by Brittany Stares
“Social finance,” along with “social investing” and “impact investing,” is a term that has become highly fashionable in conversation but can remain elusive when it comes to being put into practice.
Social finance departs from traditional investing in that it is not focused on financial returns alone. In contrast, social finance is about investing to make a specific, positive social impact – while still generating a financial return. In some cases, investors may be willing to accept below-market returns based on the social outcome. In others, market-comparable returns provide the necessary lure to attract large streams of capital.
Canada’s MaRS Centre for Impact Investing describes three categories of social finance tools:
1. Debt instruments (such as loans, loan guarantees, etc.)
2. Equity investments (issuing of shares in a business)
3. Venture philanthropy grants (not repayable)
For charities and nonprofits, as compared to money-making social enterprises, debt instruments merit the most discussion. Debt instruments take various forms, including loans, lines of credit and community bonds, and can be used by organizations for bridge financing, funding new developments, expanding, etc. Typically, they are repaid with interest so the lender makes a profit. Bank loans are the most familiar of these; however, foundations, municipal governments, individuals, institutional investors, community loan funds and others can also serve as lenders, and are sometimes more accessible to small organizations than large banks. One example of a loan fund is the London Community Foundation’s Loan Fund in London, Ontario, which turns donations into capital loans for affordable housing developers. Another debt instrument is a community bond, which is essentially a promissory note offered by nonprofits or charities that is purchased by individuals or organizations and repaid with interest at a later date. Each bond can be small, a few hundred or a few thousand dollars, making community bonds a unique way to leverage support from local community members.
One of the best-known examples of community bonds in Canada is the Centre for Social Innovation’s issuing of RRSP-eligible bonds in 2010 in Toronto. The bonds offered annual returns between 3-4.5% and raised $2 million for the organization to purchase a new building. .
For some, social finance can be a tough pill to swallow. Using financial returns to “incentivize” taking action on pressing social issues might seem unpalatable. Some argue there is an inherent clash between business and social values. There are also concerns that social finance encourages debt upon charities and nonprofits that may not be equipped to handle it. While social finance does require organizations to adopt, at least partially, a business mindset, its potential is hard to deny. Public sector resources and private philanthropy have proven insufficient to address major social challenges, such as ensuring an adequate supply of affordable housing. Charitable donations in Canada are declining. Social finance opens the door to largely untapped sources of capital, attracting both those investors driven by social mission and those who prioritize financial returns. In fact, the Canadian Task Force on Social Finance has called social finance a $30 billion opportunity for Canada if only 1 percent of assets under management shift in this direction. However, for social finance to be successful, the charities, nonprofits and other social service providers on the ground must be prepared – these organizations must be able to align their needs with investment opportunities, and be able to demonstrate to investors reasons to be confident.
Brittany Stares is a Master’s Candidate in the Philanthropy and Nonprofit Leadership program at Carleton University and a Research Assistant for the Carleton Centre for Community Innovation (3ci).