In 2015, the Government of Canada announced its plan to create a Social Innovation and Social Finance (SI/SF) Strategy. Two years later, a 17-person steering group was appointed to lead consultations with stakeholders and co-create a set of recommendations, released in August of last year. The subsequent 2018 federal budget earmarked $755 million over ten years for a repayable Social Finance Fund that will give charitable, non-profit and social purpose organizations access to new financing. The government estimates that the fund “could generate up to $2 billion in economic activity, and help create as many as 100,000 jobs over the next decade.”
This past June, the federal government announced the first key collaborators to implement an Investment Readiness Program (IRP), which will spend $50 million in non-repayable grants over two years to prepare social purpose organizations for private investment and to help them access the new Social Finance Fund when it launches in 2020.
We spoke with Stephen Huddart, president and CEO of the McConnell Foundation and a member of the SI/SF steering group, about the Investment Readiness Program and why it’s a necessary first step. This interview has been edited and condensed.
Research Money: What is the Investment Readiness Program and how does it work?
Stephen Huddart: The overarching purpose of the IRP is to make capital available for the social sector. There’s an effort here to create a marketplace for social finance — or what we would call “solutions finance” — with civil society in the driver’s seat. We had the example of Big Society Capital in the UK, and to a certain extent, the Canadian model is based on that. When Big Society launched with 600 million pounds, not much happened until they created the Access Foundation as an adjunct structure which had capital to deploy in the form of grants, which were not repayable, but supported capacity-building and the development of intermediaries for some smaller seed investments to take place. The Impact Readiness Program has a similar purpose.
R$: So it’s like an on-boarding ramp?
SH: Yes. We need to develop intermediaries capable of taking capital and deploying it effectively into regions of the country, such as the North, and on key challenges like climate change or chronic disease prevention. The vision is to support and strengthen a widespread social finance ecosystem. There are some areas — Indigenous-owned enterprises, for example — where capacity-building needs to happen in different ways.
At another level, it’s important that we instil in civil society and its partners an understanding of what social innovation is and what it can be. What’s social R&D? How do you do that? How do you come up with novel solutions to complex challenges? How do you work with university researchers and community listening processes? There’s a set of tools and approaches to this work that needs to be strengthened for the fund to achieve its real potential.
R$: What’s at stake? What would we lose without an Investment Readiness Stream?
SH: There are a lot of civil society organizations that are not accessing existing capital that could effect change. They receive grants, raise capital for buildings and so on through existing sources of funding; however investments in capacity-building for the social purpose enterprise sector are less available. Specific approaches have been developed that aren’t widely used. For example, some projects can benefit from capital structures that integrate grant funding to de-risk a solution through R&D, so that investment can flow in and play a role in scaling.
A lot of people would just say, “Borrow money and have to repay it back? We’re not in that business. We’re a charity. Just give us some more grants and donations and we’ll keep doing what we do.” These new funding models introduce a new dimension to social purpose organizations, where capital can be borrowed, invested and repaid in order to achieve solutions beyond what grants alone can do.
The IRP also enables Canada to create a marketplace where pension funds, financial institutions and other actors can enter into problem-solving with community partners at the table. That hasn’t happened much in the past. There are lots of places in the charitable sector where investing in better outcomes could affect a lot of people positively, but outcomes funding structures aren’t in place, and therefore capital isn’t accessed efficiently.
R$: How important is the distinction between for-profit and not-for-profit? It seems to make more intuitive sense for a social enterprise or a company with a social mission to bring on investment than for an outright charity.
SH: We’re in an era when social enterprises are proliferating. A lot of young people are agnostic about whether they are working with a charity or a social enterprise. Their primary motivation is to make a difference while earning a living. This is part of an evolving picture where corporations are integrating social purpose into their activities.
In a sense, the charitable sector has succeeded in making us all more concerned about how to effect real change, whether that’s reducing poverty or addressing climate change or improving the economic situation of Indigenous peoples. Charities have long solicited our donations to work on these issues.
But now these challenges are important enough and big enough that we need more than grants and donations to solve them. We think that there’s a market for big dollars to move into this space, and we need cross-sector collaboration to ensure that this happens faster and more efficiently.
The Social Finance Fund is a significant move on the part of the federal government to leverage more capital into that space. They’ve committed $775 million over 10 years, with the condition that those funds be leveraged twice. So for every federal dollar in the Fund, two more have to be raised. This is happening at a time when the financial sector is recognizing that it has in many cases mis-priced the risks that we’re facing from things like climate change, the social unrest caused by poverty and inequality and so on. These are all issues that, if not addressed, reduce the value of public and private investments, increase the cost of insurance and so on.
R$: At the end of the day, these are repayable investments, so the bottom line is that these investments need to succeed on a financial level.
SH: Sure. But keep in mind that we’re talking about investments that can be situated in proximity to grants where none of the capital is repayable, and where the money comes in to create the conditions for a successful investment. We can also talk about things like zero interest loans or loan guarantees. Patient capital or concessionary investments can be put into place so that a more senior level of investor can come in and be well assured that their capital will be returned. And these returns are not correlated with stock markets.
There’s a misconception that investing in things like affordable housing is risky because it involves poor people. But that’s not the case. The reality is that people who have access to credit or repayable capital for the first time are very careful with it. They respect it, and work hard to meet their commitments. We’re now talking about entire communities taking on these investments as well as collaboratives that include communities and their partners. Overall these are safe and important investments, in the health of our communities, with dividends that extend well beyond financial returns.