There are seemingly not enough social impact investment opportunities to quench investor appetite in Canada.
If we remove the opportunities to invest in green energy, and instead analyze opportunities to invest in communities, we see very little by way of investment. Considering this state of the social impact investment landscape, how can investors intent on having an impact, fund opportunities that create lasting social change while generating a fair return?
The first step is becoming aware of the opportunities that currently exist across Canada. The fact is, social purpose organizations are lagging in creating social enterprises, programs and projects that can be funded through social impact investment. However, there are several organizations that have leveraged funding from Foundations and the Government to create viable investment opportunities:
Social Impact Funds
Organizations like Windmill Microlending and Access Community Capital have leveraged private debt to create micro-loan programs targeted to communities facing barriers.
Windmill Microlending provides microloans to help skilled immigrants and refugees continue their careers in Canada. This includes supporting clients to obtain the Canadian licensing requirements to work in their field, pay for exams, relocation costs and professional association fees. These financial supports are complimented by career advisory services that help clients choose the right path to achieve their professional goals, support navigating the Canadian financial system and ongoing mentorship.
Access Community Capital focusses on supporting emerging entrepreneurs with low-interest loans. These programs target marginalized communities that may not qualify for traditional financing and are supplemented by accelerators and coaching supports.
The wrap-around programs that organizations like this coordinate to support lenders, help to maintain high repayment rates. As organizations seek to broaden their community impact and create investment opportunities, targeted loan programs and funds will become more common.
Organizations like Solar Share, the Centre for Social Innovation and more recently, Sketch Working Arts, demonstrate how community bonds are a form of debt financing that can activate individual community supporters and turn them into investors.
SolarShare is Canada’s leading renewable energy co-operative, developing commercial scale solar energy installations across Ontario. By leveraging community bonds, SolarShare enables retail investors to invest in these projects through a 5 -year “Solar Bond” that earns a 5% annual interest rate. The Ontario Government purchases energy from these installations on a 20-year contract, creating a stable revenue stream for the repayment of the bonds.
The Centre for Social Innovation (CSI) is a social innovation hub, providing a coworking space and incubator for social purpose organizations. In 2010, the organization raised $2 Million through community bonds to purchase their first building, CSI Annex. In 2014, the organization raised another $4.3 Million through community bonds to buy their second building, CSI Spadina.
Through early engagement with institutional investors, when structuring the bond, organizations have ensured that their offering can appeal to the investment goals of a wide range of stakeholders.
Online Investment Platforms
While still limited by the availability of investment opportunities, SVX has created an investment platform that promises to provide a single point of access raising capital and making investments for investors seeking social/environmental impact. As the number of charities, non-profit organizations, and social entrepreneurs creating investible opportunities increases, platforms like SVX will play an important part in highlighting investible opportunities.
While there are organizations that have stepped up to the plate as trailblazers in social enterprise, there are still challenges in bringing attention to viable opportunities. Beyond the social good that is generated, there is little incentive for investors to accept the below-market rate returns that many impact investment opportunities offer. In addition, the perceived risk of investing in social purpose organizations, can be a deterrent.
Federal, provincial and municipal governments have several tools at their disposal to make social impact investment opportunities more attractive and hold a key secondary role in creating a more active impact investment environment in Canada. Much like the incentive programs that spurred innovation in the green energy industry, and has resulted in more favourable investment opportunities, the government needs to take proactive steps in encouraging investors to support innovation and financial investment in the social sector. In Canada, this could include:
The creation of Opportunity Zones and Qualified Opportunity Funds
As highlighted by the Ontario Realtor Party, Opportunity Zones create a financial incentive to invest in economically distressed communities. In the United States, it was the 2017 Tax Cuts and Job Act that served to establish the Qualified Opportunity Zones program. Through the program, communities are nominated by a State and certified by the Treasury Department as qualifying for the program. The program then allows Investors to defer a capital gain and invest those dollars into Qualified Opportunity Zone Funds.
As the program is relatively young, it is too early to tell what the true impact these funds will have on under resourced communities. However, money from this program is being used in the United States to support investments across the country, including new housing, grocery stores, medical clinics, broadband infrastructure, and the creation of local innovation districts. Opportunity Zones have the potential to ensure that the communities most in need of support are being provided with equitable investment.
Guaranteeing Community-led initiatives and projects
To help lessen the perceived risk of investing in social impact opportunities, government agencies and non-government granting agencies could support organizations by becoming guarantors. A guarantor agrees to assume the obligation of some or all the debt if the borrower defaults. This would provide a level of protection against losses for investors wishing to invest in community-led initiatives and projects that have the potential to generate revenue. For agencies that routinely provide grant funding to organizations, becoming guarantors could be used to both encourage organizations to pursue investible opportunities and motivate investors to fund opportunities.
Incentivize Foundations to Increase their Social Impact Investment Portfolio
This year, there have been increasing calls for government to increase the disbursement quota (DQ) of charitable foundations to 10%. In recognition of both the increased pressure on non-profit organizations due to COVID-19, and the average annual rate of asset appreciation seen by foundations, calls for more support are justified. However, as discussed in the report released by the Task Force for Social Finance there is also an opportunity for foundations to increase the portions of their capital in Mission Related Investments (MRI). This can translate into social impact investment and can help translate into the greater social impact that advocates for an increased DQ would like to see.
While the opportunities to invest in real community impact are limited, they do exist. With a greater willingness from investors to explore unique opportunities, more proactive involvement from governments in making the opportunities more viable, and increased activity by the social purpose sector in creating opportunities, the ecosystem can expand rapidly.
It will take all parties thinking creatively and stepping a little outside of their comfort zone to create the impact that is possible.