As Canada’s federal government prepares to choose the members of its Social Innovation Advisory Committee, the social finance sector should think critically about the vision of the Social Finance Fund. As outlined in the 2018 federal budget, the Fund will provide $394 million to funds and intermediaries over the next five years. How can policymakers ensure these public resources make a lasting impact?
The following three principles can help assess demands for resources and evaluate whether the Social Finance Fund has been successful.
How can policymakers ensure that organizations of all sizes are able to access resources, and that being larger doesn’t make it easier to access the Fund?
First, due diligence standards and evidence requirements should be proportionate to the amount of investment an organization receives. When these standards and requirements are high for all organizations, this presents a barrier to funding for small organizations and makes it uneconomical to invest small amounts. Within the Social Finance Fund’s portfolio, policymakers should ensure the effort needed to receive $100,000 in investment should be close to one-tenth the effort to receive $1,000,000. Ensuring that funding processes “scale down” will allow organizations to receive small amounts of money and receive larger amounts as they mature.
This principle of proportionality can be seen in the 2015 YouWin program in Nigeria, one of the largest business plan competitions in history. Experts rapidly ranked 24,000 business plans, and a randomized selection of high-scoring plans chose 1,200 entrepreneurs to receive grants of $50,000 USD. Subsequent evaluations have called it one of the most effective economic development programs ever. The program is being replicated in Kenya and other countries. A due diligence process that required simple information, proportionate to the grant amounts, was key to the YouWin program’s success.
Evidence requirements for the Social Finance Fund must be proportionate to the amount of money invested in a given initiative. This would reduce the potential for missed opportunities if the funds might have been applied with more impact elsewhere. At the same time, the Social Finance Fund can require higher quality evidence of impact where larger investments merit this information.
Impact evidence can be an important public good to help public and private investors identify which strategies deserve the greatest investment. Tools like Nesta’s standards of evidence model provide a framework for the social finance ecosystem to show increasing levels of rigour in proving its impact.
How can the Social Finance Fund ensure it invests in initiatives that wouldn’t have otherwise happened?
The principle of additionality means that the Social Finance Fund must address gaps in funding for sectors and diverse approaches to have the greatest effect.
Surveys by the Business Development Bank of Canada and the Canadian Venture Capital and Private Equity Association (CVCA) show that mainstream private capital is concentrated in internet and communications technology (ICT), health, and later-stage cleantech.
Thankfully, Canadian impact investors are already directing capital to other sectors with meaningful impact. In the Responsible Investment Association’s 2018 impact investing trends report, the top three sectors that impact investors are investing in are food and agriculture, housing, and energy, where there are more existing vehicles to deploy capital.
The Social Finance Fund can develop and shape the market towards those areas where it can make the greatest impact. Indigenous economic development, sustainable forestry, and sustainable food and agriculture (including fisheries) stand out as industries where a more robust social finance market could develop given Canada’s existing markets and industrial expertise.
Equally important, the Social Finance Fund provides an opportunity to support new approaches and tools in social finance for which there isn’t yet a mature market. As a public investment, the Fund can take on the risk of newer models. Revenue loan structures, cooperative business models, evergreen fund models, and new methods of adjudicating and deploying funds are all promising areas for further market development.
How can policymakers ensure that solutions last long enough to reach their potential?
A robust social finance marketplace includes grand ambitions like a just energy transition, Indigenous economic reconciliation, and a viable labour market for all. No single private organization can realize these objectives alone. What matters is long-term, cumulative impact, not temporary relief.
Policymakers need to think carefully about the durability of enabled strategies, whether that is in non-profit or for-profit business models. Those organizations that ultimately receive investment through Social Finance Fund-backed funds need clear avenues to repay investment, whether through their ongoing market viability or earned revenues in combination with ongoing grant support.
The social finance sector needs to have a strategy for success from the outset, as articulated by the impact-first investor the Mulago Foundation. Whether success comes from replicating a solution across a whole industry or scaling an organization, social finance funds should invest in organizations that offer products and services which their clients have demonstrated clear demand for (and where feasible, a willingness to pay for), making long-term viability more likely. Otherwise the social finance sector risks enabling a temporary boom of energy and activity that eventually wanes without the long-term demand to sustain it.
Bringing it Together
The Social Finance Fund is poised to help develop Canada’s impact investing marketplace. Like all public funds, its resources can be used in competing ways. The fund must deploy its resources strategically, by building and deepening the impact investing market. With proportionality, additionality, and durability as first principles, the Social Finance Fund will have a better chance of making a lasting contribution to a vibrant social finance marketplace, which in turn will help resource a more sustainable and just economy.