Skeptic's guide to social finance

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

http://www.socialfinance.org.uk/

http://www.bridgesventures.com/

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://www.charitybank.org/

http://www.grameen-info.org/25

http://www.kiva.org/

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.”