Investors Primer
"Evidence suggests that many thousands of people and institutions around the globe believe our era needs a new type of investing. They are already experimenting with it, and many of them continue even in the midst of a financial and credit crisis. That’s why the idea of using profit-seeking investment to generate social and environmental good is moving from a periphery of activist investors to the core of mainstream financial institutions. No one can know for sure how much money has been invested or is seeking investment that generates both social and environmental value as well as financial return. But a good guess is that the total size of the market could be as big as $500 billion within the next decade." (source)
- Government, at both the federal and provincial levels, continues to be a key source of social finance in Canada – primarily through grants and contributions, as well as operating and program subsidies. While there are a few initiatives at the federal level, at the provincial level, Quebec has been a leader in social finance through targeted programs, dedicated financing vehicles and capital pools, and an enabling regulatory environment.
- Philanthropic Foundations Canada estimated that there were over 8800 foundations at the end of 2005, of which almost 2400 were active grantmakers with assets totalling $13.9 billion and granting pegged at $1.2 billion in 2004. As well, community foundations in Canada hold more than $2.91 billion in a report published in 2009.
- Community development financial institutions such as credit unions and caisses populaire continue to be a prominent feature of Canadian communities. According to the Social Investment Organization, there was a total of $1.397 billion in community investment and social finance assets in Canada in 2008.
Social Finance in Practice
- The Great Bear Rainforest Fund, is a $120 million funding package for conservation management and ecologically sustainable business ventures in First Nation territories in the Great Bear Rainforest. This public-private-philanthropic partnership was structured to allow private funds ($60 million) to flow to a conservation endowment fund, while using public funds ($60 million) for investments in ecologically-sustainable business ventures within First Nations’ territories or communities.
- The $50 million CAPE Fund was launched by former Canadian Prime Minister Paul Martin to provide equity and quasi-equity investment in the range of $1 million and $7.5 million to Aboriginal businesses. The Fund included investors from private and philanthropic sectors, including strong representation from Canada’s largest financial and mining companies.
- The Public Service Alliance of Canada – the pension fund of Canada’s largest federal public service workers’ union – partnered with Alterna Savings to invest in affordable housing. The $2 million investment was structured as a Guaranteed Income Certificate (GIC) backed by Alterna, which effectively satisfied the fiduciary requirements of the fund. Alterna, in turn, has partnered with the Ottawa Community Loan Fund to develop housing loan products for the retail market.
- La Fiducie du Chantier de l'économie sociale Trust (Fiducie) is an innovative structured finance product to meet the needs for long-term capital investment in social economy enterprises in Quebec. It is a $52.8 million patient capital (quasi-equity) fund that offers loans with a 15-year capital repayment moratorium to support social enterprise and real estate investments.
- Twenty pension funds invested in BC-based Concert Properties that provided returns that exceeded real estate benchmarks, while creating a significant number of unionized construction jobs and affordable housing options.
Key Trends
- According to the Social Investment Organization, socially responsible investment accounts for nearly 20 per cent of assets under management in Canada in 2008.
- A number of social enterprise-specific funds have been established in some of Canada’s major urban centres, providing a combination of grant and patient debt capital structures.
- Responding to greater awareness and interest in climate change from both consumers and governments, investment in environmental ventures will continue to rise for the foreseeable future.
Key Issues (source)
- Lack of efficient intermediation, with high search and transaction costs caused by fragmented demand and supply, complex deals, and a lack of understanding of risk.
- The compensation system for traditional intermediaries also impedes getting small deals done which may have less lucrative fees.
- Lack of enabling infrastructure to help people identify and function as a part of an industry since the market is structured around a history of bifurcation between philanthropy (for impact) and investment (for returns).
- Networks are underdeveloped, and a lack of reliable social metrics makes the suspected trade-off between fnancial and social benefts even harder to assess.
- Still an emerging industry, impact investing lacks the models, theories, policies, protocols, standards, and established language that would enable it to fourish.
- Many investors and intermediaries do not understand the implications of social and environmental considerations on the underlying risk of an investment opportunity—and there is a preconception that there must be a fundamental tradeoff between fnancial returns and impact.
- Lack of suffcient absorptive capacity for capital with an imminent lack of impact investing opportunities into which large amounts of capital can be placed at investors’ required rates of return.
- There are too many organizations providing grants and relatively few providing other forms of capital, leading to a misalignment between the demand and supply of social finance.
Key Questions for Investors
Investment portfolios that aim to maximize blended value must project a desired integration of financial and other dimensions of returns. Then they must also develop guidelines for many other investment and portfolio variables, some of which are interdependent. Such investors must address a number of questions:
- Types of investment: Will the portfolio invest in debt, equity, and/or other types of securities? Will capital support for-profit and/or not-for-profit investments?
- Level of engagement: To what extent will the investor and portfolio manager engage the investments? Will they approach investment with the hands-on perspective of a venture capital investor, or will they adopt a more passive approach to investees’ management?
- Investment concentration and target allocations: How much of the portfolio should be allocated to relevant segments of blended value investments and how concentrated in any one specific investment will the portfolio be?
- Investment in research and development: In addition to deploying capital to blended value investments, to what extent will the fund invest in advancing the field through research and development around its BVI strategies?
- Performance measurement: How will the portfolio measure the value it creates and the outcomes it engenders? How can these measurements be used to adjust the portfolio dynamically?
(source)
Recommended Reading
Monitor Institute (2009) "Investing for Social and Environmental Impact"
