Tapping the Social Side of Finance
Social finance has emerged as a distinct asset class in Canada. Specially designed investment vehicles are providing socially responsible businesses and co-operatives with financing that up to now has been inaccessible. The launch of the SVX platform promises to draw Ontario investors and social enterprises even closer. While institutional investors have been driving the market, vehicles such as solar bonds, offered by Toronto-based Solarshare, are giving retail investors a chance to get their feet wet. Joanne Reynolds of MaRS Centre for Impact Investing and Julie Leach of SolarShare spoke at a conference organized by the Smith School of Business Centre for Social Impact.
From the mists of corporate canyons, the outline of a credible social finance ecosystem in Canada is starting to appear. Yes, it may lack depth and not reach beyond large investors. But, as attendees of a Smith School of Business conference learned, social finance has firmly established itself as a distinct asset class in Canada.
“We’re starting to pull institutional money into this marketplace,” said Joanna Reynolds, associate director of MaRS Centre for Impact Investing. “Years ago, these investors said there was no way they were going to look at social finance. Now the thinking is much more, Let’s consider this, it might be part of a healthy portfolio.”
At Queen’s to speak at the Responsible Leadership Summit organized by the Centre for Social Impact, Reynolds defined impact investing as an investment in a project, business, or financial vehicle with the explicit intention to create a positive impact and generate a financial return. (Impact investing is distinct from socially responsible investing, which broadly incorporates environmental, social, and governance factors into an investment portfolio.)
Tools of the trade include grants, debt, loan guarantees, deposits, and equity investments. These investments, Reynolds said, are going into a “spectrum of corporate forms,” including socially responsible businesses, social purpose businesses, co-operatives, and enterprising nonprofits.
The Ontario Catapult Microloan Fund, for example, provides low-interest loans of $5,000 to $25,000 to social entrepreneurs. It is a partnership between the Centre for Social Innovation, Province of Ontario, Alterna Savings, Microsoft Canada, TD Bank Group, KPMG, and Social Capital Partners.
“This is very different from what’s going on in traditional markets,” said Reynolds. “You can’t get this kind of financing from a bank these days.”
“This is very different from what’s going on in traditional markets. You can’t get this kind of financing from a bank these days”
Reynolds is particularly excited about the recent launch of the SVX, an investment platform that brings together impact ventures, funds, and accredited Ontario investors. For Ontario-based non-profits, co-operatives, and businesses, the SVX offers advice and connections to help them raise up to $10 million for their social impact or environmental ventures (they pay an annual flat fee based on their 12-month trailing revenues). And for investors, the SVX provides pre-screened investment opportunities that speeds up their due diligence process. Founding partners are MaRS, TMX Group, Torys LLP, J.W. McConnell Family Foundation, Rockefeller Foundation, and the Ontario provincial government.
This platform is necessary, Reynolds said, to help social finance scale up. “There is a significant lack of diversity and depth,” she said at the Centre for Social Impact conference. “Within each asset class, there are very few different types of products. And certain asset classes are limited to specific sectors.”
There are also few opportunities for retail investors to participate in social finance. That’s partly because consumer demand has been hard to measure but there are also regulatory restrictions and a lack of knowledge among financial advisors. “Go to financial advisor and ask for an impact investment product,” Reynolds said. “They’ll have nothing for you.”
One exception in the finance retail space is SolarShare, a Toronto-based renewable energy co-op that is marketing “solar bonds” to small investors in Ontario. These bonds have a $1,000 minimum and promise a five percent annual return. The funds directly finance solar projects across Ontario that are already built and producing stable revenue, said Julie Leach, Solarshare’s community investment and marketing manager.
“We’re trying to win people over through their wallets,” said Leach, who joined Reynolds on the conference panel. “We go to schools, churches, basements, community fairs, conferences. . . We feel this is a way to provide legitimacy, to build a case for renewable energy, and to get more of the public on board.”
The policy and regulatory realms have been slower to pick up on the trend. Reynolds would like to see government update the Income Tax Act and related guidance to enable impact investment and social entrepreneurship in the charitable and non-profit sector. Doing so, she said, would provide charities and nonprofit organizations with increased flexibility to generate revenue in order to advance their objectives, as recommended in the 2014 MaRS report, Mobilizing Private Capital for Public Good: Priorities for Canada.
— Alan Morantz