THE STANDING SENATE COMMITTEE ON SOCIAL AFFAIRS, SCIENCE AND TECHNOLOGY
OTTAWA, Wednesday, February 14, 2018
The Standing Senate Committee on Social Affairs, Science and Technology met this day at 4:15 p.m. to examine issues pertaining to social affairs, science and technology in general, and, in particular, to study the creation of a social finance fund.
Senator Art Eggleton (Chair) in the chair.
The Chair: Welcome to the Standing Senate Committee on Social Affairs, Science and Technology.
I’m Art Eggleton, a senator from Toronto and the chair of this committee. I would like the members of the committee to introduce themselves.
Senator Petitclerc: Senator Chantal Petitclerc from Quebec.
Senator Omidvar: Ratna Omidvar from Ontario.
Senator Frum: Linda Frum, Ontario.
Senator Seidman: Judith Seidman, Quebec.
The Chair: Today we’re starting a two-meeting study on the creation of a social finance fund, and we have two panels this afternoon. There are still members coming from the other side, from the Senate, who will come in and fill some of these other chairs, but we will get under way because we have a tight time frame to deal with these two panels.
For the first panel, which will go until 5:15 p.m., approximately one hour, I welcome James Tansey, who is on our video conference system. He is from the Centre for Social Innovation and Impact Investing out in Vancouver. As they say, here in our studio we have Stephen Huddart, President and Chief Executive Officer of the McConnell Foundation, and Marie Bouchard, full professor, École des sciences de la gestion, Université du Québec à Montréal.
So let me start with our guest on video, Mr. James Tansey, if you can give us seven to ten minutes of opening comments.
James Tansey, Executive Director, Centre for Social Innovation and Impact Investing: Thank you for the introduction and happy Valentine’s Day to everyone there. I will try to keep my opening remarks short. I have shared a copy of these remarks with you; as well, we will be circulating other supporting materials.
As I’m sure you know, a number of us have been involved in a process initiated by the federal government to look at social innovation and social finance mechanisms in Canada. As part of that study, we’ve been looking at international best practice but also the strength of existing practice in Canada.
I think it’s fair to say — and I think this is captured very well by this quote by William Gibson: “The future is already here -- it’s just not very evenly distributed.” That reflects the fact that across the country, there are existing examples at various different scales of best practice with respect to social finance and social innovation, particularly some of these funding intermediaries providing new ways of providing capital to Canadian social enterprises and social ventures.
It’s important to recognize that Canada is almost unique among the OECD countries in terms of both the rate of its growth -- Canada is one of the few OECD countries to have a significant population growth driven by immigration; as such, Canada is grappling with some of the contradictions that have resulted from these successes in terms of population growth and economic growth. Some of those include things like rapid urban development, where fundamentally what we’re seeing is that the supply of housing, for a range of reasons, isn’t keeping up with demand. That’s resulting in real housing insecurity and housing affordability issues across the country. We think some of these innovative fund mechanisms can help with that.
We’re also grappling with our failures, such as the historic injustices in our relationships with the indigenous people of Canada.
We’re facing the same problem many other countries are facing with the development of an advanced public health care system that devotes 97 per cent of its resources to treating the symptoms of diseases, and hopefully curing those diseases, instead of preventing diseases. What we’ve seen from fund mechanisms in social innovation is that one dollar spent on prevention can save between $6 and $20 on treatment.
Across the country in the years since we started the centre we have seen many examples of social innovations that test new solutions to these kinds of social problems. These include models for investing in social housing, funds that receive investment from retail investors to support social enterprises and affordable housing, and mechanisms integrated increasingly into government procurement that create opportunities for social enterprises and employment for people who have been excluded from the workforce and miss out on opportunities to participate and who also become a significant burden from a taxpayer’s perspective.
So much of our work in the last six months has been looking at models in Canada that are working but are just not evenly distributed.
What I want to address in my opening comments is a tendency to focus on a fund as a pool of capital without recognizing that the funds that have worked both in social finance funds but also in private sector funds -- the pool of capital itself -- the money, sits in a broader system. It’s not enough to simply say, “Let’s throw more money at the problems.” I think there are at least five reasons we should highlight why we need to see the idea of the fund not just as a pool of capital but as part of the system.
The first issue is it’s very rarely the case that the social or environmental problem of concern is caused by a lack of capital. We spend billions of dollars as a country on some of the most intractable problems, from health care to employment to social housing. We have allocated $40 billion over 10 years as a federal government to the issue of affordability. The issue isn’t the amount of money; it’s that we need to find new ways of spending and investing that capital to produce more effective outcomes. In this sense, innovation is the scarcest resource, not necessarily the capital. If we could reallocate it, we could use it more effectively.
Second, in the private sector, funds don’t just increase the supply of capital to investors in a passive sense. They focus on using the money in different ways. Investment funds have a much higher tolerance for experimentation in constructive failure than the public sector tolerates. You have to remember that more than 80 per cent of new ventures fail within two years. Public sector experimentation doesn’t tolerate anything near that level of failure and of learning. This cycle generates knowledge and experience that feeds into future innovations.
In many cases when investors are looking at new areas, they aren’t focused purely on the innovation itself; they’re focusing on the quality of the management team — the track record — at least as much as the specific innovation.
The third issue is that once fund managers and investors start to see successes, these experiments have to pivot and turn into programs that are designed for growth that improve performance and quality. There’s a critical transition in this phase from experimentation and learning to where innovation is locked in, grown and expanded.
What we’ve seen a great deal of in Canada is lots of experimentation in the social innovation space, and now we’re looking at opportunities to take that to scale. Some of the fund models we’ve been talking about, such as wholesale funds, provide the capital to do that.
Fourth, successful funds can attract growth capital to take early-stage innovations to scale. When governments are emerging from an era of austerity and are under constant pressure to manage expenditures, any social innovations that can attract support from the $50 billion of philanthropic capital in Canada or the $1.5 trillion of assets under management in Canada may have a greater chance of going to scale. Thirty-eight per cent of that $1.5 trillion is already managed under some sort of environmental, social and governance screen.
In this role, when we think about a fund, the role of government and public funding within that is to enable more leverage and co-investment.
Finally, social finance and innovation, by definition — and this is probably the most important issue — involves working across cultures of the public sector, social sector and private sector. These barriers are significant. Each sector regards the others with a level of suspicion, and some of these cultural differences can be some of the biggest barriers we need to overcome.
In this context, governments at all levels in this country need to continue to take a leadership role in convening cross-sectoral coalitions of the kind we’re involved in now and underwrite a new culture of public sector innovation.
All of this speaks to the need to see social finance as part of an overall ecosystem that builds a constituency, builds leadership, embraces innovation, builds the capacity in the social and public sector organizations to experiment, learns from failures and ensures that successful interventions can be translated and scaled into programs.
If this work succeeds, government as a stakeholder and investor can create the kind of policy environment where public commitment spending is leveraged with private and philanthropic capital. I believe this ecosystem can drive innovation to solve some of the most pressing challenges we’re facing.
The Chair: Thank you very much. I note this quote from William Gibson, as one who speaks frequently on poverty and inequality issues. I like it: “The future is already here -- it's just not very evenly distributed.”
Next we will have Ms. Bouchard.
Marie J. Bouchard, full professor, École des sciences de la gestion, Université du Québec à Montréal, as an individual: Thank you for this opportunity to exchange our views with you today on this subject.
I was unable to have the text of my speech ready in time to give to the interpreters, and therefore I will give my presentation in English.
My perspective is that of an academic specialized in social economy but also as a practitioner in the area of social finance. For more than 15 years, I have been sitting on a weekly basis on the advisory boards of two social economy funds in Quebec. I have examined hundreds of social enterprise business plans and followed their viability over years. I have studied the impacts and performance of a social fund in Quebec on a longitudinal scale.
I want to share with you some of the conclusions from my research and observations.
The first is that social issues can, at least in part, benefit from social finance. I will explain the relationship between social enterprises, social innovation and social finance.
The second is that social finance can be truly innovative. I will illustrate this by referring to the case of the solidarity finance sector in Quebec. My conclusion is that a social finance fund can be useful. Governments can be instrumental in supporting the varied social innovation ecosystems that are emerging in different parts of the country and in helping create new ones where they are needed.
There are various definitions of social enterprises, but they have three features: social goals, profit constraints and democratic governance. Social enterprises are not new, but they are more and more considered as one of the key players in the matter of finding innovative ways of addressing social and environmental issues. However, their three constitutive features often limit their capacity to easily access the financial means that are required to innovate, grow and diffuse their new solutions at a scale that will make them meaningful.
Indeed, conventional financial institutions do not know how to estimate the risk level of such projects. Assessing the much-needed long-term investment is difficult, especially in the start-up and growth stages, or when they require cash flow for new projects.
Social finance can help reduce this gap. As in many cases, social investors are ready to trade off part of the financial return for a more social return. In practice, however, social finance institutions find it difficult to face a quadruple challenge. First, investing small amounts in what are perceived as high-risk projects that offer low financial return in the absence of an investment pipeline that enables scaling up impacts.
There is therefore a need for a support environment in which social innovators, social finance institutions and government can work together. Such ecosystems are emerging in many parts of Canada. I will illustrate how such ecosystems work by referring to the case of the responsible and solidarity-based finance ecosystem in Quebec.
This network is at the junction of demand and supply of social finance services. The offer side is composed of a variety of financial institutions that act in complementarity according to the varied needs, size and development stages of the social enterprise. On the demand side, local social entrepreneurs identify needs and put forward initiatives for their communities. They generally benefit from the help of technical resources to support them from incubation to cruising speed. Together, these Quebec social finance institutions developed an approach for analyzing social economy enterprises. This approach formalizes tacit knowledge generated by years of experience with social entrepreneurs. The guide is used as a reference even outside of Quebec, as it has been translated into six languages, including Korean, Japanese, Portuguese and Spanish.
The Quebec network of solidarity funds now offers financing of various sizes, from $3,000 to $100,000 and even more. They are endowed of a mix of private, public and charitable contributions. They accompany social entrepreneurs from the very ideation of their project to growth stages.
For example, Réseau d’investissement social du Québec, RISQ, is exclusively dedicated to social economy, non-profit and co-operative enterprises. Its original endowment was provided in equal parts by donations from private banks and enterprises and by the Quebec government. RISQ has invested more than $27 million in over 1,000 projects initiated by 800 social enterprises. For each dollar invested by RISQ, up to an additional $26 were invested by social finance partners, an average of $13 per $1 invested by RISQ over 20 years.
The experience of RISQ was helpful in creating in 2006 the Fiducie du Chantier de l’économie sociale, of which the endowment is composed of private and institutional investments and of a contribution from the Government of Canada. The original endowment of $56 million has grown today to almost $100 million. So far the Fiducie has invested close to $50 million over 190 projects, worth a total of $337 million.
One of the keys to this model resides in partnership and decentralized multi-stakeholder governance. Solidarity finance institutions are also grouped in a network called CAP Finance, a structure emerging from a previous community-university research alliance. A working group on solidarity finance is also active inside the liaison and knowledge transfer organization Territoires innovants en économie sociale et solidaire. Knowledge sharing and transfer proves to be inseparable from social innovation and social finance.
To conclude, social enterprises and social finance can make a big difference in the future of our societies. This deserves the full attention of government as well as of other important stakeholders, starting with social entrepreneurs themselves. Government can support social finance by de-risking, taking first losses, providing loss guarantees and injecting funds to raise the potential of existing funds and help create new ones. Social investors and social innovators can exchange knowledge about how it works, focusing on how communities express their needs and learning how they envisage creative solutions.
Initiatives are burgeoning everywhere in regions of Canada as well as in other countries. It is time to learn from each other. There are many ways of designing social finance, and we have to develop our own way of doing it.
Social innovation calls for innovative finance. I will end by quoting Albert Einstein. “We can’t solve problems by using the same kind of thinking we used when we created them.”
Thank you for your attention.
The Chair: Another good quote.
Mr. Huddart, please.
Stephen Huddart, President and Chief Executive Officer, The McConnell Foundation: Good afternoon, senators. It is such a pleasure to be here. Thank you for your interest. Thank you, Senator Eggleton and Senator Omidvar, for your leadership in bringing us together.
My colleagues on the ESDC Social Innovation and Social Finance Co-Creation Steering Group have given you a global overview and a closer look at the Quebec social economy and some aspects of that, including the solidarity finance instruments.
I’m going to begin with a story in some detail that illustrates what a social finance fund can do. I will then conclude with the urgent opportunity for philanthropy, the public sector and private capital to invest in promising solutions to a host of social and environmental challenges.
My story is about the Huron-Wendat First Nation outside Quebec City and their solution to the deplorable housing situation that exists on many First Nations reserves. Without title to their lands, indigenous people living on reserves have no access to mortgage funds with which to build decent homes that they own. They depend on federal transfers to band councils. When you have a limited budget with which to build as many homes as possible, the results are often substandard.
Band councils control who gets to live in those houses and for how long, and so with no security of tenancy people can be evicted at any time, and there is no incentive to look after the place where you are living.
The Huron-Wendat have developed a solution to this problem. They began by holding a referendum by which the community agreed to put their federal housing money into a community loan fund. That fund has made over 400 housing loans to band members, all at 7 per cent interest with a less than 2 per cent default rate. They operate a school on the reserve that trains indigenous youth from the community and farther afield to become carpenters, plumbers and electricians. They have a thriving little business community with several social enterprises, some of them actually getting quite big. One of Canada’s biggest manufacturers of snowshoes is in this community.
However, the Huron-Wendat housing loan fund has no access to market capital. Its loan fund is entirely committed, and repayments are insufficient to meet the increasing demand for new loans. So a Wendake-based First Nations owned and managed non-profit called ABSCAN was created to fill that void. It raises First Nations savings through bonds in conformity with financial market authorities. Since 2005, they have raised and invested over $35 million in First Nations housing, including in the Wendake Housing Fund, with no losses or arrears to date.
They approached the McConnell Foundation to grow this model and replicate its success to other First Nations in Quebec first and eventually across Canada. We began by making two $25,000 grants to study and document this approach, and INAC matched those grants. With that funding, they were able to put together the templates, the plans, the steps you have to take to move into this direction.
Two years ago we collectively raised $1.4 million to do four demonstration projects on four reserves. That $1.4 million looked like this: The foundation contributed $150,000 in further grant funding for capacity building in those four communities, and then a $350,000 zero-interest loan with which to seed housing loans. That was matched by INAC, and the Huron put in another $400,000 themselves from their own resources.
Last summer, construction began on several individual homes and one multi-unit residence. This spring, all of those projects will be completed. There are now 20 more communities who want to introduce this model. The project needs $10 million to keep moving forward. That’s too much for a foundation like McConnell, and it’s too little for an institutional investor. To put it bluntly, what bank wants to make unsecured loans for housing on First Nations reserves?
A social finance wholesale fund could accelerate this process and take it to scale using grant funds to seed new ideas and approaches, blended finance, low-interest loans, loan guarantees and so on, to test ideas and bring them up to another level. And then, finally, a combination of patient capital, with first loss provisions, loan guarantees and so on to enable investment at a substantial scale.
By the government’s own estimate, the housing deficit on First Nations reserves across Canada will reach 80,000 units by the end of the decade. The Huron-Wendat model may not be a solution for all of them, but even if it was for only 10 per cent of those houses that need to be built, we are talking about a $2 billion opportunity that is not being addressed by conventional capital markets.
This is but one example of where we need to integrate philanthropic, public and private sector resources, including capital but also other supports, to address pressing problems. The granting economy cannot take care of these things on its own. Governments cannot easily take the kinds of risks necessary to foster innovation, but they can create incentives, help to scale promising solutions, and reduce regulatory barriers that inhibit innovation.
The private sector has talent and financial resources to contribute, too, and as Larry Fink of BlackRock observed recently, they have an underaddressed obligation to the public good.
I recently spoke to the CEO of a large pension fund who was on his way to Davos. “What do we do,” he asked, “in the face of mounting social and environmental challenges on one hand, and on the other, a stock market that continues to generate record returns for investors?” That was three weeks ago, not two, so things have changed a little. Overall, his question is important, which is, where is the incentive to do things differently?
There are two answers to this question. The first is that the stock market is not the economy. If we want an equitable, sustainable and inclusive economy, we have to invest in it. We all have roles to play.
The second part of the answer is to see our challenges as opportunities for inclusive growth. This applies to everything from the transition to a low-carbon economy, to indigenous economic reconciliation, to homelessness and the integration of new immigrants.
A social finance fund aligned with other innovations and social infrastructure can serve to catalyze and accelerate this transition.
This is our urgent opportunity, and building on examples like the Chantier de l’économie sociale, the Quebec model, social finance funds in other countries, we have a unique opportunity to improve lives, to generate world-leading social innovations and advance our commitment and contribution to attaining the United Nations’ sustainable development goals. Thank you.
Senator Omidvar: Thank you to you and to the steering committee for responding so quickly to this request for a study. We do have an opportunity because of the report that ESDC will put out sometime in May or June. This is most timely.
I want to describe the social finance fund, as I understand it. You know those books —Gardening for Dummies — I’m going to do a social finance fund for dummies. Can all of you confirm if I got it right? Because I’ve been steeped in this. I want to use this opportunity to deconstruct the idea a little.
It starts off with an entrepreneur, or a charity in the case you mentioned, Steven, the Huron-Wendat First Nation. It starts off with someone dedicating themselves to solving a wicked problem. They solve it, and there is evidence to support that. The challenge is they can’t actually access the capital required to make it truly work across the country or even in a region.
On the other hand, you have investors, some of them are private foundations, some of them are institutional investors like the Royal Bank, some of them could be wealthy individuals dealing with a fund manager. They can’t tap into this market either because they have no access to it. This is where you come to your conclusion, all of you, I think, which is that we need a new ecosystem, a new marketplace that brings together proven ideas -- they could be small; there is usually a fiery activist behind them -- and the money. Together there will be a fund of funds. It’s not just housing. It could be literacy. It could be mental health. It could be diabetes. It’s not just loans; it’s loan guarantees, first-loss provisions, et cetera, so all of these come together and we create a new marketplace. I think of it as a new kind of stock exchange in a way. Did I get that right?
Mr. Huddart: Yes. I think it’s very important that we understand the dynamic of what this marketplace does — and I would just emphasize that from the perspective of a philanthropic foundation, we have money that we have to give away by law. We can afford to make mistakes, fail often. Fail and learn quickly is our motto. We can create the conditions for others to come in around proven or promising approaches. That creates the kind of pipeline and stacking of capital into promising solutions that you refer to, senator.
The other part is that in the social economy space, we have got a set of relationships, companies, procurement policies in government, ecosystems around that, that we can grow with further investment. Yes, I think you have got it.
Ms. Bouchard: It’s not exactly like a market or a stock exchange in that entrepreneurs need an understanding of what a social business plan is. It’s not a simple business plan, and they need an accompaniment, and they need to be understood by social finance of what they are doing. It looks like a market, but it doesn’t really work like a market.
Mr. Tansey: I think there are two distinct funds that the senator described. One, if we think of the social finance funds in the U.K., they are typically not focused on start-up organizations. Most of their investments are going to help mature social enterprises and charities to expand their programs and to invest in property and real estate or free up equity from real estate or provide subsidies to affordable housing.
Those tend to be the more mature organizations. When we talk about social finance funds, it tends to be at that end of the spectrum.
There is a seed fund model, which we have been exploring in Canada and at the university, where it is much more explicitly a blend of philanthropic capital and donations where the assumption is that the majority won’t succeed and won’t grow, but the combination of charitable donations and tax credits can mean that the investor gets 70 per cent of their costs back.
So two different forms of fund, and we tend to think about them typically going to entrepreneurs and start-ups, but there are really two different kinds of design.
Senator Omidvar: That helps quite a bit. I hear from you that there is a need for capacity building, both to help the investor understand how to risk create or how to invest in these streams of funds and investing in start-ups and tolerating failure. That was a useful clarification.
The Chair: You have mentioned fund of funds. Of course, we’re also here to try to determine what the government role in this needs to be. Would the government be running this fund of funds in collaboration with private and charitable sectors? Is it the kind of thing, for example, that you might have a subsidiary of the Business Development Bank do? I’m trying to get it into some sort of solid form so that we can better understand how this might finance fund might run. Who wants to tackle that?
Mr. Huddart: Sure. We are actually discussing this at the committee currently. I believe our recommendations will be that this fund of funds, this facility, should be located outside of government. It should have government presence at the table, but in order to be reflective of the diversity of capacities and interests, it should be at arm's length from government itself. And in part, I think that protects government a little bit, to start testing, to doing the developmental work and building the use cases and so on.
And I do think there is a marketplace here; I disagree respectfully with my colleague.
We are seeing globally that capital is flowing into this space from the likes of Goldman Sachs, the banking sector. So I think we want to be responsive to some of those dynamics while protecting community interests and local interests in seeing their issues move forward.
Senator Petitclerc: I will start by admitting that I didn’t know very much about this area. Of course, we did our homework, but I find it to be rather complex. Therefore, I will start with a simple question. I will try to gain a good understanding of this area, which seems to be complex and have many challenges, but is also fascinating. I was speaking a little earlier with Senator Omidvar and telling her that we could go so far as to say that this is groundbreaking.
One of the things that interests me is that there are investors. I am trying to get a sense of why people would invest in this area. It is not philanthropy. Or is it, but just not in the traditional sense? Could you explain that for me? Are they doing this because they have a sense of fairness or are making a moral choice? How stable do we hope this will be? Because we are hearing that investors will not earn the usual returns, if I can put it that way. This is somewhat confusing for me.
Ms. Bouchard: If I may, these funds do not have negative returns. These funds can be sustained for a long time. With respect to risk, 89 per cent of loans are repaid in full. The interest earned on these loans more than covers the losses. Although this may not be exactly comparable to traditional financing and how it works, we can easily see that most of the funds that invest in newer enterprises have one loss at maturity on most loans. Certain loans are profitable and, therefore, the funds overall are profitable. This is a market that is structured in a very different way.
What are the lenders’ motives? We should ask them. There are lenders who definitely want stable investments without expecting a huge, excessive profit, but who want to maintain capital in the long term over 20 to 25 years. Loans to social enterprises are often long-term loans. It is patient capital with repayments that can be made after a payment-free period, which gives the enterprise time to get off the ground. Once past the start-up phase, the enterprise is capable of repaying the loan in keeping with its business plan. These funds do not take losses.
Mr. Huddart: May I speak to this question? I think it depends on your perspective. If you’re from the philanthropic sector like we are, we are looking to have greater impact than we can have with our granting dollar. So at McConnell, more than 10 per cent of our portfolio is now in impact investments, about $70 million. We are not taking any losses there, on average. If we balance the portfolio, we are at or better than market return. We are interestingly able to get that return in a counter-cyclical way. Those investments do not go up and down with the stock market; those are community loans. They are community-backed. It’s an interesting dynamic we see emerging there.
If you’re from the public sector, you look at problems like child welfare in Manitoba, 11,400 children in state care at a cost of $50,000 per child. That is unsustainable. That is a terrible outcome for many of those children and families. There has to be a less costly way to deliver better outcomes. So lower cost, better outcomes is a very appealing approach for government, and for the private sector, there are three things that are important.
First, the private sector has to renew its social licence. That’s what Larry Fink, head of the largest investment fund in the world, said in his letter to all corporations just a month ago. It’s time for business to do good and to be seen to be doing good, and BlackRock is going to insist that they be clear about that.
Second, investing this way is a very good strategy for attracting the best talent and keeping it. Young people today want lives of careers of purpose, and the companies that do that are actually going to be leading in the next wave of economic growth.
And third, this is a source of innovation, of ideas. This connects you to universities, young people, communities, and the ideas are so plentiful. So there is, from each sector, a very compelling reason to get involved in building this space.
The Chair: Mr. Tansey, did you want to add something?
Mr. Tansey: I didn’t get the full question, but I agree. I think it has been summarized by the other respondents.
The Chair: Thank you very much.
Senator Seidman: Thank you all for your presentations. I’m going to try to struggle with some kind of parallels for this as well, so that all of us can more intuitively understand what we’re talking about, and our viewing audience might be able to as well.
Innovation is something we hear a lot about these days. We can all relate to the concept of innovation. This government is investing a whole lot of money in innovation, but it’s science innovation. So we’re into artificial intelligence, and all the kinds of things that we hear about on a daily basis.
But you’re all talking about social innovation. So I would like to try to understand the concept of this fund beside or parallel to what we all can relate to, which is science innovation and all the kinds of funds that are out there for R&D.
With the concept of moving, I think Ms. Bouchard referred, on the demand side, to local, social entrepreneurs, identifying needs and putting forward innovative solutions for their communities. They generally benefit from the help of technical resources to support them from incubation to cruising speed.
So it’s more than money. I think that’s the concept of innovation, and start-up and seed money taking an idea through to its fruition. We can all relate to that because we talk about it all the time. Let’s hear about it from this perspective, if you might. It might help us to understand a bit better, or at least it will certainly help me understand a bit better.
Ms. Bouchard: Yes, social innovation resembles a technological innovation, but it works with social factors or works in the social field. Entrepreneurs, whether they are social or not social, usually require an environment. We can believe there are solos, and they are heroes,but usually there is an environment of support around an entrepreneur, whether it’s a social or a non-social entrepreneur. If you look at a social entrepreneur — and there’s usually a collective around him or her — this person identifies new needs and emerging situations in the community that don’t yet have a solution and that might find a solution through bringing resources together that are not usually brought together, for example, home care for the elderly. It’s better to keep a person at home than see that person come into the clinic, but we need help around them.
There are also a lot of workers that are informal. These women don’t have an official job. They do domestic work. This is another situation; they’re not related.
The social entrepreneur will say if we bring these two problems together and find a way to give formal jobs to these women inside organizations that can provide home care services to these aging people or people who are losing their autonomy, we can find a new way to solve the problem and reduce the costs of health care. We can improve the lives of old-age people and improve the work situation of these women who do home care. This is a typical social innovation. It will take place with the support of a local clinic that will identify who are the old people at home who need the support and with other social workers that will identify who are the women that don’t have a formal job. A bunch of organizations will work together to make it happen, and then it can diffuse.
The Chair: Any other comments?
Mr. Huddart: I completely agree with the perspective that Ms. Bouchard has contributed. I want to add that technology and society are in a co-evolutionary dance these days. There’s a place where these two have a lot to learn from each other. We can talk about the social context for technological innovation, and we have to. As Google's Sidewalk Labs takes up residence in Toronto and starts to talk about operating systems for cities, we want to make sure that civic concerns, interests and creativity are included in that calculus. We have examples in Canada of world-leading social technological innovations. The Hacking Health program, for example, is now in 35 cities around the world and brings people who write code together with people on the front lines of the health care system to come up with apps and protocols and ways of integrating data into more efficient and effective and less stressful service delivery. It is a remarkable platform. The Art Hive movement out of the University of Concordia has spread to 100 places around the world. Open and free community art studios make the means of creative production available to low-income people. It is a tremendous social innovation that is now taking up the technological aspect and building in maker spaces and other related activities.
There’s a rich innovation zone that can be funded through experimentation and funds that allow the growth of the most promising innovations. I want to add that perspective to the ecosystem conversation.
Mr. Tansey: There are strong parallels with conventional technology innovation. One of those parallels is that we tend to think of that as being primarily start-ups coming up with a new idea and developing it through to a fully fledged enterprise. Within the university we have a system to support brand new ideas and the early development of those with faculty and students, all the way to an accelerator and into a seed fund that helps them to grow. But we should also remember that innovation comes from inside business and government, and there’s more entrepreneurship within those organizations through facilities like design labs, which we’ve seen in New Zealand and Denmark. Innovation isn’t merely the precinct for early-stage start-ups but needs to be embedded in existing organizations and institutions.
At one end of the spectrum, we have helped an organization go from a start-up to producing low-cost medical devices for emerging economies that cut the costs enormously, and that was a pure start-up. At the other end of the spectrum, we’ve had social innovations that look at how you introduce preventive health interventions within the health care system, working with fitness labs, doctors and cohorts of two to 5,000 people where it’s fully embedded within the health care system.
That’s exactly parallel to how innovation happens in the mainstream economy, but we tend to favour the pure, bright-eyed start-up full of millennials changing the planet. I think that’s really only half the story.
Senator Bernard: Thank you all for your evidence this evening.
My question, I think, is for you, Mr. Huddart. I was really inspired by the examples you gave of how this has worked in First Nations communities. I immediately began to think about communities that I’m aware of in Nova Scotia. Looking at some of those Black communities, there are about 43 of them. They are all very marginalized and they’ve been there since the 1700s. I know that in many of those communities people have struggled for many years to find a way out of the systemic and structural cycles of poverty and unequal access.
I’m thinking about the whole idea of the social finance fund. How would or how could something like this benefit communities like that?
Mr. Huddart: There are several ways. I think this is exactly where it’s important to understand the purpose of a social finance fund. One of its purposes is to level the playing field to unlock latent human capital. To give you an example, the Province of Saskatchewan has data showing that keeping people in prison is actually producing more and better criminals but is not solving any other problem. In their effort to depopulate prisons and use that capital to set up training programs instead, they lack funding to create social enterprises -- that is, companies that will hire those people coming out of the training programs within 72 hours of graduating so that they don't risk going back into the cycle of criminal activity that got them into trouble in the first place.
The social enterprise is not a magic bullet. It has to be applied in coordination with advanced and enlightened public policy and an ability to work with community on community-led solutions.
In Manitoba, in the community of North Winnipeg, one of the poorest in the country, a group of women is re-engineering the way that child and family services support vulnerable mothers and is providing better outcomes for children and families. It’s a community-led, community-governed model that now looks interesting to a government which is spending $500 million a year on state care of children that it really has, in many cases, no business taking care of. That investment should be going into communities and families.
This approach begins with listening to and paying attention to the most affected people at the centre. Putting that and their problems at the centre of the question is where the ideas that can be supported originate. There are new social process tools. My colleague mentioned the social innovation lab. That’s what they did in Winnipeg. They set up a guide group of parents, a guide group of elders, a guide group of researchers, one of people from the social services space and one of funders. Together, over four years, they have produced 40 ideas for transforming that economic and social space that is North Winnipeg.
There are tremendous tools. It’s not just the money. It’s the engagement with communities, the trust that needs to be built over time and the ability to start testing and doing things differently that will make the difference.
Senator Bernard: In your experience, where do these ideas originate? Who is pulling these groups of people together?
Mr. Huddart: They begin in the community sector. The civil society sector has 80,000 charities in Canada and another 80,000 not-for-profits. We have the second-largest civil society sector in the world, and there’s a lot of capacity there.
Working with people who are in community and community leadership roles, but making those action initiatives possible — another social process tool is to get the private sector at the table. Bring in the public sector agencies and work together with communities to start a conversation about how we understand this situation, where we see opportunities to do things differently, what could we test, what hypotheses are there. Let’s go on learning journeys, take people from the community and go downtown to the government offices where decisions are made and talk to these people, and vice versa.
It’s a dynamic that surrounds this that is about building those new relationships, and nowhere is it more acute and needed than around the question of achieving a level of economic equality in this country — indigenous reconciliation, economic reconciliation.
The Chair: Thank you. Any other comments?
Before I go to the second round, I want to ask a couple of quick questions.
You have talked a lot about outcomes. You have talked about the kinds of issues. You described very well, Mr. Huddart, this particular project in your comments involving indigenous people. But we haven’t had enough discussion yet about the inputs, about the creation of the fund, where the fund comes from and how the fund is used — loans, grants, tax incentives.
You have said you don’t think government should be running it — or a government Crown corporation. It sounds like it should be a partnership, whether it involves private and public sectors, the charitable sector, et cetera. How do you see that being set up? Do you see government providing funds for that partnership to set it up and actually bring it about, but then having it run on its own?
What else do you see the government doing? The word “incentives” has come up. Incentives from government could be grants, loans or tax incentives. What do you think should be done in those regards? After all, we have to focus in on what the government should do to help make it happen.
Mr. Huddart: Thank you for the question. It’s fundamental to our work on the committee, and I think that’s where we are recommending that government, first of all, send a strong signal that it is committing to the development of this fund and the related social infrastructure that will support these kinds of changes.
We think government may want to look at the dormant bank accounts as a place for capital that could be put to higher public purpose. As they have done in the U.K. and are about to do in Japan and other countries, that capital can go to work and bring in private sector capital. I think the banks should be invited to participate. I know there’s a role for foundations. We’re already talking among ourselves about how to come to the table.
As to the question of tax incentives, I’m not sure we would go there right away, although one of the people inputting to our committee has talked about a registered social enterprise development fund, with a tax credit attached to attracting that kind of capital.
Beyond that, the question of whether it should be a Crown corp or not, a Crown corp wouldn’t necessarily be a bad idea. It does exist apart from government, it can have its own board, it can manage its own affairs and report to government without being controlled by the results of elections. That’s possible.
You also mentioned earlier the federal Business Development Bank. We think they have tremendous capacity to apply, in terms of the incubation and support systems, the kinds of things Ms. Bouchard was talking about that social entrepreneurs need. If we can get the BDC to open up to that kind of enterprise, it would be a tremendous additional capacity.
It’s also something governments can talk to each other about. When it comes to health care and education, these are often provincial matters. That’s another case where bringing governments together might be another way to accelerate the development of this capability.
The Chair: Any supplementary? Ms. Bouchard and then Mr. Tansey?
Ms. Bouchard: Thank you. We did a large consultation across the country; we heard that the need is not only to help fund the funds that exist but to help funds that exist to de-risk their investments.
What is badly needed is to have uncollateralized loans to these social enterprises. De-risking is very important — or taking first losses and providing loan guarantees. It’s not only funding but financial tools to help the social finance sector be more liquid.
Mr. Tansey: From the perspective of the co-investors, there are a couple of features we have looked at. One is that a wholesale fund doesn’t necessarily make direct investments. It could do, but it works with existing financial institutions that already make social sector investments. So that’s tapping into the expertise and the relationships that are already there, and it becomes another source of capital for that. That’s really important for philanthropic and private investors, because to have confidence that their investment is going to be secure and generate leverage, they need that independence from the cycles of politics around elections and need to have a sense that it can operate outside of normal budget cycles. For this to work, those other investors are putting capital at risk as well, and they need to know there’s that kind of independence.
That’s certainly a way it has worked in the U.K.
In terms of the mix of investments, I think Dr. Bouchard mentioned the importance of loans in the U.K. setting and other jurisdictions, there’s a mix of some equity, but the majority has been debt, either secured or unsecured, provided to ventures and repaid on a patient basis over time. The impact of that in terms of the cash flow of social sector organizations can be enormous.
We’ve also seen real value in first-loss reserves. The Canadian government has provided that in development financing through organizations, and that has given private investors the confidence to put their funds in, knowing there’s some sort of patient capital overwriting it.
I don’t think there’s a single solution; there are multiple solutions and a mix of instruments that work well.
The Chair: How do you define a wholesale fund?
Mr. Tansey: Funded funds get used as a shortcut, but that’s more of a private sector model. The wholesale fund is where a pool of capital is invested in existing financial intermediaries — existing funds. It’s wholesale because it doesn’t make the picks for the direct investments itself; it relies on intermediaries to do that. That could be an existing housing fund, like New Market Funds in British Columbia, or many of the funds that exist in Quebec.
The organization of it is about picking the fund managers and track record, not picking the direct investments. That makes sure the investment is happening close to either the constituency or the geographic community.
Senator Omidvar: As you’ve described this notion of a federal role in setting up the wholesale fund, the social finance fund, the fund of funds — whatever you may be calling it — can you help us understand whether this fund of funds would invest in — there are so many issues in Canada. In the Senate, we hear daily about veterans’ issues, poverty, students’ issues, et cetera. Should this fund focus on a set of priorities that are — I hate to use the word “national,” because we have provincial stakeholders in the matter — or should it be left up to stakeholders at the table to meet their needs as they see fit? Is there some tension you can help me sort out here?
Mr. Tansey: I would just say that the first rule has to be that we can’t see a newly launched fund mechanism as a panacea for all of the social and environmental issues we’re trying to address. It’s a public policy choice as to what the political priority is in any town. Let’s not launch something that tries to tackle everything. Let’s pick the things where we can make progress.
The second is that I think it’s always going to be a mix of some national priorities where there’s a real need for something programmatic with respect to indigenous housing or preventative health, combined with intermediaries closer to the geographic communities. I think it needs a narrower sectoral focus and then the flexibility to pick those investment intermediaries on the basis of merit.
That’s the role for government. It’s not just pushing the money out to the regions but having an arm’s-length entity that says these intermediaries can demonstrate impact and financial returns and a targeted approach, because this is private and public money being used here, and it needs to be invested on merit.
Senator Omidvar: I would like to hear from Ms. Bouchard.
The Chair: Quickly, because we’ve run out of time.
Ms. Bouchard: Thank you. I think each region in Canada has a different level of development of these institutions, and where they exist and are already organized, I don’t think there’s a need to double this governance. Care has to be taken in organizing a federal fund of funds with respect to what exists in Quebec in particular and in other provinces where they already exist.
The Chair: I’m sorry that we’ve run out of time because we really do have more questions we would like to ask. We’re set up for Australia and the U.S. coming in next.
So let me thank Mr. Tansey, Mr. Huddart and Ms. Bouchard for their contributions to helping our understanding and moving forward with the social finance idea.
Our meeting of the Standing Senate Committee on Social Affairs, Science and Technology continues with the second panel of this meeting, for which we will bring in some guests all the way from Australia and from the United States.
I will introduce them to you. We have Rosemary Addis, who chairs the Australian Advisory Board on Impact Investing, which provides leadership and strategy to accelerated growth of the impact investment market operating in and for Australia. She’s also a member of the OECD expert group on impact investment and represents Australia in the Global Social Impact Investment Steering Group.
We are also joined by Antony Bugg-Levine, President, Nonprofit Finance Fund. The Nonprofit Finance Fund advances missions, social progress through financing, consulting partnerships and knowledge sharing and empowers leaders, organizers and ideas. Before he joined the Nonprofit Finance Fund, he designed and led the Rockefeller Foundation’s impact investment initiatives, and he’s the coauthor of a 2011 publication called Impact Investing: Transforming How We Make Money While Making a Difference, all of which is part of our subject matter today.
Welcome to both of you. I would ask each of you to give a presentation of up to seven minutes. Then committee members will chime in with their questions to you at that point.
I’ll start with Rosemary Addis. Welcome from Australia.
Could you hold on just a minute, please, Ms. Addis? You’re breaking up. We apparently have a problem on the line here, so we can’t hear you very much. Can I go to the other speaker while you check this out?
Mr. Bugg-Levine, while we try to fix the line to Australia, we’ll start with you, if you could, please.
Antony Bugg-Levine, President, Nonprofit Finance Fund: Thank you so much, and please let me know if you cannot hear me either.
As the chair mentioned, I am here representing the Nonprofit Finance Fund.
The Chair: Oh my. I’m sorry. It appears that this is a general problem for both of you coming in. So we’ll have to suspend for just a few moments while the technicians go at this. You can hear me, I trust, okay. So the technicians will go at this, and we will get back to you as soon as we possibly can.
Okay, we’re ready to go. Let’s try this again. I’ll again try to start with Rosemary Addis.
Rosemary Addis, Chair and Executive Director, Impact Strategist, Australian Advisory Board on Impact Investing: My thanks to the chair and the committee for giving us this opportunity to contribute to your proceedings today. I’m really pleased to be able to share the work of the Australian Advisory Board on Impact Investing, and the work we’ve been doing to collaborate with our Canadian colleagues already to promote impact investing is something we think can enable significantly more resources to go to enterprises, assets and service delivery that make a real difference to people.
Today, I want to share with you really briefly what we’ve learned from our own work in the global context that has led us to the conclusion, in the Australian national advisory board, that an impact wholesale fund would be a game changer for this market and, potentially, other markets, the policy case for that and, in very brief terms, the design for the implementation initiative that we put together called Impact Capital Australia.
So the strategic framework that we’ve been working with on the Australian advisory board, just by way of background, really focuses on leadership, action and policy. We have concentrated very much on where we think we can get real breakthroughs in the market, and I think that’s important background to the conversation today. We have focused in very clearly on the actions we think will take the market forward in a real step change, and Impact Capital Australia is one of those initiatives.
To give you the landscape of impact investing here, in a very summarized form, we are seeing similar interest and momentum grow here as we have seen elsewhere in the world, and there has certainly been a positive shift over the last five years, with significantly more activity. But, also in common with other countries and ecosystems, there is still a way to go, and there are barriers and things that we need to address. They include things like the lack of coordinating infrastructure, the need for more intermediaries and to build capacity and to really seriously be able to drive and design initiatives that are driven from the impact side and from communities, at a scale and in ways that can attract more resources to them.
In fact, we conducted another market consultation just at the end of last year. On the positive side, people really felt not only that had there been significant developments but that there is really a lot more potential to be tapped into, and they also emphasized some of the questions and challenges about how to get this to scale and reach the potential. A particular focus there is the need for skilled intermediaries who can bring together the people with the resources and capital and the impact-driven organizations and activity, and that’s a really critical gap.
That’s important for a couple of reasons, I think, one of which is that it’s not a unique challenge, obviously, to our context in Australia, but it’s also not a unique challenge to new and developing areas of market-based activity that we have seen, whether it’s in energy or other aspects of innovation. So, that means that there are things we can look to that, broadly, do tell us what can help us to cut through and make a difference.
There are precedents, for example, across OECD countries, in areas of stimulating innovation and early-stage businesses, that show us that enabling intermediaries, overcoming information asymmetries and being able to set up funds are regular mechanisms that are used in economic policy right across the OECD, to have a catalytic effect and to help to bridge these types of gaps in a market dynamic.
In the impact-investment context, as you have heard from others this morning, there has definitely been a focus on impact funds and, in particular, wholesale funds. The reason for that is that we think they could be an effective mechanism to increase efficacy, including the efficacy of government spending against policy priorities. So that’s about better outcomes, and unlocking private capital, obviously, for directing toward things that matter to people in communities is also about obtaining more outcomes. From our perspectives, ensuring that what we do is about more and better is critical.
The impact wholesalers can have a really catalytic effect in stimulating scale in terms of helping to pump prime the intermediaries, and, as you heard in the questions in the previous session, if we are looking at a wholesale fund, what that really provides is a base with capital and a mandate and capacity to provide a long-term platform that can drive activity and unlock a critical mass of new capital and ways of doing things.
We think of that as a multiplier effect: If you make 10 direct investments, you get 10 direct investments; if you invest in 10 funds and they each make 10 investments, you get 100 new investments. So you get more capital coming into the mix, but you also get a greater diversity of ways of doing things and proving up different models.
Well designed, we think this can achieve more and, in fact, well in excess of what can be achieved through direct investment in the individual policy initiatives. Importantly, that’s about much more than money. The support of intermediaries ultimately multiplies the opportunities that we have to demonstrate new models and to scale up models that work, that can really make a difference for families and communities and provide new solutions to complex issues.
You have heard about the U.K. experience. We can also look to other areas. For example, in the energy space, there are precedents like the Global Energy Efficiency and Renewable Energy Fund, GEEREF, that started with $154 million euros and has been able to unlock about $2.4 billion euros from the private sector funds and, also importantly, invest in projects that have created over 5,000 jobs and brought energy to 308,000 developing market households and helped the intermediaries that it’s worked with to grow scale.
I’ll briefly say why we think that’s an important role for government and then speak briefly about Impact Capital Australia.
Governments have a really proactive role as market builders. If we look at other areas of market activity, there are none from which governments are absent. In this area, obviously, governments, particularly federal governments, are important partners because they are a key beneficiary and a major participant in impact investing. The signalling effect of their collaboration and commitment can be critical in instilling confidence and ensuring that impact investment initiatives, and, in particular, things like wholesale funds, can operate as public good that can help to grow the pie and develop capacity that can have a much wider impact.
Our work in looking at what has been done elsewhere around the world across a range of markets as part of setting our priorities has looked at what some of the features of wholesale are. Government buying is certainly at the top for those. We can share with the committee our other findings in that regard.
Where we have landed in the Australian advisory board and with a number of the stakeholders that we have worked with in a partisan process over several years now is that while there are no simple bullets, there are definitely game changers. We focused in on a wholesale fund as a key game changer for Australia. We have invested in developing what we call Impact Capital Australia as an implementation-ready proposal, and we have been working with government, with banks and other financial institutions. We are in the process of trying to secure the capital to see that embedded in the Australian market.
In terms of the key features, we see this as a $300 million fund, predominantly a wholesale institution that would be formed as a partnership between the public, private and community sectors. It would have two core functions. One of those functions is about the wholesale investment; the other function is as a market champion, a real go-to place that can invest in intermediaries, originate investments and implement strategy that can encourage diversity, innovation and growth right across the system.
As a wholesaler, it would provide safe capital to new impact funds being taken to the market by others and help those in the market to grow so that they can then make investments in enterprises, or in assets, or in service delivery options. Our modelling indicates that this would have a material multiplier effect. I have shared some background on that with the secretariat to the committee. The intention here is that we would have government funds matched initially by a combination from financial institutions and community organizations in Australia. This institution would require a one-off contribution from government and would become self-sufficient over a period of approximately 10 years.
We anticipate that it would invest across funds that are operating in 10 key impact areas, and that its investments would focus on funds that would be working to build opportunities in a combination of assets or organizations, program and service delivery. For example, it might invest in a fund that is bringing new business opportunities to communities that have been under-invested, helping to create jobs and local economic activity. It might invest in a housing investment fund, with purpose-built accommodation and services for people with disabilities. It might invest in a fund to support new business models that are really trying to crack difficult social issues and bring collaboration to the market, and it might invest in a social impact bond fund. There are a number of examples we have looked at more specifically, and we can share that with you.
As a market champion, Impact Capital Australia would target barriers to growth. It would create a centre of expertise that can actively develop and openly share expertise with others and provide knowledge and tools into the market, as well as meaningful engagement with communities to do work from the ground up as well as with the investment community, sector experts and government.
The Chair: Just wrap up, please?
Ms. Addis: It's a game changer. I just want to thank you for this opportunity to share our learning with you.
The Chair: Our thanks to you for being very informative for our concern here about social financing in Canada, and the way you have done it in Australia. You have a lot of experience.
New York is coming on next, in the same time zone we are, Mr. Bugg-Levine.
Antony Bugg-Levine, President, Nonprofit Finance Fund: Thank you so much. It is an honour to be here today. I am coming to you from New York. I am an American, but I have many family members in Ontario and British Columbia and feel great affinity for everything you’re doing in Canada, especially the work you have been doing. We have been working closely over the last few years with the MaRS Discovery District in Toronto and the Centre for Impact Investing. You have some great assets in Canada, and it’s a very exciting time to be having this conversation.
I come at you with the perspective of my day job, which is as the CEO of the Nonprofit Finance Fund. We are a nonprofit loan fund registered with the U.S. Treasury Department. In 38 years, we have made around $700 million of capital available to homeless shelters, health clinics, food banks and other social service organizations. We have a long track record of taking advantage of the government programs that have been set up to enable our kind of work to happen in the U.S.
I’m also coming here in my role as the founding chair of the Global Impact Investing Network, an organization we founded in 2009 as a recognition of the growing interest around the world from a wide range of investors who seek to put their capital to work to solve social problems and need a set of supports to make that happen.
In that role, I have advised banks, pension funds, private foundations and others over the years and really have a sense of the opportunities available given all the work that has been happening in Canada.
I come at this work not from the role of a banker. I might look like a banker — at least today from the waist up. I won’t stand up to show you what I look like below this. I come at this from a human rights and social justice perspective. I got into this work not because I wanted to make life easier for bankers but because I was struck by the great opportunity we had to solve social problems in our society that required more capital than was available from philanthropy and government, and the recognition that while $100 trillion sits in global capital markets not pursuing social purpose, there are so many places where capital could be put to work. And building the instruments that can connect the money from where it is to where it can go to make a social purpose is ultimately what I think this work is about.
In that regard, I am here to tell you that this opportunity is real. That money that is sitting in the global capital markets is more interested than ever before in pursuing social purpose. Earlier, Senator Omidvar mentioned a marketplace. We need a marketplace, but the market is not currently clearing. I think the role this government has in support of the task forces and some of the private sector actors such as Mr. Huddart and the work he has been doing at the McConnell Foundation is a great opportunity to create the conditions in which a marketplace can form that can connect the money increasingly seeking to be put to social purpose to those worthy projects that can both generate social return and investment. I know in Canada, groups like RBC — and I’ve been speaking to some provincial pension funds — are eager to work to place capital in for-profit investments that can solve social problems. In government you have an opportunity to make that happen.
I want to spend a few minutes on what specifically a government can do. Senator Omidvar heard me say this yesterday. It might seem like a troubling premise that on the one hand we say there is all this money, and on the other hand we need government support. The experience globally is that government can play four essential functions in helping to build that functional marketplace.
The first is to create the conditions in which the market can make investments where they are currently mispricing risk. In the United States, the most prominent example is in the flow of capital into low-income and affordable housing, which has been the major place in which impact investing assets have gone over the last three decades. That was a market in which the mainstream banks simply misunderstood and thought those were riskier investments than they were. They would not have made those investments but for a set of government policies that created conditions in which investments started to happen to prove to the market that those were less risky than they thought they were.
The second area is in subsidizing expert intermediaries. Ms. Addis mentioned the need for organizations who know how to understand the risk in the marketplace. My organization, for example, recently made a loan to a very well run homeless shelter operation here in New York City. They needed a $2 million loan. The experts on my team know that that loan is actually low risk, but the banks simply do not have a business model that would motivate them to develop the expertise to understand how to assess the risk of that organization. The loan is ultimately too small and their business too complex for a mainstream bank. If not for expert intermediation and a subsidy to enable me to keep my team together doing what we do, it’s unlikely anyone would have simply made that loan.
The third area is reducing risks. Sometimes the risks are real. It might not be that market is misperceiving risk. Your bankers might be very good, and they might recognize that a loan is too risky for them. In this case the government can provide subsidies that reduce risk.
Here in the United States, when we sought to expand the provision of primary health care as a result of the expansion of insurance, there was a need to build many more health clinics that could serve communities where they had not had those clinics before. Those loans were still risky, but the government set aside capital that was made available. In this case, it was a multiplier. Rather than spending $10 million to build a new clinic, the government could make $2 million available in the form of a grant, which creates the economic conditions and allows my organization and others to provide the additional $8 million in the form of a loan, effectively leveraging your government support to go further.
Finally, and I think this is important in the context of the move towards outcomes-based financing and social impact bonds and paid by results, which I know is an area explored by some of your task forces, one of the most important things government can do to support investment capital flowing is to make revenues reliable. Mr. Huddart mentioned the area of foster care. We have recently made a loan to an organization in Cuyahoga County just across the lake in Cleveland, Ohio, where our borrower will support families reunified who have had their children taken away and create the conditions in which they can take care of their children. That removes the burden from the state of having to take care of kids in foster care.
We are able to make that loan because the government committed that if this program works, it will pay for the results of those kids being taken out of their care. Reliable funding on the back end is a crucial ingredient that a government can provide to enable us and investors to mobilize private capital into these initiatives.
Finally, I would like to say, if you look at the example that Mr. Huddart mentioned with the First Nations and housing, you see all four of these dynamics at play. The market was probably mispricing risk, and there was a need to subsidize the experts to make that deal happen. You needed to reduce the risk. Ultimately, the reliable funding on the back end, and in this case it could be rent or mortgage payments from the individuals, creates the conditions in which we can do this.
Senator Bernard mentioned the context in Nova Scotia. I imagine these dynamics are at play in various degrees. It could be that the market is misperceiving the risk of serving those communities. Again, a smart government policy can address all of those.
Finally, Senator Petitclerc said that this is groundbreaking. I would argue that it is not. Neither is it so far behind others that you cannot be innovative. I think this is a great moment for Canada. You have resources in your private sector who have been thinking in smart ways about this. You have others you can learn from, as in the case in Australia and elsewhere, but at the same time you can really be leaders in connecting capital in a very socially driven way to create new solutions that work for everyone.
The Chair: Thank you very much. This information is most helpful. As the phrase goes, mobilizing private capital for public good.
Senator Omidvar: I have two very different questions for the two presenters. Is that allowed?
The Chair: Sure. It would be good, since they are both on video conference and there is delayed sound, if each member could say who they direct the question at, and I can give the other panellist an opportunity to answer as well.
Senator Omidvar: My first question is to Ms. Addis. I want to understand the role of the Australian government in setting up the Impact Capital Australia fund better. Is the Government of Australia investing in it as an investor? Is it on the board? Is this Impact Capital Australia fund outside of government? How does it relate to provincial jurisdiction? I think Canada and Australia are fairly similar in that way. I would like to understand more precisely the role of government and how it plays out in your context.
Mr. Bugg-Levine, I have so many questions to ask. How do you track different kinds of capital? Where does this capital come from? Is your fund the wholesaler? I don’t know if it is, but if it is, does your fund invest in a narrow set of issues? How do you determine them? Or is it come one, come all? Perhaps I will leave it there.
Ms. Addis: Thank you for the question. As I mentioned, Impact Capital Australia is implementation ready, so we are still working to bring all of the parties to the table. We have in-principle commitments from two of the major Australian banks, and we are having active conversations with the government about whether this is something they feel they can do.
To answer your questions about the design process, we have designed this as something where the government capital would represent half, so $150 million of $300 million, and it would come in on a subordinated basis. There are a number of ways that could be structured. In some ways, the most streamlined and straightforward is a grant, but it’s also possible it could be structured as an investment that looks more like equity or something like a zero-coupon bond. We have modelled a number of ways, and we have started conversations with the government about how some of those would work. We can obviously take that so far, and then you need to understand how it would work in the way they currently find the budget rules. So we are having those conversations with them to see if we can take that forward in the context of the current budget during --
We have designed this to be an independent institution. Certainly, the feedback we have had from the financial institutions, as you heard in the session, is that that is something that they would require to bring their investment to the table. We have done extensive work with Ashurst, the international law firm, on the constitution in order to achieve both that independence and a mission lock that would also give confidence to government of the purpose and objectives of the organization and that that would be embedded in the way that it operates.
We envisage that the government would obviously be not just an investor but also an important stakeholder in other respects. Because of the way that our government thinks about probity, they may not want to be directly represented on the board, but they may have an arrangement where they nominate somebody who is an appropriately qualified individual to come onto the board. At the moment, we are proposing this as a federal government initiative. We certainly do have our state governments, and they have been active in impact investment and in terms of social impact bonds, which has been their first priority, but also housing and some other areas.
In our context in Australia we think it would be difficult to achieve this through state government investment, particularly state government investment alone, because each state would need to segment its contribution by geography, and that creates constraints on the mandate that make it harder to go to one of the most impactful and promising solutions on a national basis.
I should also say our federal government has become increasingly active in impact investment over the past few years. Last year, they released social investment principles. One of those principles is that they are interested in taking more action to help to grow and enable this market. We can certainly share those principles with you.
In terms of the detail of all of that, we can also share with you elements of the design and the way that it’s intended to work right down to very concrete levels of how we think the constitutional arrangements would work.
The Chair: Thank you very much. We’ll go to Mr. Bugg-Levine.
Mr. Bugg-Levine: Thank you. The question of where we get our capital and how we choose how to place it, last year, we raised $48 million of new borrowing. We borrowed an additional $48 million primarily from U.S.-based banks and insurance companies. TD Bank is a lender of ours since they bought a U.S. operation.
We primarily raised that money from banks that have been motivated since 1977 to fulfill a regulatory — it’s not a requirement. But in the U.S. in 1977, an act was passed called the Community Reinvestment Act. It was intended to make sure that retail banks made loan capital available in poor communities. There had been evidence following our civil rights movement that loan capital was being systematically withheld for racist reasons from primarily African-American people living in inner cities, and there was a recognition that the market was not going to solve that problem on its own.
It was not a mandate, but a law was passed that said our regulators would test every three years the extent to which banks were making capital available in those communities. Instead of doing so themselves, they effectively realized they would be better served by having organizations like mine that could come up and make the loans. Every time a bank lends to us, they get credit for the loans we make as part of fulfilling that regulatory obligation. That has led to a proliferation of organizations like mine. There are approximately 1,300 community development finance institutions, which is the form we take, registered with the U.S. Treasury Department, eligible to take the money from banks.
That’s where we raised our money, primarily in the form of debt. We borrow that money, and we pay it back with interest. In our 38 years, we have never lost a dollar of our investors’ money. Because of that track record, the banks are comfortable lending to us knowing it’s a safe way to lend and get credit for the regulators. We pay them slightly less than one would pay for the projected risks we offer — historically, we’ve been no risk to our investors — and they would not likely be doing that were it not for that regulation.
The opportunity for Canada and others in the future is more forward-looking: How do you tap into the capital that now doesn’t need a regulatory requirement? Many of these pension fund holders, institutional investors, wealthy families and foundations want to make impact investments, because the movement has come up and is compelling to them. That did not exist in the 1970s, and therefore it was required by regulation.
The last thing I will say on this point is that we couldn’t simply make this model work if all we had was regulation that motivated banks to lend to us. They wouldn’t be willing to lend to us if we didn’t have stable operations that were supported with equity or permanent capital. They won’t lend to us all the money we are going to lend; they want to make sure we keep some on our books to cover losses.
A major source of that over time has been direct subsidies from our federal government. We have a multi-billion-dollar annual appropriation called the CDFI Fund, the Community Development Financial Institutions Fund, that is housed within the Treasury Department. It makes direct grants on an annual basis, on a competitive basis, to organizations like mine that make the case that if we receive an operating grant, we will be able to multiply the amount of money we put out into the market in the form of the investments we make. It’s the combination of those two policies, one that motivates banks to lend to us and the other that helps us subsidize our operations, that makes this model work.
To answer your question of where we place our money, the regulations simply require us to make sure our borrowers operate in low-income census tracts. Every 10 years when the U.S. conducts a census, the government designates areas of our country as low income, and any investment made in those areas qualifies under the Community Reinvestment Act. That’s one way to target your intervention. It has problems, because the motivation within the market then is to find census tracts that are gentrifying and put a hotel on the edge of them. That’s the safer thing to do. It doesn’t necessarily lead us to be motivated to find the most marginalized communities where we can make the most difference, recognizing that doing that also incurs greater risks.
To meet the regulation from government, we have to ensure our borrowers are in poor communities. As an organization that is independent but mission-driven and governed by an independent board that keeps us accountable to our mission, we add extra layers of consideration when we look at whom to lend to, in our case specifically focused on the services they provide in the community and to whom they provide those services.
The Chair: Very good. Thank you to both of you for those answers.
Senator Seidman: Thank you both for your very informative presentations.
I think I have the same questions for both of you. Perhaps Ms. Addis would start, and Mr. Bugg-Levine could follow. As you both have said, here we are, in a way, with an advantage. We’re starting out some decades later when this is trendy, almost. People want to do something impactful. They want to invest in their society.
Is there a model out there? Is there a country? Is there something we could look at that would give us particular guidance on how to go about this social finance fund to fund social innovation? Please say a few words, if that is the case, about why you think that is the model; what are the advantages?
Ms. Addis: Thank you for the question. We’re starting out in many ways, but there’s also, as Mr. Bugg-Levine mentioned, experience we can draw on. His fund has nearly four decades of experience, as do others in different marketplaces. My understanding is that Canada, similar to Australia, has a rich history of social and community enterprise, and things we can look to as to what has worked in the past.
So as to where we look for the models that might help us inform Impact Capital Australia, we looked to what was happening in this market in other countries. We worked extensively with our colleagues in the U.K., with Big Society Capital being the predominant example of a functioning impact-driven wholesale fund. They worked with us, and we were able to distill the lessons and adapt that to the Australian context.
Also, there’s the question of what would they do differently if they had the opportunity. We think there’s a lot of learning from that model and from what they have learned over the past five years on the ground.
We also looked at other areas of market activity. We found examples in clean energy finance, in microfinance and in other areas where you’ve had developing market-based activity with some element of social, environmental or cultural mandate to it that we could also look it, including the GEEREF example I gave before. We also found the OECD work on what has been effective across OECD countries in helping to stimulate investment for innovation and to really build the capacity of early-stage organizations to be very helpful. There are references we can refer you to there.
I actually did some work with our colleagues at Oxford as part of them developing materials on social finance. There’s a chapter on the role of governments and policy that pulls out a number of examples about the different mechanisms for government, in particular when we’re thinking about catalytic finance and funds. I would be happy to refer you to that.
The other place we looked to, particularly similar to Canada as a federal country or a country with a federal system of government, is what the European Union has done, and there are a number of examples there, all the specific, concrete examples referred to in the material provided to the secretariat. In Australia, we’ve found that you can identify across that some very consistent factors, particularly when you’re thinking about the kind of wholesale fund that you’re talking about.
As I mentioned earlier, that includes that government either partner in this kind of an initiative, but also that you’re strategically designing to better connect the capital and the opportunities than what happened organically. There’s a focus on developing the intermediaries to get closer to the ground and create the multiplier effect. There’s a collaborative co-design approach so that the different stakeholders are consulted, but also it’s built into the design and you can design for this to become more self-sustaining over time, with the impact in mind as well as where the capital will come from.
Mr. Bugg-Levine: I would make a metaphor with our speed skaters over in Seoul. Yours are doing better than ours. If this is a 1,500-metre race, no one is past the first turn. I think you can learn from others, but there’s no reason that Canada, with the right attention from the right parties, couldn’t craft a policy that works for your specific situation and that takes the lead, in many ways, and for what it’s worth, helps lead this movement to help others. I don’t think there’s any one country you should follow. Your situation is unique. You have a vibrant financial services sector. You also have issues of marginalization related to First Nations and others. You have absorbed some immigrant populations. You have a set of dynamics that are fascinating and unique. I would encourage you to pick the best aspects of other people’s experiences that you can learn from rather than trying to adopt one wholesale. I used a different metaphor around a 100-metre sprint on the track to the British 10 years ago. I said that no one is more than two metres beyond the starting block, so you might feel like you are behind, but with concerted effort you can take the lead.
They’re certainly an example of how one can put two things together. The government federal focus on a wholesaler, subsidizing it, getting the banks to help capitalize it, alongside reform and how government pays for services. Those two things together are creating interesting opportunities in the U.K. around investing in organizations that can pay for outcome-driven approaches. I think you should model that. I know there’s been work done at the MaRS Centre and others around that. Mr. Huddart mentioned the early work going on in Manitoba. Again, that’s an interesting example.
In the United States, what you can learn from is the coupling of an incentive to have banks to lend into these projects alongside the direct-subsidized intermediaries. It’s a different lesson that’s been very powerful.
Certainly in northern Europe, around investing related to climate change, they are years ahead of us in focusing on how pension fund assets can be mobilized to address issues of climate change specifically. I wouldn’t just look to countries in the north. India and South Africa have both had interesting provisions that have mandated their mainstream financial services institutions to extend their work into communities they otherwise would not. There are tools to look at. No one has perfected them, and there’s no silver bullet I would encourage you to apply wholesale in your context.
Senator Petitclerc: I will ask this first to Ms. Addis because, Mr. Bugg-Levine, you have answered it a little bit.
I’m curious to know, because one of the things that we want to do, obviously, is to make sure that when it comes to social financing, there’s a certain amount of fairness and equity. I’m curious to know how do we make sure — and, in fact, Senator Bernard’s example was to me very relevant because you have those small communities and different social organizations. It feels to me like the different dots, like when it comes to government investors, the social sector, need to be working very well. We wouldn’t want good projects and innovation to get lost for any reason.
How do we make sure that the organizations that need it don’t fall into some gap because of where they are or because of the nature of their organization when maybe they have this great idea but they don’t even know about social finance?
Ms. Addis: It’s a really important question, and there are a few things to think about as you grapple with that.
As Mr. Bugg-Levine said, it’s not one initiative that’s going to give you all the solutions. Having a suite of complementary approaches is part of the answer to that.
The other thing we’ve spent a lot of time thinking about is that sometimes, and particularly in some of the traditional social policy, we have tended to throw hard boundaries between public, private and social sectors, and increasingly we need to be less concerned about the type of organization or the type of entities and more concerned about what they’re doing and the impact they’re creating and being prepared to do that.
You’ve heard about some examples, and community investment is another way, if you like, where some incentive has been provided, whether it’s through things like the Community Reinvestment Act or through initiatives like what Bridges Fund Management has done in saying that this capital is available for investment in aspirational opportunities in communities that are in the bottom 25 per cent of communities for social and economic instances available, but there are other benchmarks where communities are underserved, so you can now set up clear frameworks for that.
The work that has been led by Bridges, also in the impact management project now looking at how we can think about impacts up and down the value chain, gives fantastic tools to really talk about what you’re trying to achieve, for whom, how much you’re trying to achieve, and what the intention is that that can deliver.
The opportunity when you are thinking about this from a government policy perspective is to apply some of those same questions and tools and then look at how you can build that into the design.
In addition to the things Mr. Bugg-Levine has mentioned, the way that wholesalers can work and that other initiatives can work also to put the spotlight on particular areas of interest and perhaps open up the playing field to ideas and organizations that sometimes don’t come through the normal procurement processes includes putting calls out to the market and seeing what comes forward and having the capacity to be able to then develop promising ideas in collaboration.
Mr. Bugg-Levine: This is a great question. Thank you, Senator Petitclerc, for asking. It’s so important to consider issues of equity as we accelerate this movement. Because if it is not thoughtfully designed, it will amplify inequalities and provide greater support for those organizations best able to take advantage of this movement and who typically are the least marginalized.
It’s how you design your policies. In the case of the United States, we are motivated by regulation to lend to certain geographic areas. The government could choose to make that very narrowly defined. It could be the absolute most vulnerable and poorest areas are the only ones where this policy applies.
The challenge you will find is that there are certainly market failures in which racism and other misperceptions lead investors to misunderstand risk and, therefore, they can do very well financially serving those communities. In many cases, the market is already doing a good job. The reason they’re not lending is because it’s hard and risky. Senator Bernard mentioned the communities that are isolated in Nova Scotia. It could be that it is simply economically not viable for anyone, for a fund like mine or someone else’s, to lend to those communities because the loans you could make would ultimately be too small and the cost of serving them would be too high to make it pay off.
In that context, the government needs to recognize there is going to be a trade-off between the subsidy you’re willing to put in and the reach you want this program to have.
You absolutely can reach those communities with this opportunity. It will require you to subsidize on three fronts. You will need to pay someone to help those communities gain greater expertise and capacity to understand how to tap into this opportunity. That needs to be grant-funded by someone. The private foundations cannot be expected to do all of it.
You will need to help reduce the risk of those loans. We can lend in cases where there’s someone willing to take some risk and bring the capital in.
The third thing is you probably will have to subsidize the transaction costs of your lenders going in and making that possible. You can solve this through policy, but at some point you will face a trade-off between how targeted you want this to be on your most marginal communities and what ratio you expect to get of private capital through government subsidy, and it is hard.
I need to say this a lot in the United States, but I hope I have to say it less in Canada. You cannot expect private investment capital to substitute for government social spending. This is an agenda that can make your social spending more effective and get more out of the money you do spend.
Mr. Huddart’s example of First Nations is a great example. Should the government put money in and build those houses or put 10 per cent of the money in and create a mechanism in which a revolving loan fund can get the job done? You can use this as a way to get greater results from your government spending, but I would be wary of anyone who believes this is an agenda that, coupled to an austerity budget, can maintain our community at a level of equity and social justice while pulling back on government spending completely.
The Chair: Your point comes through loud and clear.
We have run out of time. Both of you have given us an international perspective from Australia and the United States, with commentary on other places, and it’s all very useful. I thank you both for being part of the process, and I thank my colleagues. We will be back tomorrow morning on this subject as well.
Senator Seidman: Excuse me, I don’t mean to interrupt, but they offered us information, particularly Ms. Addis.
The Chair: Yes. If you have information to send us, send it to the committee clerk. We’d be happy to use that.
Senator Omidvar: Ms. Addis, in particular, your chapter in the book about principles of government would be interesting for us.
The Chair: Yes, it would be. With that, I will wish all of you a happy Valentine's Day.
(The committee adjourned.)