This story is in partnership with Employment and Social Development Canada (ESDC).
In a 2018 letter to MP Jean-Yves Duclos, Imagine Canada’s President and CEO, Bruce MacDonald, wrote about his hope and optimism for the then-recently announced Social Finance Fund, helping charities, non-profits and social purpose organizations access new financing.
Throughout his letter, MacDonald emphasized that, in order for a strong social finance market to take hold, social enterprises need to be supported by the government to access social finance loans. He wrote that, with a looming social deficit and greater need to be self-sustaining, charities and non-profits “often face a long, hard road in developing successful social enterprises”. However, once they get there, MacDonald wrote, they have many unique strengths, such as being mission and outcomes-driven — both of which are very important skills in the social finance sector.
A lot has changed since 2018, including the ever-increasing service demand for charities and non-profits. At the same time, a slow-growing economy and household financial trouble from COVID-19 is seeing a downturn in individual donations, and a possible reduction in government contributions for years to come.
“There is a major challenge in terms of the precarious funding environment that charities and non-profits operate in,” says Adam Jog, former manager of public policy and research at Imagine Canada, now at Canada Mortgage and Housing Corporation. Aside from government support, he says, helping charities and non-profits increase their earned revenue — and later, take on social finance — might be the only way to address the funding gap.
Social finance is a type of debt that uses private capital for social impact, as well as a financial return. To take on a debt, charities and non-profits first need financial stability, to ensure they can pay back their investors in a timely manner. By increasing revenue streams (such as a non-profit selling goods or services), an organization can earn more money, and take on new debts — including social finance loans.
The $755 million Social Finance Fund aims to give non-profits, charities and social purpose organizations access to social finance loans. However, for many organizations, taking on a new debt is easier said than done — so Employment and Social Development Canada (ESDC) launched the $50 million Investment Readiness Program (IRP) pilot in 2019.
Is social finance the magic bullet?
In 2017, before the IRP launched, Imagine Canada worked with ESDC to hold a series of consultations with the public sector. The findings informed ESDC’s report, ‘Inclusive Innovation’, which outlined 12 recommendations for growing social finance in Canada.
Bernadette Johnson, Imagine Canada’s director of advocacy and knowledge mobilization, says that the report focused on the fact that charities and non-profits need support with everything from social finance awareness to financial expertise “in order for the social finance markets to really take hold. You’re not going to have a (prosperous) social enterprise market without healthy charities and non-profits.”
When the Social Finance Fund was announced, Imagine Canada and other ESDC partners were “skeptical that charities and non-profits were at a stage where they could really take advantage of the fund on equal footing with social purpose businesses,” Johnson says.
However, to help charities and non-profits make the most of the fund, Imagine Canada collaborated closely with ESDC to “help shape the design and the thinking around the IRP,” Johnson says. Part of this work included developing a more accurate picture of exactly how charities and non-profits were participating in the social finance market today. “We offered to use our sector monitor platform, which is a survey panel that draws a representative sample of charitable organizations,” Johnson says.
Part of Imagine Canada’s work included publishing the report, ‘Are Charities Ready for Social Finance?’, in August 2020. The organization surveyed 1018 registered charities from across Canada, to better understand the challenges of the current market landscape, and what needs to change for charities and non-profits to become ready for the IRP — and eventually the Social Finance Fund.
The devil is in the details
Of the charities surveyed, 32 percent were small, with an annual revenue of less than $150,000. Of the medium-sized charities, 29 percent had between $150,000 and $500,000, and 19 percent between $500,000 and $1.5 million. Of the larger charities, 11 percent had between $500,000 and $1.5 million, while nine percent had annual revenues of five million dollars or more.
For report author Jog, many of the report findings confirmed his assumptions — for example, that charities with larger annual revenues were more likely to be familiar with social finance, especially if their annual revenue was five million dollars or more. Of these organizations, only 8 percent said they were “not at all familiar” with social finance, compared to 45 percent of organizations with annual revenues under $150,000 — which, at 32 percent, makes up the majority of the charities surveyed.
“This is speculative, but some of that might have to do with the fact that larger charities are more likely to hold debt,” Jog says, because they have more reliable revenue sources. “I would imagine that there’s probably a greater understanding of how debt works, that there is some practical experience with it that may make them more knowledgeable about social finance to begin with, and may lead them to say that they’d be more likely to take on social finance in the future.”
The report also found a significant relationship between an organization’s knowledge and attitude to social finance, and the types of debt that it currently holds. Charities and non-profits that hold term loans or trade credit from suppliers (a minor 6 percent and 3 percent of those surveyed, respectively) were far more likely to say they would take a repayable social finance loan.
Jog re-emphasizes that this may be due to an existing familiarity with “some sort of debt instrument.” As well as this, there are some structural similarities between social finance and term loans: both are for a set amount of money, with a specified repayment schedule.
Half of the charities surveyed held some kind of debt. While most of these charities reported not having difficulties repaying their debt (likely to be medium-to-large sized charities, earning more than $150,000 per year), 56 percent said that their organizations would be unlikely to want to try to access a social finance loan. “It’s a bit starker than that, too,” Jog says. “Something like three-fifths (of the 56 percent) said that their organization would be very unlikely (to try to access a repayable loan),” Jog says.
One reason for this might be that, when compared to other attributes that make a charity ready for social finance — such as a board that takes risks, or leveraging relationships with key stakeholders — all charities generally reported a relatively weaker capacity for measuring and evaluating finances. Of all charities surveyed, however, smaller charities were more likely to report having weaker abilities across the board, whether that was financial evaluation or communicating the impact of their core mission.
Being able to measure and evaluate finances is vital for providing a return on funders’ investments. In the report, Jog writes that the ‘relative weakness of financial abilities makes sense’, due to the precarious funding landscape that charities and non-profits currently operate in. As smaller charities are less likely to rely on earned income revenue, they are more impacted by that landscape, making it that much harder for them to prepare for a social finance loan — let alone accept one.
What it’ll take for a meaningful change
To be more inclusive of smaller charities and non-profits — especially those relying solely on grants and donations — Jog outlines one major action that both social finance investors and the government need to take. “If you want to increase access to the social finance marketplace, it would make more sense to have a diversity of instruments that match, even if in some sort of rough way, the current experience of (smaller) charities,” Jog says, whose debts, he found, are more likely to be in the form of credit cards, building leases or non-residential mortgages. He encourages investors to meet smaller charities where they’re at, “rather than trying to create a (social finance) marketplace that forces charities to move towards it.”
One way to do this, Jog says, is for the Social Finance Fund to offer loans that are set-up in a way that is more similar to the types of debts charities currently hold, such as lines of credit or building leases, which have no reporting requirements or a need for return on investment.
As well as this, Jog recommends more flexible terms of finance: the ability for the charity and investor to agree to a change in financial conditions for the loan, based on the charities’ fluctuating financial situation. In this way, a social finance loan can meet the needs of charities which are ‘uncertain about their finances, uncertain about their ability to repay a loan, and lack assets for collateral’.
For two years, partners of the IRP pilot project have been working with hundreds of charities and non-profits, building investment readiness. Looking beyond the IRP to the broader social finance ecosystem, Johnson says Imagine Canada’s report “demystified a lot of common perceptions about charities’ current participation in the social finance market, amongst social finance actors” – namely, the government’s “overestimation” of the “ability or willingness of organizations to engage in the (social finance) market.”
Johnson reiterates that this resistance is due to the barriers that charities must overcome before accepting a social finance loan, such as “valuing social impact in a language investors will find attractive, the ability to evaluate an investable program and communicate social returns, a lack of knowledge about the market or its players”, and more.
To tackle this, the report outlines two major recommendations for the Social Finance Fund: adapting the diversity of social finance loans, and building readiness for investments through increased awareness, earned income advice, and human capital for in-house financial expertise. Johnson says there are some “fundamental shifts” that came from the report, leading to “some questioning about how we frame the (social finance) market and whether charities are ‘ready’ for it’.”
For Johnson, it’s this re-evaluation that marks the report’s success, guiding the work of ESDC in running the IRP and hopefully, future impact investors looking to back charities and non-profits. “The creation of the IRP was in part an acknowledgement of these issues,” she says. “We hope the report advanced this understanding.”