Skeptic's guide to social finance
Post on 14-May-2015
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The Skeptic’s Guide to
Social Finance
• Why social finance?• What is it and what is it good for?• Will it work for you?• What’s in the way…
Finding a definition…
…what do we mean by ‘social finance’?
What are we hoping social finance will do?
The challenge of access to
1) Debtliability or obligation
2) Equityownership
3) Capitalcash and resources usedto generate an income
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My original hope
The powers of the capital markets to:• Self-regulate industries (M&A, bankruptcies)• Foster and spur innovation
Social Finance ≠ Revenue
Social Finance ≠ Social
Enterprise
Providing some
context…
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Social Enterprise
Social Entrepreneur
Social Finance
Social Innovation
Social Economy
The Ideas & Concepts
The Role in Society
The Organization
The Individual
The Resources
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Social finance is…
…the application of tools, instruments, and strategies where
capital intentionally seeks a blended value (economic, social,
and/or environmental) return.
“The Quest for Blended Value Returns”, Karim Harji and Tessa Hebb, Carleton Centre for Community Innovation
http://socialfinance.ca
Social impact bonds
Impact Investing
Community bonds
Venture Philanthropy
Blended-value investing
Mission-related investing
Micro-lending, microcredit
Community Interest Corporations, L3Cs
Crowdfunding
Venture Philanthropy
• Not truly social finance• Longer-term grants, business planning• Akin to ‘patient capital’
Impact Investing/Blended Value Investing
Perspective of the supply side – the investor…
• Investing for a mixed return, including financial, social, environmental, etc.
• Many vehicles of investing available• Includes bonds, equity
Debt: Loans & Financing
• Alternatives to major banks• Credit unions, investment and community
development funds• Working capital, lines of credit, mortgages,
loans
MRI/PRI
Mission-related investing / Program-related investing
“What if we put all charitable assets to work creating a social return?”
Foundations invest for a return, beyond their grant stream/disbursement quota:- Loans (mortgages, lines of credit)- Equity in social enterprises
Crowdfunding, Microcredit
Microloans, microcredit• Popularized by Grameen Bank – now available
through many institutions at all scales (typically below $25k).
Crowdfunding• Corollary to microcredit – multiple small grantors or
investors for project or organization
Kiva marries the two concepts in an innovative option.
http://socialinnovation.ca/communitybonds
Community Bonds
Centre for Social Innovation (Toronto)• Raised capital through the issue of bonds to
purchase a building• Minimum $25k investment, 4% return/5 year
period.• Bonds are RRSP eligible• Currently issuing a new round for the purchase
of another building, with minimum investment at $10k
Social Impact Bonds
Social Impact Bonds
(United Kingdom)
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CICs are a new type of limited company designed specifically for those wishing to
operate for the benefit of the community rather than for the benefit of the owners of the
company
(United Kingdom)
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• A CIC cannot be formed or used solely for the personal gain of a particular person, or group of people. Must meet a community benefit test.
• CICs can be limited by shares, or by guarantee, and have a statutory ‘Asset Lock’ to prevent the assets and profits being distributed. There is also a ‘dividend cap’ on payouts.
• A CIC cannot be formed to support political activities and a company that is a charity cannot be a CIC, unless it gives up its charitable status. However, a charity may apply to register a CIC as a subsidiary company.
L3C Companies (US)• The low-profit, limited liability company, or L3C: a hybrid of a
nonprofit and for-profit organization - a new type of limited liability company (LLC) designed to attract private investments and philanthropic capital in ventures designed to provide a social benefit.
• L3Cs have an explicit primary charitable mission and only a secondary profit concern. But unlike a charity, the L3C is free to distribute the profits, after taxes, to owners or Investors
• On April 30, 2008, Vermont became the first State to recognize the L3C as an official legal structure. Similar legislation has since been pushed in other States such as Georgia, Michigan, Montana and North Carolina.
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Supply vs. Demand
Intermediaries Investors (Supply)
Demand (Projects/
Orgs)
Under-developed, uncoordinated marketplace:- Limited knowledgeable investors- Few efficient brokers- Limited opportunities, high
transaction costs
For What Purposes?
• Who really benefits?• Does this work for you? Can you provide a
return on investment or quantifiable outcomes?– Much of the work of the charitable sector cannot
provide ROI, or has difficulty in providing clear, quantifiable outcomes
Confusing, For what return?
• Most investments seem complex• Are social finance investments to help produce
a market-like rate of return?OR
• Are social finance investments to produce a social return, and possibly a below-return or even a loss? (Donations and grants are, strictly speaking, a loss.)
Restrictions
• Nonprofits cannot make, distribute a profit• Foundations must make a market return on
investments, fiduciary duty• Securities regulation• Often limited to accredited investors
Legislation and Regulation
• Government interest in changing regulations is ponderous, and usually grasps at low-hanging fruit with clear and successful pilots in other jurisdictions
• Multiple jurisdictions in Canada, securities regulators
• Various departmental authorities, from Finance, CRA, Industry, etc.
No Evident Intermediary
• Traditional financial investments have many established intermediaries: brokers, banks, stock markets
• Require rankings, assessments, analysts, knowledgeable and efficient brokers, vendors, etc.
• Simplify complex metrics (e.g. LEED), create economies of scale
The future of social finance
• #1 – Foundations should invest 10% of assets in MRI• #2 - Canada Impact Investment Fund• #3 – Multiple players need to
develop bond and bond-like instruments for social impact• #4 – Mobilize pension fund assets for
impact investing
• #5 – Modernize regulatory frameworks for charities, nonprofits, consider hybrid models• #6 – Modify tax provisions for private
investors• #7 – Strengthen business capacity of
charities, nonprofits, social enterprises
• Building markets – supply and demand• Government incentives, regulation, legislation• Lessons from pilots, other initiatives
“There is a lot we can do now under the current framework.”
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