Social Finance: supply-side perspectives on the Canadian social capital market

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Key trends, issues, and opportunities for investors seeking a combination of economic, social, and environmental ("blended value") returns. Includes an introduction to the Canadian social capital market, supply-side challenges and opportunities, and how to align the demand and supply of social finance. Presented at the Social Economy Centre, University of Toronto.

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Social Finance: supply-side perspectives on the Canadian social capital market

  1. 1. Social Capital Financing: Supply-Side Perspectives<br />Karim Harji<br />Manager, Partnership Development – Social Capital Partners<br />Co-founder – socialfinance.ca<br />Social Economy Centre <br />University of Toronto<br />24 March, 2010<br />1<br />
  2. 2. Agenda<br /><ul><li>Explore the key trends, issues, and opportunities for investors seeking a combination of economic, social, and environmental ("blended value") returns.
  3. 3. The Canadian social capital market
  4. 4. An introduction to the supply-side
  5. 5. Aligning demand and supply
  6. 6. Supply-side challenges
  7. 7. Supply-side opportunities</li></ul>2<br />
  8. 8. An Introduction to Social Finance<br /><ul><li>Social finance is the deliberate, intentional application of tools, instruments, and strategies to enable capital to achieve a blended value return. (Harji and Hebb, 2009)
  9. 9. Social finance is an approach to managing money that delivers a social dividend and an economic return. (Wikipedia)
  10. 10. Also known as… social investing , responsible investing, ethical investing, double or triple bottom line investing, impact investing, targeted investing , etc etc.  there are important differences!
  11. 11. Goes beyond simply capital for non-profit social enterprises
  12. 12. The social finance ecosystem: demand, supply, intermediaries</li></ul>3<br />
  13. 13. Social Finance in Practice across Canada<br /><ul><li>Social Capital Partners – arranges for growth financing and provides advisory services to successful businesses that integrate a social mission into their HR model
  14. 14. Vancity– Canada’s largest Credit Union : 400,000 members, $14.5 billion in assets
  15. 15. Meritas– mutual fund committed to SRI: screening guidelines, shareholder activism and community development investments (up to 2% for microfinance)
  16. 16. Registered Disability Savings Plan (RDSP) – tax-deferred savings vehicle to assist families in planning for long-term financial security of their relatives with disabilities
  17. 17. Great Bear Rainforest Fund – public-private-philanthropic partnership structured to allow investments in ecologically-sustainable ventures within First Nations’ communities
  18. 18. Social Venture Partners (3 Canadian chapters) – network of engaged philanthropists that provide money and expertise for capacity building of nonprofits
  19. 19. CAPE Fund – $50 million fund launched by Paul Martin to provide equity and quasi-equity investment in the range of $1 million and $7.5 million to Aboriginal businesses
  20. 20. Enterprising Non Profits (BC/ON) – provides matching grants to non-profit organizations that are interested in starting or expanding a business
  21. 21. Ottawa Community Loan Fund (OCLF) – loans of up to $15,000 to small business owners, internationally-trained professionals, social enterprises, community groups.</li></ul>4<br />
  22. 22. Elements of a Social Capital Market<br />5<br />Source: Alex Nicholls and Cathy Pharoah (2008) “The Landscape of Social Investment”, http://www.sbs.ox.ac.uk/centres/skoll/research/Pages/landscapeofsocialinvestment.aspx<br />
  23. 23. Financing The Social Economy<br />6<br />Don McNair (2010) “The Financial Ecosystem of Canada’s Social Economy”, http://www.cedworks.com/files/pdf/free/MW200308.pdf<br />
  24. 24. The Spectrum of Social Finance<br />7<br /> Jed Emerson (2003) “The Blended Value Map: Tracking the Intersects and Opportunities of Economic, Social and Environmental Value Creation ”<br />
  25. 25. The Social Finance Continuum<br />8<br />Below-Market Investments<br />Public Equity<br />Fixed Income<br />Private Equity<br />Cash<br />Guarantees<br />Subordinated Loans<br />Senior Loans<br />Cash<br />Grant Support<br />Equity<br />Market-Rate Investments<br />Source: F.B. Heron Foundation<br />
  26. 26. Supply Side<br />Adapted from: Causeway, SiG, Volans (2009) “Building The Case for Social Finance in Canada”<br />Banks / Credit Unions <br /><ul><li>Vancity
  27. 27. Alterna Savings
  28. 28. Canadian Co-operative Association
  29. 29. Citizens Bank
  30. 30. Desjardins
  31. 31. Royal Bank</li></ul>Specialized Funds<br /><ul><li>Canadian Alternative Investment Co-op
  32. 32. Community Loan Funds (various: Ottawa, Montreal, Toronto, St. John)
  33. 33. Social Enterprise Fund (Edmonton)</li></ul>Institutional Capital<br /><ul><li>UNPRI Signatories: CPPIB, etc.</li></ul>Retail Investors<br /><ul><li>Mutual Funds: Meritas, Acuity
  34. 34. Registered Disability Savings Plan (RDSP)</li></ul>Investment Management Firms <br /><ul><li>CAPE Fund
  35. 35. Ecotrust Canada Capital
  36. 36. Fonds de solidarité
  37. 37. Investeco
  38. 38. Renewal2 Investment Fund
  39. 39. Resilient Capital
  40. 40. Social Capital Partners </li></ul>Foundations<br /><ul><li>Edmonton Community Foundation
  41. 41. J.W. McConnell Family Foundation
  42. 42. Maytree Foundation
  43. 43. Ontario Trillium Foundation
  44. 44. Tides Canada </li></ul>Grantors<br /><ul><li>Enterprising Non-Profits
  45. 45. Toronto Enterprise Fund </li></ul>9<br />
  46. 46. Demand Side<br /><ul><li>Canada’s nonprofit and voluntary sector is the second largest in the world
  47. 47. CRA: over 161,000 nonprofit and voluntary organizations, of which approximately 83,000 are registered charities. (Pearson 2008)
  48. 48. Excluding hospitals, universities and colleges, the dominant revenue source (48%) of nonprofit and voluntary sector revenue is fees, compared to 39% for government support and 12% from philanthropy (Imagine Canada 2005)</li></ul>Reflects the importance of alternative revenue streams<br />This does not discount the importance of grants<br /><ul><li>Brouard et al. (2008) have developed a dataset of eight hundred social enterprises in Canada
  49. 49. Québec has over 6,200 social economy enterprises employing more than 65,000 people and generating over $4 billion in revenues (Pearson 2008)</li></ul>10<br />Source: Karim Harji and Tessa Hebb (2009) “The Quest for Blended Value Returns”, http://www.carleton.ca/3ci<br />
  50. 50. Uses of (Social) Finance<br />Pre-funding of Capital Fundraising: organization wants to take advantage of a fixed contract price for building work. A bridging loan enables it to proceed<br />Provides Working Capital: organization may have secured funding but may have to wait to receive it (e.g. payment terms are quarterly in arrears). Working capital underpins cash flow in the short term. <br />Provides Development Capital: organization is interested in investing in training or new facilities and equipment. This investment may help organizations to develop income streams which contribute to their viability over the medium to longer term. Development capital can take a variety of forms including: <br /><ul><li> loans for projects if finance can not be found elsewhere (stand-by facilities/underwriting);
  51. 51. secured and unsecured loans; or loan guarantees;
  52. 52. a loan only repayable by a royalty on future sales of a product or service (quasi-equity);
  53. 53. a royalty deal which shares profits with the investor once the enterprise generates a specified surplus (quasi-equity); or
  54. 54. the subscription or purchase of shares in a social enterprise (Note: a charity can not offer shares – assets are held for the public benefit).</li></ul>Source: Trillium Foundation, “Social Finance” , http://www.trilliumfoundation.org/User/Docs/PDFs/research/Social_finance.pdf<br />11<br />
  55. 55. Aligning Demand and Supply<br />12<br />Source: Alex Nicholls and Cathy Pharoah (2008) “The Landscape of Social Investment”, http://www.sbs.ox.ac.uk/centres/skoll/research/Pages/landscapeofsocialinvestment.aspx<br />
  56. 56. Intermediaries<br />Adapted from: Causeway, SiG, Volans (2009) “Building The Case for Social Finance in Canada”<br />Academic<br /><ul><li>University of Toronto (OISE, Rotman)
  57. 57. Carleton Centre for Community Innovation
  58. 58. Sauder School of Business
  59. 59. Schulich School of Business</li></ul>Capacity Builders <br /><ul><li>Causeway Social Finance
  60. 60. Social Innovation Generation
  61. 61. Community Futures Development Corporations
  62. 62. Ontario Nonprofit Network
  63. 63. Chantierl’EconomieSociale
  64. 64. BC Centre for Social Enterprise</li></ul>Associations<br /><ul><li>Social Investment Organization
  65. 65. Canadian Community Investment Network
  66. 66. Community Foundations of Canada
  67. 67. Philanthropic Foundations of Canada</li></ul>Credit Unions<br />Community Development Financial Institutions<br />Federal Government<br /><ul><li>Human Resources and Skills Development Canada
  68. 68. Canada Revenue Agency
  69. 69. Department of Finance</li></ul>Ontario Provincial Government<br /><ul><li>Community Economic Development Funds
  70. 70. First Nations Finance Authority
  71. 71. Ministry of Finance </li></ul>ESG Information<br /><ul><li>Jantzi-Sustainalytics</li></ul>Web Platforms<br /><ul><li>CommunityLend</li></ul>13<br />
  72. 72. Alterna Community Alliance Housing Fund<br /><ul><li>Created to address Ottawa’s affordable housing shortage
  73. 73. Provides low-cost financing for second-mortgage financing, and as necessary, primary-mortgage financing
  74. 74. Structured as investment grad instrument offering a five-year GIC rate of return</li></ul> It took 7 years before PSAC was able to find a “risk-free vehicle” to be able to do this!<br />14<br />Adapted from: Causeway, SiG, Volans (2009) “Building The Case for Social Finance in Canada”<br />
  75. 75. Building the Social Capital Market<br />15<br />Source: Monitor Institute (2008) “Investing for Social & Environmental Impact, A Design for Catalyzing an Emerging Industry”, http://www.monitorinstitute.com/impactinvesting/<br />
  76. 76. Supply Side Challenges<br /><ul><li>Legal framework that prohibits innovative activity</li></ul>Social enterprise and hybrid structures e.g. can’t take equity stake in nonprofits<br />Pension funds and Program Related Investments (PRIs): fiduciary responsibility<br /><ul><li>Transactions and search costs too high for viable deals</li></ul>Limited coordination or co-investment among capital suppliers<br />Lack of mature intermediaries; poor knowledge of demand side<br />Difficulty in structuring deals that include non-traditional financial instruments<br />Lack of “demonstration funds” of sufficient scale<br /><ul><li>Bifurcation between philanthropy (for impact) and investment (for returns)</li></ul>Silo’d nature of foundations (grantingmaking vs. investment committees)<br />A typical foundation operates like a private investment company that gives away a portion of its profits to charity... <br /><ul><li>Social impact metrics</li></ul>Underdeveloped understanding of assessment and incorporation of social risks and returns; inability to capture/use comparable data across sectors<br />16<br />
  77. 77. Supply Side Opportunities<br /><ul><li>Engage institutional investors</li></ul>Increased demand for responsible investing strategies (UNPRI, etc.)<br />Providing options for community investments<br /><ul><li>Utilize foundation assets</li></ul>Program-Related Investments<br /><ul><li>Create innovative financial vehicles</li></ul>Tiered deal structures<br /><ul><li>Build capacity of intermediaries</li></ul>Align incentives to “connect” demand and supply<br />Coherent understanding of framework for social impact assessment<br />17<br />Further reading: Karim Harji (2010) “Delivering More Capital to Communities: A Supply-Side Perspective on the Canadian Social Capital Market”, Making Waves magazine, http://www.cedworks.com/waves.html<br />
  78. 78. Addressing the Key Challenges: Silver Buckshot, Not Silver Bullet<br />18<br />Source: Monitor Institute (2008) “Investing for Social & Environmental Impact, A Design for Catalyzing an Emerging Industry”, http://www.monitorinstitute.com/impactinvesting/<br />
  79. 79. New Capital on the Horizon<br />Loan and Investment Fund (Nora Sobolov)<br /><ul><li>Modeled similar to the Nonprofit Finance Fund in the US
  80. 80. Provide working capital and bridge loans to non-profit and charitable organizations</li></ul> <br />Community Investment Vehicle (Social Investment Organization)<br /><ul><li>A product to channel investment dollars from individuals and institutional investors
  81. 81.  Invested nationally in revenue generating social enterprise owned and operated by non-profits</li></ul> <br />Fund of Fund Product (Mercer Consulting)<br /><ul><li>The Fund of Funds would allow investors to get access to socially responsible investment opportunities in a cost efficient manner (multi asset class, global diversification)</li></ul> <br />Social Venture Fund (MaRS Capital Services and Edgestone Capital)<br /><ul><li>Primarily for early stage social ventures with strong potential to scale
  82. 82. Demonstration vehicle that can be leveraged to larger size with government participation</li></ul> <br />PRI Fund (Community Foundations of Canada, Philanthropic Foundations of Canda)<br /><ul><li>Align more than 3.5% of foundation assets (i.e. endowments) with mission</li></ul>19<br />Source: Adam Jagelewski (2010) “New Capital on the Horizon”, http://www.socialfinance.ca/blog/post/new_capital_on_the_horizon<br />
  83. 83. Suggested Resources (more available @ socialfinance.ca)<br /><ul><li>A. Boshyk et al.Canadian Socially Responsible Investment Review 2008 (Toronto: Social Investment Organization, March 2009). <http://www.socialinvestment.ca/documents/caReview2008.pdf>.
  84. 84. J. Emerson and J. Spitzer. From Fragmentation to Function: Critical Concepts and Writings on Social Capital Markets' Structure, Operation, and Innovation. (Oxford: Skoll Centre for Social Entrepreneurship, 2007).
  85. 85. J. Emerson, T. Freundlich and J. Fruchterman. Nothing Ventured, Nothing Gained: Addressing The Critical Gaps in Risk-Taking Capital for Social Enterprise. (Oxford: Skoll Centre for Social Entrepreneurship, 2007).
  86. 86. K. Fulton and J. Freireich. Investing for Social and Environmental Impact: A Design for Catalyzing an Emerging Industry. (Monitor Institute, January 2009).
  87. 87. K. Harji. Delivering More Capital to Communities: A Supply-Side Perspective on the Canadian Social Capital Market. (Making Waves magazine, forthcoming April 2010). <http://www.cedworks.com/waves.html>
  88. 88. K. Harji and T. Hebb. The Quest for Blended Value Returns: Investor Perspectives on Social Finance in Canada. (draft; Ottawa: Carleton Centre for Community Innovation, November 10, 2009). <http://www.carleton.ca/3ci/3ci_files/Documents/Social_Finance_in_Canada.pdf>.
  89. 89. B. Martin and C. Strandberg. Education and Training on Responsible Investing for Canadian Foundations and Endowments: An Inventory and Needs Analysis. (Toronto: Social Investment Organization, September 2009). </li></ul>20<br />

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