A key consideration for many witnesses was how to generate capital for social finance and build investor confidence in this new market. An important part of this discussion, particularly from witnesses from the supply and intermediary sides of the market, focused on the need to mitigate risks to investors and provide incentives to invest in social finance initiatives.

Many witnesses discussed possibilities surrounding various types of funds (i.e., pools of capital) to encourage impact investment and secure against losses in this new market. Other possible federal actions raised by witnesses included the development of government social procurement practices, and non-financial measures to help improve market information and otherwise mitigate risks to investors. Each of these options for developing the social finance market will be discussed below in turn.

A. Financing and Tax Measures

Witnesses discussed a variety of possible financing instruments in which the federal government could invest to support social finance initiatives, and leverage additional investments from a variety of sources.

In this regard, the Committee heard that various options exist for the federal government to supply capital to encourage the development of the social finance market. Noting the potential role of the federal government in providing “catalytic capital” to support social finance, Adam Spence stated:

The concept is simple: catalytic investments are those that trigger the future flow of capital to a desired company, asset class, sector, or geography. We would recommend that the government establish an impact investing matching program as catalytic capital to support existing and new funds through direct co-investment, credit enhancements, or incentives. In addition, grants may also be required to support the development of intermediaries that would unlock new investment.[161]

Similarly, Norm Tasevski noted the potential of “catalytic capital funds” to support social finance activities. Under this type of fund, different types of investors (i.e., those focused primarily on social impacts and those focused on financial returns) would invest in the same opportunity at varying levels of risk. As Mr. Tasevski explained:

Catalytic capital structures bring together different categories of investors, what we would call the social first investor and the finance first investor, into the same investment opportunity. One investor category invests capital and agrees to absorb a certain preset level of loss. In doing so other investment groups reduce the risk associated with the overall investment opportunity. Due to the reduced risk an investor group receives a return that is more in line with their risk return expectations, which is typically the market rate.[162]

The Committee heard that Big Society Capital an independent financial institution in the UK created to make investments in social investment funds – illustrates a policy shift “from [a] government providing large direct investment funds to [a] government setting up a social investment wholesaler that was independent of government.”[163] Describing the institution as a “wholesale social investment fund”, Mr. Boyle further explained:

The way it predominantly works is by being a cornerstone investor in social investment funds and those social investment funds themselves specialize in certain areas, with different types of lending to different organizations.

…

It's now supported over a hundred front-line organizations. When it was set up there were about eight funds in the U.K. and there are now over 30 of those funds.[164]

Big Society Capital was initially capitalized with £600 million, of which £200 million came from four banks, and £400 million came from dormant bank accounts that were transferred to the institution through the passage of legislation.[165] While some witnesses suggested that a similar measure could be implemented in Canada, Stanley Hartt pointed out that dormant bank accounts here are translated into the Consolidated Revenue Fund after 10 years, and so their use to capitalize the social finance market “would represent an actual cost to the government.”[166]

The Committee heard that another alternative known as an “outcomes payment fund” has been applied in the U.K. to support outcomes-based finance initiatives. In particular, the U.K. Department for Work and Pensions had established this fund, which prioritizes certain social outcomes and establishes amounts that the government is willing to pay for the achievement of these outcomes. As Sarah Doyle explained:

This is something that was initiated in the U.K. Their Department for Work and Pensions, for example, has created a fund that identifies a set of youth employment outcomes that the government is willing to pay for. It set maximum prices that the government is willing to pay. This type of model can then allow the market to respond with innovative solutions. We think that has strong potential to be replicated in Canada across a range of different issue areas.[167]

The U.K. also instituted tax benefits within the social sector in order to encourage more investment of private capital in the social finance market. Mr. Boyle told the Committee that “the majority of the tax benefits that we've advantaged to this area within the U.K. have actually been about replicating within the social sector the same sorts of tax reliefs that work for purely commercial organizations.” He further noted that “[i]t's a 30% tax relief on people's income tax to the same kind of qualifying amount,” and “capital gains and similar other capital losses can be deferred through this tax relief.”[168]

Other options for bringing capital into the social finance market were discussed by witnesses. Tim Jackson noted that options for government investment could include matching funds to build on investments from other sources. He suggested that the government could support a “fund-of-funds” arrangement, under which it would make capital available to fund intermediaries, which would in turn make the impact investments:

[W]e think the federal government has a role to play in putting capital to work alongside others’ investment, not doing this alone but being an impetus for others. What do I mean by that? It means that you could follow the example you’ve done on things like the venture capital action plan, what Nova Scotia did with their community economic development investment funds, and what the Government of Canada and the Government of Quebec did with the Chantier de l’économie sociale, where government said they would not be the only player in the marketplace but would match private sector, foundation, or charity financing. You could put in place a matching program, or you could put in place a fund-of-funds program, where you actually provide a significant amount of money that then could go to intermediaries, who would then invest it in the impact investing space.[169]

Witnesses also suggested that the federal government support impact investment by providing capital to secure loans made in the social finance arena. Some witnesses asked the federal government to consider supporting “credit enhancement funds” to provide first-loss capital to impact investors. As explained by Sandra Odendahl:

In banking, this [credit enhancement] means guarantees. This is first-loss capital. It basically means backstopping investment money into a sector where you want to see investment. In particular, this is important for de-risking some of the riskier, early-stage-type investing that smaller retail investors, who can't afford to lose a lot of money but who might want to participate in social finance, might be more inclined to do it if it were somehow backstopped to some extent.[170]

Others suggested that existing federal small business financing programs could be expanded to provide loan guarantee investments to support social enterprises as well. For example, Brian Emmett of Imagine Canada told the Committee that he would like to see “the government treat charities and non-profits more as small businesses and be eligible for the small business financing program and the Business Development Bank’s small business loans.”[171] Similarly, Magnus Sandberg of Social Capital Partners stated that:

[W]e think it would be very, very interesting to explore already existing government programs aimed at the private sector and add a social twist to it. One example is the Canada small business financing program. The government is essentially guaranteeing up to 80% of the loan provided by financial institutions to small and medium-sized organizations that the banks wouldn't necessarily otherwise provide loans to because they're too risky. Imagine if on top of that we add a social twist, whether it's hiring, it's environmental solar panels on the roof of the businesses, or what have you, we think that could be a very interesting model.[172]

B. Social Procurement

Witnesses suggested social procurement as a means through which the government could support social enterprises and help develop the social finance market. The Committee heard that social enterprises need greater access to the demand side: by having access to more customers, they can grow their businesses and increase social impact. In this way, witnesses suggested, social procurement can foster this growth without incurring additional costs to government. As David LePage noted:

Government can create significant social impact at no added cost, no loss of quality, and create a true value and dividend for Canadian taxpayers through social purchasing programs.[173]

François Vermette of the Social Economy Working Group indicated that the tendering process of all levels of government is currently designed in a way that excludes social enterprises.[174] He suggested including “social clauses” within requests for proposals for government contracts and procurement policies in order to foster opportunities to subcontract to social enterprises.[175] Mr. LePage further explained the potential partnerships and positive social outcomes that could be generated by this process:

Now, if there were social policies built into that contract, they would look at opportunities to subcontract to social enterprises that are creating training opportunities in communities across Canada, because all of those government buildings, whether they're in Yellowknife, Quebec, or Toronto, have a lot of different opportunities to engage partners. You have the private sector contractor being able to unbundle and look at social clauses based on a government contract and then working with social enterprises to actually deliver the services, which would result in training. It becomes a government, private sector, and community sector partnership, using social enterprise to meet everyone's needs.[176]

Cathy Taylor noted that a “social procurement action plan” would encourage companies who secure government contracts to engage social enterprises and therefore leverage government’s purchasing power to strengthen communities.[177]

Finally, Kieron Boyle noted that the development of legislation – known as the Social Value Act – has required that public sector “commissioners of services” within the U.K. consider the social value of services, in addition to the economic and short-term cost issues. He further explained that:

… the idea [is] that for many commissioners thinking about value in the round, this often means they're getting better value for money than just a very short-term focus on the cost of a service when commissioning it. We feel that things like that are just as important as these initiatives around crowding in finance.[178]

Commenting on a recent review of the U.K. Social Value Act, Wayne Chiu of The Trico Group noted that it had found “three barriers to realizing the potential of the act: awareness and take-up are mixed, there is a lack of definition of social value, and measurement of social value is not being developed.” In his view, this indicated a broader need to develop better evaluation methods and evidence of social impacts in this sphere.[179]

C. Non-Financial Measures to Support the Social Finance Market

Witnesses appearing before the Committee also identified non-financial measures to build investor confidence in the social finance market. In particular, witnesses noted that the federal government may have a role to play in clarifying rules and expectations around fiduciary duty and due diligence in the social finance context, and in sharing market information among actors and across jurisdictions.

1. Duties of Investors

First, some witnesses from the supply side of the social finance market (e.g., banks, foundations) mentioned the need to clarify expectations around the fiduciary duty incumbent upon institutional investors who are investing in the social finance market. For example, Kieron Boyle noted that “fiduciary duty [and] the responsibilities of trustees, … and on what basis they are allowed to invest, and what things they can think about other than pure financial returns”[180] are complicated questions in the U.K. as well. In addition, Sandra Odendahl noted that the:

… government can play a role in supply [through] clarifying the fiduciary duty of institutional investors. The way it stands right now is that trustees of pension funds and endowments in Canada, depending on the jurisdiction, are uncertain if they are breaching their fiduciary duty by investing for social impact rather than strictly for returns.[181]

Sarah Doyle and Ian Bird also indicated that while many impact investments could be considered prudent investments from a traditional financial perspective, others may have significant merit and be in line with a foundation’s charitable objectives but may be expected to return less than market rate. They suggested that where there is such an alignment between the investment and the foundation’s objectives, foundations should be able to invest at below-market rates.[182]

In addition, some witnesses spoke about the importance of due diligence (financial and social) in the social finance sector. The Committee heard that due diligence in the social enterprise and social finance sector can look quite different than the protocols in place in the private sector, including informal networks. For example, Evan Saugstad of the Northern Development Initiative Trust noted that “[w]hen you get down into your small communities, most of your local politicians know everybody, or they can ask somebody who knows about somebody. We have an incredible unofficial due diligence network.”[183]

Magnus Sandberg of Social Capital Partners, a non-profit that plays an intermediary role between the private sector and organizations seeking to place job-seekers with barriers to employment, noted how his organization conducts both social and financial due diligence processes for potential projects. With respect to social due diligence, he explained that his organization seeks to determine, for example, whether the business that seeks to employ individuals with various difficulties would be a good place for candidates to work, whether there are many entry-level positions, if the pay escalation is adequate, and so on.[184]

2. Information Sharing

Finally, some witnesses expressed the need for better information sharing and coordinating within the social finance market, and have suggested that the federal government could play an important role in this respect. Departmental officials noted that while direct oversight from the federal government may be challenging given jurisdictional issues, sharing information and lessons learned would be a valuable role for the federal government to play:

The federal government, I think, can play multiple roles, as national governments do, from the perspective of different markets. It might be information sharing; when information doesn’t travel, that is a market impediment, so the national level government could certainly share information.[185]

David LePage suggested that the federal government could facilitate cross- sector discussions more effectively than single actors from one sector. He noted that “… government is in a unique role to facilitate and encourage, to initiate, and to partner on cross-sector engagement” among government, the private sector, and the community sector. He further recommended that the federal government encourage dialogue among these actors, noting that “[i]f I invite corporations to a table, I might get a response. If the government convenes a meeting, we get a tremendous response.”[186]

ESDC’s national call for concepts for social finance was cited as an example of the government’s ability to bring together actors from different sectors The outcome of this “call for concepts” yielded a report entitled Harnessing the Power of Social Finance in May 2013 which helped to build an understanding of social finance.[187] Michael Toye of the Canadian Community Economic Development Network emphasized the importance of a collaborative approach between private sector institutions and community groups and applauded ESDC for its efforts in that direction:

We would commend Employment and Social Development Canada for having created a round table of stakeholders to do just that and we encourage its continuation as the social finance landscape evolves.[188]

In keeping with the suggestion that the government could play a coordinating role, Cathy Taylor added that the government has a responsibility to define the concepts relevant to the social finance market, such as the social enterprise. This responsibility would also provide an opportunity to align and coordinate with the provincial governments.[189]

The Committee also heard that non-governmental actors can play a role in effective information sharing. Sandra Odendahl of the Royal Bank of Canada spoke of their efforts at “translating” the social finance concepts in order to present them in a language that is familiar to the traditional finance and investment community.[190]