One of the bright spots in the Canadian and global venture capital landscape is the rapidly growing and evolving impact investment movement.
The movement is referred to by many names — triple bottom line, investing for impact, social impact investing, or the blended value approach. Phillips Hager and North Investment Management, in their Overview of Impact Investing, describe it as a "proactive approach to investing that seeks to solve social and environmental challenges through direct investment in private companies, projects and funds, while also earning a relatively attractive financial return."
More importantly, impact investing represents innovation and an evolution of the purely philanthropic distribution models that have historically fallen short on either capital, impact or both. At scale, an impact investing industry could allow for a renewable and sustainable form of financing for an endless array of initiatives, from poverty alleviation and affordable housing, to natural resource conservation, and even clean infrastructure projects.
Investments can take many forms and are generally structured in a similar fashion to typical venture capital equity or debentures. Other forms include social impact bonds and, in a recent development, crowd-sourced investment and debt financings.
Bill Clinton's A Case for Optimism describes how the post-2008 global political and socio-economic instability and the rise of social media have highlighted our global interconnectedness and placed a spotlight on individual, class and environmental crises. The spotlight has spurred an avant-gardism among the next generation, old and new money, and even the average investor, many of whom simply want to align their investments of time and capital with initiatives that reflect their values.
The shortfall between what is needed for social and environmental impact around the world and what is available is staggering and underscores the need to unlock private capital. Judith Rodin is the president of the Rockefeller Foundation, a leading and early explorer of the impact investing industry. She states, "If you put a price tag on all the social and environmental needs around the world, it is in the trillions. All the philanthropy in the world is only $590 billion. So, the needs far exceed the resources."
The demand for increased capital for social enterprises across Canada is estimated to be between $450 million and $1.4 billion, according to the Canadian Task Force on Social Finance. On the bright side, international experience suggests that a relatively modest infusion of public capital at the national level into "fund-of-funds" programs can kick-start the mobilization of private capital into this asset class in a meaningful way. The U.K. government's £20-million investment in Bridges Ventures (a U.K.-based social investment fund) in 2002 attracted over £120 million of private impact investment over six years and likely contributed to the development of over £325 million in other social venture capital funds.
While we're still in the "early days" in terms of building a sustainable Impact Investing industry in Canada, there are plenty of reasons to be optimistic that we can emerge as a leading player in the global impact investing movement.
Exciting initiatives from early innovators and new participants are being launched across the country. From east to west, we have examples of early innovators with a decade or more of experience in nurturing and growing this industry, including Vancity, Renewal Partners, Social Capital Partners, and Le Chantier de l'économie sociale de Quebec, among others. I highlight two of them below.
Social Capital Partners: Founded by Bill Young in 2001, Social Capital Partners (SCP) is a non-profit organization that has established and scaled two successful impact investing initiatives.
First, SCP helped establish and scale a portfolio of profitable social enterprises across Canada that consisted primarily of startup businesses expressly designed to generate a profit but also required to generate a significant number of entry-level jobs with good career paths for people outside the economic mainstream. SCP's social enterprise portfolio includes:
In 2006, the SCP model evolved with the creation of SCP's Franchise Community Hiring Program. Through the program, SCP provides low-interest subordinate debt financing to franchisees that commit to hiring entry-level employees through community employment agencies such as the YMCA. The interest rates tied to the loans are socially-adjusted, meaning that for every additional person hired through a community service agency, the franchisee's interest rate on their loan is lowered. With this program, SCP now has facilitated investments with several franchise partners, most notably with 24 Active Green + Ross locations across Ontario and all corporately-owned stores.
Le Chantier de l'économie sociale de Québec: A multi-stakeholder association led by two main financial institutions — Le Réseau d'investissement social du Québec (RISQ) and La Fiducie du Chantier de l'économie sociale — and other supporting organizations to develop common tools, maintain dialogue and improve collaboration. Programs include patient capital loans from as little as $5,000 to $1.5 million, with up to a 15-year moratorium on repayment in the terms. A detailed overview of Quebec-based impact investing models can be found in the September 26 blog by Erica Barbosa on the socialfinance.ca website.
Building on the momentum of the early innovators, new industry organizations and funding vehicles have recently launched and are further supporting the growth of this industry.
The MaRS Centre for Impact Investing: Opened in late 2011, the Centre for Impact Investing is a national hub designed to increase the awareness and effectiveness of social finance, which directs new capital, talent and initiatives toward tackling Canada's most pressing social and environmental problems. Acting as a neutral collaboration space, the Centre is designed for co-creation between government, community and the private sector. The Centre builds on the foundational work of MaRS and Social Innovation Generation (SiG), including the landmark report by the Canadian Task Force on Social Finance.
Royal Bank of Canada (RBC): In January of this year, RBC announced a $20-million commitment to a new social and environmental initiative aimed at facilitating solutions to social and environmental problems. The initiative includes a $10-million capital pool that will be invested in for-profit social enterprises delivering environmental and/or social impact. The fund is expected to initiate direct and third-party fund investments in the fall of 2012.
RBC has a long history of investing in profitable companies with a social and environmental return. In 2007, RBC launched the RBC Jantzi Funds suite of products, and in 2008 the PH&N Community Values Fund became part of the RBC Global Asset Management Suite of Funds. Then in 2009 RBC, through its venture capital fund RBC Venture Partners, provided seed capital to Boston-based JANA Inc., a mobile platform designed to direct money from big brands directly into the pockets of consumers in remote areas of emerging markets in exchange for completing surveys or purchasing products and, in the process, legitimately providing economic empowerment to the rural poor.
An ongoing challenge considering the nascent stage of the Impact Investing industry is determining the "all in" ROI (financial and social) and arriving at industry standard and accepted measures. I'll save that discussion for subsequent article.
The elements required to build any industry are leadership, coordination and capitalization. Canada seems to have shining examples of the leadership and coordination required to build an impact investing industry. The challenge, not dissimilar to our struggling venture capital industry, will be capitalizing and ultimately generating the returns to gain widespread acceptance among institutional investors.
International experience suggests that initial infusions of public capital can create a lot of leverage in attracting private capital, but the pension funds, private enterprise and endowments largely remain trapped in a traditional and arguably less effective paradigm of charitable giving.
Ultimately, the promise of Impact Investing is progress — progress in evolving the philanthropic/charitable economic model and sustainable progress toward alleviating individual, class and environmental crises resulting in a virtuous circle.
David Unsworth is a partner at RBC Venture Partners.
For more information, the Canadian Task Force on Social Finance published Mobilizing Private Capital for Public Good, which provides seven recommendations for supporting and evolving the Impact Investing industry. It can be found at www.socialfinance.ca/taskforce .