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Social Finance: Its promise and its challenges
 

Social Finance: Its promise and its challenges

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In the past, Canadians relied on governments and non-profits to meet social needs, while leaving markets, private capital and business to deliver financial returns. This binary system is breaking ...

In the past, Canadians relied on governments and non-profits to meet social needs, while leaving markets, private capital and business to deliver financial returns. This binary system is breaking down. Profound societal challenges require us to find new ways to mobilize ingenuity and resources for effective, long-term solutions. A social finance marketplace investing in social, environmental and economic returns.

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    Social Finance: Its promise and its challenges Social Finance: Its promise and its challenges Presentation Transcript

    • Its Promise and Its Challenges Tim Draimin Executive Director Social Innovation Generation (SiG) April 7 th , 2011 Social Finance Experts Speaker Series @ Rotman
      • National initiative of four nodes across the country
        • Tim Draimin, National Executive Director
          • Tim Brodhead, Stephen Huddart, McConnell Foundation - founder
          • Frances Westley, University of Waterloo
          • Al Etmanski, PLAN Institute
          • Allyson Hewitt, MaRS
      • The primary aim of SiG is to encourage effective methods of addressing persistent social + ecological problems on a national scale
      • SiG convened the Canadian Task Force on Social Finance recognizing social finance as a social innovation and an indispensable vehicle for scaling social innovation
      Social Innovation Generation
    • Getting Out in Front Social Innovation Problems Traditional problem solving Growing solutions delivery gap
    •  
    • Who is the non-profit sector?
      • 161,000 registered
      • Charities and
      • not-for-profit
      • O rganizations
      2M employees (7.2% of Canada’s labour force) $146.6B (2005) in revenues; larger than the retail and automotive sectors
    • Cross-sector Partnerships “ There is growing understanding that many of our largest social and economic challenges cannot be addressed by government alone nor, for that matter, by business or community organizations by themselves.” Tim Brodhead President, J.W.McConnell Family Foundation
    • The need to innovate The collaboration imperative Building an innovative mindset & culture
    • Barriers to Social Innovation
      • System doesn’t value social innovation, actively discourages it
      • Non-profit (NP) income model broken
      • NP funders & regulators are risk averse, leaving little room for experimentation and failure
      • Proven social innovations struggle to be recognized and go to scale (NP & FP)
      • Corporates not yet embracing blended & shared value approach
      • Donations, Grants, Contributions (Gs&Cs) to non-profits under duress
      • Demand for social services is increasing
      • Social problems becoming more complex
      Traditional Funding for Not-For-Profits Under Pressure IMAGINE CANADA reports that…”governments are cutting spending to reduce their deficits. The March 22, 2011 federal budget proposed to reduce department spending by at least $4 billion per year by 2014-15 and many provinces are also anticipating or announcing cutbacks.”
    • “ Charities and non-profits rely on three core sources of revenue: government funding, philanthropy, and earned income. Of these, only earned income offers any prospect for growth over the long-term.” Earned income up 17% from ’05 to ’08
    • Social finance is an investment approach to solve social or environmental challenges while generating financial return. This includes investments that range from producing a return of principal capital to offering market-rate or even market-beating financial returns. Social finance encourages positive social or environmental solutions at a scale that neither purely philanthropic supports nor traditional investment can reach. so  cial fi  nance [soh-shuhl fi-nans, fahy-nans], n.; synonym: impact investing
      • Non-profits diversifying revenue
      • Government changing approach: commission outcomes vs. providing services
      • Shift from measuring outputs to outcomes; new focus on metrics
      The need to innovate : New models evolving
    • Peter Drucker, Management Seer We know that social-sector organizations need management. But what precisely management means for the social-sector organization is just beginning to be studied. With respect to the management of the nonprofit organization we are in many ways pretty much where we were fifty or sixty years ago with respect to the management of the business enterprise: the work is only beginning. (Emphasis added) The Atlantic Monthly; November, 1994; The Age of Social Transformation; Volume 274, No. 5; pages 53-80.
    • Social & Financial Return Continuum Social finance approaches seek to support a spectrum of organizational business models
    • Shifting Values / Growing Awareness People seeking profit and social purpose Shareholders raising the bar “ Shared Value” gaining recognition Philanthropic model fundamentally changing
    •  
    • Only if business learns how to convert the major social challenges facing developed societies today into novel and profitable business opportunities can we hope to surmount these challenges in the future. Government, the agency looked to in recent decades to solve these problems, cannot be depended on. The demands on government are increasingly outrunning the resources it can realistically hope to raise through taxes. Social needs can be solved only if their solution in itself creates new capital, profits, that can then be tapped to initiate the solution for new social needs. — The Frontiers of Management (1986) Peter Drucker, Visionary
    • J.P. Morgan Releases First US Report on Impact Investing November 2010 “… increasing numbers of investors rejecting the notion that they face a binary choice between investing for maximum risk-adjusted returns or donating for social purpose…” “… impact investments are emerging as an alternative asset class…” 10-year profit potential… $667bn*
    • Ronald Cohen’s Social Investment Task Force 2000-to-2010 UNITED KINGDOM
    • NEW UK ANNOUNCEMENT BY PRIME MINISTER DAVID CAMERON February 2011
    • Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance
      • The Task Force on Social Finance was conceived by Social Innovation Generation (SiG) to identify opportunities to mobilize private capital for public good, within either non-profit or for-profit enterprises.
      • Canada’s ability to conceive, build and scale social
      • innovations will require more capital than available through philanthropy and government. Canada’s emerging social finance marketplace will allow public and philanthropic capital to leverage significantly more private capital to achieve long-term benefits for Canadians.
      Katherine Fulton, November 2010 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance “ one of the great social innovations of the early 21 st C” *
    • “ Our Government will take steps to support communities in their efforts to tackle local challenges. It will look to innovative charities and forward-thinking private-sector companies to partner on new approaches to many social challenges.” — 2010 Federal Speech from the Throne Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • “ Impact investing provides capital for social enterprises to grow instead of just revenue to survive” Sir Ronald Cohen UK Social Investment Task Force Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • “ It is this notion of making it financially attractive to solve social issues... [that] is intriguing a growing number of institutional investors globally.” An Overview of Impact Investing Phillips, Hager & North Nov. 2010 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Task Force Members Ilse Treurnicht Tim Brodhead Sam Duboc Stanley Hartt Tim Jackson Rt. Hon. Paul Martin Nancy Neamtan Reeta Roy Tamara Vrooman Bill Young
    • Definition : social finance (or impact investing) Actively placing capital in businesses and funds that generate social and/or environmental good and (at least) a nominal principal to the investor. Impact investors seek to harness market mechanisms to create social or environmental impact. Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Task Force addressed 3 challenges
      • Capital Mobilization
      • Enabling tax & regulatory environment
      • Investment pipeline
      Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • To maximize their impact in fulfilling their mission, Canada’s public and private foundations should invest at least 10% of their capital in mission-related investments (MRI) by 2020 and report annually to the public on their activity. 1 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance What is an example of MRI? The investment committee of a Canadian family foundation decided to provide a loan from its endowment capital to help a local non-profit purchase a LEED certified office building in the area in which they provide services. The loan is for $3M over 10 years at an interest rate of 6.5%. 1
    • To mobilize new capital for impact investing in Canada, the federal government should partner with private, institutional and philanthropic investors to establish the Canada Impact Investment Fund. This fund would support existing regional funds to reach scale and catalyze the formation of new funds. Provincial governments should also create Impact Investment Funds where these do not currently exist. 2 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
      • What do we mean by Social Investment Funds?
      • Social Investment Funds channel capital to organizations and individuals that have
      • historically struggled to access mainstream finance.
      • Réseau d’investissement social du Québec was created in 1997 with matching contributions from the Quebec government and the private sector. It has since invested $11.6M in 292 social enterprises, leveraging over $147M in total investment.
      • Renewal Partners, a Vancouver- based, private investment fund focused on social purpose businesses and real estate.
      • The Cape Fund, a $50M private investment fund with a strong degree of Aboriginal involvement and connection to Aboriginal communities
      2
    • Investing with a Social Bonus
      • How large can the Impact Investing market grow to be?
      • Monitor Consulting Opportunity (2008)
      Hope Consulting US Market (2010) What is the opportunity in Canada?  $30 B Impact Investing
    • Impact Investing in Canada & Abroad CANADA INTERNATIONAL Growing number of examples, but nascent; the total pool of capital is still small Social Impact Bond Financial First Investments Impact First Investments
    • To channel private capital into effective social and environmental interventions, investors, intermediaries, social enterprises and policy makers should work together to develop new bond and bond-like instruments. This could require regulatory change to allow the issuing of certain new instruments and government incentives to kick-start the flow of private capital. 3 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
      • Some examples include:
      • Community Bonds. The Centre for Social Innovation in Toronto raised $1.7M for the purchase and renovation of its new building. Toronto Community Housing raised a $450M bond for the revitalization of Regent Park
      • Impact Investing Note. The Ottawa Community Loan Fund is developing a note aimed at raising $10M for investment in affordable housing and social enterprise
      • Social Impact Bonds. A pilot underway in the UK and the US announced a $7M SIB project.
      • Green Bonds. Similar to a Community Bond but for the renewable energy sector. $2.2B US Clean Renewable Energy Bond, $1B Work Bank Green Fund and $1.5 European Investment Bank Climate Awareness Bond
      3
    • Centre for Social Innovation (CSI): $1.8M bond issue for the acquisition and re-development of new facility.
    • Social Impact Bonds A promising new financing model to accelerate social innovation and improve government performance
    • To explore the opportunity of mobilizing the assets of pension funds in support of impact investing, Canada's federal and provincial governments are encouraged to mandate pension funds to disclose responsible investing practices, clarify fiduciary duty in this respect and provide incentives to mitigate perceived investment risk. 4 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance PSAC Staff Pension Fund investment in Affordable Housing In 2007 the Public Service Alliance of Canada (PSAC), Canada’s largest federal public service workers’ union, made a $2M investment in affordable housing in Ottawa. The first arrangement of its kind, the investment was made through an innovative partnership with Alterna Savings Credit Union, the Ottawa Community Loan Fund (OCLF), 4
    • To ensure charities and non-profits are positioned to undertake revenue generating activities in support of their missions, regulators and policy makers need to modernize their frameworks. Policy makers should also explore the need for new hybrid corporate forms for social enterprises. 5 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance 5
      • BC
      • Ontario
      • Quebec
      • Nova Scotia
      • Are taking steps to explore ways to modernize regulatory frameworks that will encourage and streamline social enterprise activity.
      Mowat Centre Recommendations: “ Federal and provincial-territorial governments should embrace the sustainability of Canada’s non-profit sector as an explicit policy goal and address problems in the current policy and regulatory frameworks governing the sector that are barriers to this.” “ The federal government should undertake changes to the Income Tax Act…to allow charities and non-profits more flexibility…to allow enterprising activity as long as all proceeds are directed to fulfillment of the organization’s mission .”
    • To encourage private investors to provide lower-cost and patient capital that social enterprises need to maximize their social and environmental impact, a Tax Working Group should be established. This federal-provincial, private-public Working Group should develop and adapt proven tax-incentive models, including the three identified by this Task Force. This initiative should be accomplished for inclusion in 2012 federal and provincial budgets. Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance 6
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance 6 The Nova Scotia Equity Tax Credit (ETC) Designed for local small businesses, co-operatives, and Community Economic Development Investment Funds (CEDIFs), to address the fact that most RRSP investments were being made in out-of-province businesses. Ten years into the program, 48 CEDIFs are operating in Nova Scotia, with over 4,800 community investors providing $32M in 90 offerings. Nearly all investors are residents of the communities in which the businesses are operating and expanding local employment opportunities.
    • To strengthen the business capabilities of charities, non-profits and other forms of social enterprises, the eligibility criteria of government sponsored business development programs targeting small and medium enterprises should be expanded to explicitly include the range of social enterprises. 7 Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance
    • Social Finance at work Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance 7
      • Technical and Advisory Supports in Canada:
      • Enterprising Non-profits
      • Capacity Waterloo Region
      • MaRS Discovery District
      • BC Centre for Social Enterprise
      • The Centre for Social Innovation
      • Academic support systems, plus
      • Opening access to Canada’s SME support structures
      • Federal Government
        • Minister Flaherty
        • Federal Provincial Finance Ministers
        • Federal/Provincial/Territorial policy objectives
        • Studies underway (Capital Pool Formation/HRSDC, Social Impact Bonds/Public Safety, Policy Research/INAC, etc)
      • Provincial Governments
        • Ontario (Partnership Report)
        • British Columbia (Tri-Sector Advisory Council)
        • Nova Scotia (Social Enterprise WG, Economic Strategy)
      • Private Sector
        • PHN Impact Investing Report
        • SIO Fund Study
        • Vancity: Expanding social finance lines of business
        • Credit Union Central of Canada: engaging members
      • Municipal Government
        • City of Toronto: Exploring Application via proposed Social Finance Working Group
      Mobilizing Private Capital for Public Good Canadian Task Force on Social Finance Policy Updates
    • www.sigeneration.ca www.socialfinance.ca/taskforce