On September 28, 2017 a group of 45 senators, government officials, academics, Indigenous representatives, civil society and financial sector leaders met in the Senate’s Aboriginal Peoples Committee Room to consider how Canada could establish a ‘social finance wholesaler’ to invest in funds designed to support social change. The meeting was hosted by Senator Ratna Omidvar and McConnell Foundation CEO Stephen Huddart. Stephen’s opening remarks are the basis for the first part of this blog. The group also heard from Catherine Scott, co-chair of the federal co-creation steering committee on social innovation and social finance, and UBC Professor James Tansey, who presented his research on social finance wholesalers in other countries, and the potential to adapt this model to Canada. These are summarized in the second and third sections.
Structural innovation and the public good
Economist Mariana Mazzucato, head of the new Institute for Innovation and Public Purpose at University College London, observes in a recent article that economic growth not only has a rate, but also a direction.
Further, she points out that due to the scale of global challenges, the innovation we most need is structural. To effect a peaceful transition to a low carbon economy or to bring about economic reconciliation with Indigenous people, structural, systemic and cultural shifts are essential. This in turn raises the idea of a new social compact – one that aligns the public sector, civil society and the private sector around matters of overarching public importance.
In light of all this, the recent creation of a federal steering committee on social innovation and social finance presents Canada with an opportunity for collaboration and cross sector alignment at a scale commensurate with the challenges before us.
A national strategy takes shape
In its initial deliberations this summer, the committee prioritized six areas for action:
- Capacity and skills;
- Funding and capital (for example, creating a social finance wholesaler or ‘fund of funds’ to support local, national and issues-based investments in systemic change and/or establishing a complementary social innovation granting fund);
- Market access;
- Policy and regulatory environment;
- Knowledge transfer, data and impact measurement; and
- Mobilization and awareness.
Work on each of these priorities is now underway, and a consultation website went live on September 29. It will remain open until December 31st, 2017. (Editor’s note: this text was adjusted October 10, 2017 to include all six areas under discussion by the committee)
Financing social innovation
In his presentation, James Tansey sought to summarize the findings from a global review of impact funds and also to look at the potential to establish an institution that is suited to the unique structures of government in Canada.
Impact investing has become a fashionable term in recent years and has been applied in some cases to investments that look fairly conventional. Looking globally, the majority of funds that truly invest with purpose and impact, in the majority of cases, government has played an important role in providing startup funds and in many cases continues to provide operating funds. The recently published book ‘The Impact Investor’ carefully evaluates 12 of the most successful funds and finds that government played a central role in establishing 8 of them. The best of them are allowed to operate independently and have been able to secure up to fifteen times leverage from other funding sources,
While there is a tendency to see impact investing as a mechanism for increasing the amount of capital available to address social and environmental issues, it is important to recognize that impact investing brings at least three other benefits. Firstly, impact investing can improve the effectiveness of the use of funds by creating more targeted approaches and greater accountability, which means the same money can create more outcomes. For instance, investment in preventing disease can be much more effective than paying for treatment. Secondly, by offering a reasonable rate of return, impact investing can attract new pools of capital. Thirdly, impact investing can stimulate innovation that reframes the problems or finds new solutions; for instance, pay for performance contracts and impact bonds provide rewards for outcomes but leave the path to those outcomes open to innovation.
Based on the most recent GIIN survey, the global market for impact investing sits at $114bn of assets under management and $22bn of investing in 2016. Estimates of the comparable Canadian market suggest there is around $370m of investment and $3.2bn of assets. Within Canada, Quebec has the most developed social investing ecosystem, which was established through legislation.
Looking at other potential pools of capital, Canadian Foundations have around $45.5bn in assets and are natural partners for impact investing. Depending on the definition used, current investment by foundations is between $500m and $1.2bn, which falls well short of the recommendations of the Task Force on Social Finance of 10%. That said, the sector is growing as more investment funds are set up in Canada; a recent survey evaluated 59 impact investing funds from across the country.
Conventional investors are also increasingly looking to invest with purpose. Of the $1.5tn of assets in public markets in Canada, 38% is subject to a negative screen under responsible investing rules and millennials are 65% more likely to invest in socially responsible funds than their parents. If impact investing can provide opportunities for these investors, the potential capital pools outweigh any other sources.
Wholesale funds have been established in a number of other countries including the UK, Portugal, Japan and Australia. Wholesale funds don’t make direct investments into ventures, instead, they invest through intermediaries: established impact funds that have an existing pipeline of investments. A great deal has been learned from the experience of these countries. The largest operating fund to date, Big Society Capital, was capitalized from dormant bank accounts in the UK. While they started with a model that borrowed heavily from technology investing, they evolved very quickly to the conditions of the social sector. They recognized that impact investing requires funds to build capacity in the social sector and that the funds themselves need the ability to combine grants with investment capital in a ‘blended’ approach. While they have invested at a slower pace than they originally projected, Big Society Capital has secured 2.3 times leverage from other investors and is starting to see steady returns.
An approach that will work for Canada must recognize that this is a highly federated country, in contrast to other countries where power lies much closer to community. Aboriginal impact investing is a growing sector, but requires a different approach to governance and investment to recognize the different circumstances in these communities. And ultimately, success will come in Canada and elsewhere by normalizing and integrating social innovation and impact investing into government operations and into the wider capital markets.