly done in the U.K.
3. Third, Canada needs to develop financial intermediaries that can provide attractive impact investment opportunities to foundations. Foundations can easily make conventional investments because there are numerous investment firms that can deploy their capital with very low transaction costs. There isn’t, however, the equivalent analogs for making impact investments. Currently, any foundation wanting to do this must put their own resources into finding potential investment opportunities and do their own due diligence. Most foundations simply don’t have the resources or expertise to do this. These intermediaries will undoubtedly develop over the next 10 years as the demand for impact investment opportunities rise but we can’t expect every foundation to do this until those supports are in place.

“Should a private foundation be more than a private investment company that uses some of its excess cash flow for charitable purposes?”

The F. B. Heron Foundation board asked themselves this question in the late 90’s and it sparked a dramatic change in the way they thought about their investment objectives. Part of the role of the Social Finance Task Force will be to catalyze the conditions needed for every Canadian foundation to say “Yes” to this question. In 10 years, my aspiration is that foundations will all have in place an investment strategy that has dramatically increased their social impact and created significant new capital for companies and organizations to do well and do good.

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