Today the Canadian Task Force on Social Finance issued a call to action outlining a path forward in mobilizing $30 billion in Canadian financial support for social enterprises and social-purpose businesses. The field of social finance aims to mobilize private financial capital to fund companies whose core purpose is to address environmental and social issues. Social finance is different from traditional finance because it emphasizes 'blended value' - the concept that investing in social purpose businesses can provide a social and/or environmental benefit, as well as a financial benefit.
The Task Force (made up of ten of Canada's social finance leaders) is grappling with 1) how to unlock new sources of capital for social enterprises, 2) how to make it easier for charities and non-profits to generate much needed operating revenue from for-profit enterprises, and 3) how to create a universe of high quality, investment-ready social enterprises for the institutional investor market.
I can comment on the first problem at hand based on my work in the responsible investment space. Unlocking new sources of capital for blended value businesses is a huge challenge in Canada. Canadian institutional investors are only beginning to embrace the concepts of responsible investment on a broader scale. And the more nuanced concept of social finance, in many ways, is still in its infancy, at least at the institutional level. Two key investor segments have been missing from the discussion about social finance thus far: foundations and pension funds.
As the report points out, Canadian foundations have traditionally relied on grant-making as the primary mechanism for achieving their mission. Very few foundations in Canada have explored mission-related or 'impact' investing as a tool for achieving their mission. The report's recommendation asking the government to clarify the federal tax rules around foundation investments in social enterprises will go a long way in paving that path. However, educating foundation staff on the opportunities and benefits of impact investing will also be vital.
In the US, there is a larger market and a longer history of impact investing. US foundations have found creative ways to move beyond grant-making, and are increasingly providing loans and other financial products to non-profits and social purpose businesses. The US More for Mission campaign is trying to capitalize on the current momentum in the US in the hopes of driving more foundation capital into social finance. This may include anything from low-interest mortgages, to short term loans to bridge other grant capital, or equity investments in social and environmental start ups. Canadian foundations are only beginning to explore the opportunities in this space, and progress, as the report indicates, continues to be slow.
Tapping the Canadian pension fund market, the other major source of capital, will be an even bigger challenge. The Task Force report recommends 1) mandating disclosure of responsible investment practices by pension funds, 2) clarifying fiduciary duty requirements regarding environmental and social issues, 3) providing incentives that help mitigate investment risk for pension funds to enable them to participate in social finance.
A number of organizations such as the Social Investment Organization and SHARE, have been asking for greater pension fund disclosure for years, so far to no avail. The UK currently mandates such disclosure, which requires pension funds to describe whether and how they consider social environmental and ethical issues in their investment processes. Greater disclosure on responsible investment practices would serve to open up a point of discussion on the subject here in Canada. This would go a long way in raising awareness among pension funds and their investment managers about the potential financial AND societal benefits of allocating capital to businesses with a social or environmental cause.
The fiduciary duty issue has been another frustrating battle in Canada. It is frustrating because the debate has essentially been settled at the international level with the publication of two reports by law firm Freshfields Bruckhaus Deringer (often referred to as Fiduciary I and Fiduciary II). The reports were sponsored by the United Nations Environment Program Finance Initiative (UNEP-FI), an innovative program looking at the intersection of finance and sustainability. The Fiduciary reports concluded that not only is it NOT a violation of fiduciary duty to consider environmental and social impacts when making investment decisions, investors may in fact be in violation of their fiduciary duty if they FAIL to consider such issues. Consider the potential inter-generational financial consequences of climate change and you'll get the picture.
In Canada, despite a number of notable pension fund leaders that have embraced the concept, the average pension administrator or trustee in Canada continues to be hesitant about the idea of responsible or impact investing. And they continue to cite the fiduciary issue. Enormous effort will be needed to raise awareness and educate these key decision-makers about the value and benefits of participating in social finance mechanisms. Government incentives will help make the risk more palatable, but are not likely to erase the psychological barriers that continue to exist in the minds of pension decision-makers.
In conclusion, the Task Force report provides an excellent road map, outlining what needs to happen in order to cultivate a robust and successful social finance sector in Canada. The hurdles are large, but with the right government incentives, as well as a focused and aggressive education campaign aimed at the institutional market, hopefully we will start to see more capital flowing to businesses seeking to solve some of society's most pressing environmental and social problems.
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