“Well, I’m very flattered but I just have one question: what’s social finance?”
That was Tim Jackson’s response 10 years ago when he was asked to join the Canadian Task Force on Social Finance. He had been practicing ‘social finance’ by funding social impact businesses in his venture capital job in Waterloo, Ontario, but had not used the label.
Jackson became one of 10 experts to join the task force. A global movement had been growing to find ways of utilizing private capital for public good, from social entrepreneurship to impact investing. Ottawa wanted to understand what Canada should do to support it.
The experts were tasked with mapping out which innovations were happening at home and abroad, informing a list of recommendations. In December 2010, they published their landmark report: ‘Mobilizing Private Capital for Public Good’.
From government and foundations through to businesses and investors, the task force suggested actions for each domain of the ecosystem to push the agenda forward. “We tried to pick out key interventions or key steps for each of those levers that would be catalytic,” says Ilse Treurnicht, former CEO of MaRS Discovery District who chaired the task force.
The results have been mixed. It suggested a fund be created by the government, whose $755-million Social Finance Fund is soon to be launched, and recommended experimentation with social impact bonds – which has happened in Canada. But action on the other recommendations have moved forward much more slowly, like mobilizing foundations and pension funds behind impact investing.
A decade later, she says social finance in Canada is now at a “tipping point,” at just the time when it faces incredible national challenges. “COVID[-19] has been a stark reminder for all sectors that our systems are not serving and not protecting vulnerable Canadians,” Treurnicht says.
So how much progress has Canada’s social finance ecosystem made compared to the task force’s recommendations? How does the country now compare to its international counterparts? And most importantly, what needs to happen in the next 10 years?
Putting social finance on the map
One of the most significant changes since the task force began was awareness of social finance, says Jackson. “When you have financial intermediaries, professional service firms, financial institutions all talking about it, that’s a big difference to where it was 10 years ago.”
This change did not happen overnight. He says they didn’t quite realize at the time how much effort would be required to make businesses and other actors understand and support social finance, which is finally becoming better known in Canada.
“People are now curious about it,” he says. “If you go back ten years ago, we were pushing this,” including putting in the hard yards to get corporate boards and government leaders onside.
In 2010, he points out, “we really were nowhere on the world stage” of social finance, compared to countries like the United Kingdom and the United States.
The task force, however, gave the team a seat at the international table. “That then became a place we could learn,” says Jackson, who became Canada’s representative in G7/8 meetings on social finance, including at a meeting in Toronto in 2015.
“Really getting to learn from world leaders, that’s what I think was so important,” he says. This included countries like the UK which have a much more developed social finance ecosystem, such as the importance of boosting the investment readiness of organizations, as well as other nations like Israel who were in a similar building stage to Canada.
Despite all this learning, as well as pressure on politicians from international attention, Jackson says the reality of political cycles meant that it has been a very long journey to reach the government’s Social Finance Fund.
“Any time there was a change in government, we suddenly had to start back from square one,” he says. They spent months or even years working on some social finance projects which went nowhere because of a change in government, or just a change in minister.
“We probably underestimated the political side of adopting new policies and new frameworks, and we also may have underestimated the appetite [in government] for risk,” he says.
Some sectors have moved faster than others
Outside of the government, the social finance ecosystem has been steadily growing, including the creation of new social finance intermediaries to help investors such as foundations invest for impact, and start-up hubs for social entrepreneurs.
However, Treurnicht says some sectors have moved faster on social finance than others. “Although the market in Canada has continued to grow and strengthen obviously, it has perhaps not evolved with as much cohesion as we anticipated,” she says.
For example, Treurnicht says the taskforce had planned to focus on the government and philanthropic foundations as two major levers in encouraging social finance across the economy. While they eventually gained traction with the government, Treurnicht says foundations have not lived up to their own expectations.
The task force (with their endorsement) recommended that foundations should invest 10 percent of their capital in mission-related investments by 2020, but she estimates it is more like 1 to 3 percent in aggregate.
Although several individual foundations have been shifting their capital to impact investments in recent years, including family offices looking to achieve a greater legacy with their cash, this is yet to translate into a broader movement.
“In 2010 I felt very strongly that the foundations were really leading the charge in Canada,” Treurnicht says. “There’s not as much energy today.”
Meanwhile, thanks to global forces and the strength of the financial sector, she says Canada has been a leading voice in international discussions on responsible investing – and particularly the movement to encourage investors to invest using ESG criteria (Environmental, Social and Governance).
However, she says this is more of a “negative screen” to ensure investments are not damaging, instead of seeking out an active positive impact through investments.
“Corporations in Canada have been slower to embrace the impact opportunity,” she says. “We haven’t seen that breakout corporate leadership that we’ve seen in other countries,” giving the example of Salesforce in the United States. The global CRM company has launched two multi-million-dollar impact funds.
Perhaps the biggest success of the past decade has been the continued growth in the social entrepreneurship movement in Canada, she says. “Social entrepreneurship is flourishing in Canada, and I think the pipeline of investment-ready social enterprises continues to mature.”
According to a global survey in 2019 of the richest 45 economies by the Thomson Reuters Foundation, Canada was named the best country to be a social entrepreneur – thanks to aspects like government support and access to investment.
Wayne Chiu, the founder and CEO of Trico Homes in Calgary, Alberta, says this change is palpable when he talks with the next generation of business leaders. “If you go into a university you can’t avoid people talking about social innovation: how am I going to create a business impacting civil society?” he says.
An active philanthropist and formerly an advisor to the task force, Chiu says the government should go further in helping support this growing sector. Most importantly, he is frustrated that his foundation cannot fund social enterprises. “The government [has] so many rules regarding charity, it’s forbidding us to invest directly.”
“We should invest in risk,” Chiu says. “When I look at charity law, it’s more relaxed in the UK or even the US.”
Time to ‘roll out the road’
As Canada begins the long recovery from COVID-19, international social finance expert Cliff Prior says it is time to “roll out the road” of social finance to meet the tremendous challenges ahead, such as fixing education systems and reskilling workers.
“This is an inflection point in a lot of countries now,” says Prior, who is CEO of the Global Steering Group for Impact Investing and former CEO of Big Society Capital, the UK’s social finance fund.
Now that much of the groundwork has been done – from building and experimenting with social finance tools to persuading key stakeholders – he says the government must launch the Social Finance Fund as soon as possible so that it is ready when the depth of the national recovery becomes apparent next year.
Each country has its own priorities, cultures and strengths in terms of social finance which means there is no “cookie-cutter template,” Prior says, pointing out that Canada’s strong financial services industry and ecosystem of credit unions are renowned internationally.
His biggest tip for Canada, though, is making sure that the government does not overload its Social Finance Fund with rules. “As far as is possible, take away all the strictures that are put on it,” he says. “Give it an overall mission and let it be agile in the market.”
His biggest tip for Canada, though, is making sure that the government does not overload its Social Finance Fund with rules.
Prior explains that this has been a key benefit for the UK model, where Big Society Capital has been able to respond quickly to social priorities, catalyzing private markets in key areas like social housing. Social impact investing in the UK grew from £830 million (CAD$1.4 billion) in 2011 to £5.1 billion (CAD$8.7 billion) in 2019, with affordable housing funds accounting for 42 percent of that funding.
For members of the task force, success in the next 10 years would see investment into social issues pour in from institutional investors.
“The large, large capital is tied up in pension funds,” says Tim Jackson, which means that they will drive the market and therefore other financial flows. “Ultimately, our position in the task force was: that’s how we will know we’re successful.”
Although responsible investing is now on the agenda at the Canada Pension Plan and elsewhere, Jackson says more needs to be done to persuade them to choose impact investing – investments that actively seek a specific social or environmental impact – over traditional investments.
“When a few of these larger institutions start to step out, you’ll very quickly see others follow,” says Treurnicht.
And with all of the ecosystem growth of the past 10 years, bolstered by the sudden necessity for cross-sector collaboration during COVID-19, Treurnicht believes Canada’s “tipping point” could be at the start of an exponential curve.
Despite “enormous energy and momentum” built in recent years and across sectors, she says it’s time to “stop talking about it” and start shifting more dollars towards impact. “It will take some courage,” she says, but “I think the elements are all there.”