Impact investing: How to unlock private money for the public good
Note: This post originally appeared in The Globe and Mail. Sir Ronald Cohen is the chair of the Social Impact Investment Taskforce established by the Group of Eight; Tim Jackson is Canada’s sector representative on the Social Impact Investment Taskforce.
Poverty, homelessness, crime and unemployment are issues we expect governments or charitable organizations to tackle—not financial institutions.
But “impact investment” is attracting a new breed of investor who measures returns by broader criteria: job creation, better housing and environmental protection.
Impact investing offers a new twist on venture capitalism. It’s a simple concept that looks at new ways to mobilize private capital for the public good. The economic crash of 2008 highlighted the need to ensure that finance contributes to a healthy society, rather than endanger it. Now, the movement is gaining momentum – thanks in part to the Social Impact Investment Taskforce, established in 2013 by the Group of Eight to catalyze a global impact investment market.
Call it kinder, gentler investing. Canada is part of the global trend launching some 45 impact investment products—from environmental causes to aboriginal projects, including health care and regionally targeted funds.
MaRS, the Toronto-based innovation hub, recently partnered with Virgin Unite Canada and the Mindset Social Innovation Foundation to launch a new national impact venture fund to finance early stage, for-profit companies with a core social or environmental mission. The CAPE fund, created by the family of former prime minister Paul Martin, creates positive impacts for aboriginal peoples. The Fiducie du Chantier de l’économie sociale unites the federal and Quebec governments with organized labour to support social economy enterprises.
The SVX is the first platform in North America connecting impact ventures, funds and investors. Registered with the Ontario Securities Commission in 2013, it is expanding to other parts of Canada and across the Americas. Canada has picked up the impact investing torch and is carrying it forward.
That’s the good news.
The bad news is that the money raised for these funds is only a small fraction of private investment money circulating in the market. While the SVX supports more than 100 investors and 26 issuers, it has so far raised only $3.5-million for startups like SolarShare, a renewable energy co-op. There is enormous potential for growth. Canadian foundations manage more than $45.5-billion, and Canadian pension funds hundreds of billions more. While foundations are required to direct 3.5 per cent of their assets to grants, the rest is generally invested to maximize financial returns.
Foundations could do more. By diverting even 10 per cent of their portfolios to impact investing by 2020, they could divert millions of dollars to social programs and be more aligned to their charitable objectives.
Canada could also create more social impact bonds (SIBs), a novel “pay-for-success” financial tool for social programs. Instead of taxpayers paying for a service up front, the government agrees to pay an organization only if the outcome of their program is achieved. An investor pays the cost of the program, taking on the risk of failure, but is paid a financial return by the government when the targets are met.
In its recent budget, the federal government removed a significant barrier to Canadian foundations. By allowing charities to invest in limited partnerships, the government has eliminated a major roadblock to impact investing. It’s now time for these foundations to step up to the plate and reallocate capital.
Our diverse communities, social challenges and enterprising leaders make Canada an ideal lab for testing innovative financing. But government leadership is needed to realize the full potential of these tools.
There are some promising provincial initiatives. Ontario announced 11 projects that will receive support from a Social Enterprise Demonstration Fund focused on accelerating the growth of early-stage social ventures. British Columbia and Nova Scotia have introduced a hybrid corporate structure for social enterprises.
Last year, Saskatchewan raised private capital on the back of a commitment to reimburse investors if a housing program keeps disadvantaged single mothers and their children together. A similar model is in development with the Heart and Stroke Foundation to improve hypertension levels.
While demonstrating early interest, governments must decide whether they wish to position themselves at the forefront or remain on the sidelines of this market.
A meeting on June 8 in Toronto of the G8 Social Impact Investment Taskforce will provide an important opportunity for Canada to benchmark its progress, explore best practices elsewhere and define the next steps needed to bring this powerful force for good into the mainstream.
Sir Ronald Cohen
Sir Ronald Cohen is the chair of the Social Impact Investment Taskforce established by the Group of Eight. See more…
Tim Jackson was EVP Corporate and Community Development at MaRS and the Lead Executive for the MaRS Centre for Impact Investing. He came to MaRS from the University of Waterloo, where he served as the vice-president of university relations, with responsibility for the offices of communications and public affairs, government relations, and community relations and events. Tim has an extensive background as an entrepreneur and business leader. See more…