Harji and Hebb Nov.10 th 2009 16 Draft Only C<strong>on</strong>clusi<strong>on</strong> <str<strong>on</strong>g>The</str<strong>on</strong>g> Canadian social finance marketplace is nascent and evolving, though it is evident that many traditi<strong>on</strong>al actors – particularly government and foundati<strong>on</strong>s – engaged in social investment will remain influential. Margie Mendell, an influential commentator in the social finance space in Canada, reminds that “we must emphasize the legacy c<strong>on</strong>tributed by an already existing and established social finance or social investment sector not previously referred to as such but that has, until now, provided finance <str<strong>on</strong>g>for</str<strong>on</strong>g> cooperatives, community based initiatives and not‐<str<strong>on</strong>g>for</str<strong>on</strong>g>‐profit enterprises and organizati<strong>on</strong>s. Many of these have a l<strong>on</strong>g history.” (Mendell, 2008:12). <str<strong>on</strong>g>The</str<strong>on</strong>g>re is no clear answer to what aspect of development of the social finance marketplace will be the “tipping point” <str<strong>on</strong>g>for</str<strong>on</strong>g> the emergence of a more mature industry, or even a dedicated asset class. This discussi<strong>on</strong>, which also finds parallels in the UK and US, describes two scenarios: increased supply of capital seeking blended value returns will encourage the development of investment‐ready opportunities <strong>on</strong> the demand side; or alternatively, significant investment‐ready opportunities will be created and subsequently encourage investors seeking a combinati<strong>on</strong>s of returns across grants to below‐market to market rates of return. Presently, there is some evidence that capital supply may not currently be the limiting factor, with reference to growth of socially resp<strong>on</strong>sible investing and community investment referred to earlier in the paper. This raises a number of implicati<strong>on</strong>s. One is that existing finance intended <str<strong>on</strong>g>for</str<strong>on</strong>g> social purposes is not being packaged into appropriate products to satisfy the demand that already exists. For some social ventures, there will always exist the case <str<strong>on</strong>g>for</str<strong>on</strong>g> some <str<strong>on</strong>g>for</str<strong>on</strong>g>m of subsidy, and grants as the vehicle of choice. However, there is a misalignment with too many organizati<strong>on</strong>s providing grants and relatively few providing other <str<strong>on</strong>g>for</str<strong>on</strong>g>ms of capital. This has c<strong>on</strong>tributed to both an underdevelopment of the instruments al<strong>on</strong>g the supply c<strong>on</strong>tinuum, as well as a bias <str<strong>on</strong>g>for</str<strong>on</strong>g> (demand) organizati<strong>on</strong>s to prefer access to grants rather than loans. This is even more pr<strong>on</strong>ounced <str<strong>on</strong>g>for</str<strong>on</strong>g> social enterprises, which by their nature may require access to a broader range of finance similar to what is available in the private sector (Carter and Man 2008). Governments at the federal and provincial levels have a range of policy instruments which can stimulate the flow of investments towards social finance, and a number of less<strong>on</strong>s that can be drawn from recent experience in other jurisdicti<strong>on</strong>s. <str<strong>on</strong>g>The</str<strong>on</strong>g> establishment of Community Interest Companies (CICs) in the UK has stimulated the flow of private investment capital to activities that benefit community, and a similar applicati<strong>on</strong> to Canada could overcome an important barrier <str<strong>on</strong>g>for</str<strong>on</strong>g> Canadian charities and n<strong>on</strong>‐profit organizati<strong>on</strong>s: the ability to raise equity capital (Bridge and Corriveau 2009).With some modificati<strong>on</strong>s, Low‐Profit Limited Liability Companies (L3Cs) (US legislati<strong>on</strong> that provides incentives <str<strong>on</strong>g>for</str<strong>on</strong>g> private and foundati<strong>on</strong> capital to invest in social initiatives) could be another avenue to facilitate greater supply of capital to the sector (ibid 2009). While these legal structures pose their own unique challenges, they signal that there is no need to “recreate the wheel” to c<strong>on</strong>struct legal structures to accommodate hybrid organizati<strong>on</strong>al activities. At the present time, the Canadian social finance market is not yet calibrating risk and opportunity adequately – a trend which is not unique to this country, though amplified compared to the US and the UK (Venturesome 2008). Many traditi<strong>on</strong>al funders to social sector organizati<strong>on</strong>s are not using the full array of financial tools at their disposal – such as foundati<strong>on</strong>s and Program Related Investments – to achieve their social objectives. Governments must recognize that grants will remain an important part of the social finance landscape, but that there is flexibility to develop a range of mechanisms to deliver finance to address social issues. Mainstream financial instituti<strong>on</strong>s are still relatively insulated from the potential opportunities that exist around investing in social enterprises or social businesses, even though these may prove to be prudent investments over the l<strong>on</strong>g‐term. All these observati<strong>on</strong>s underline the importance of intermediaries to be able to catalyze the development of the social finance marketplace in Canada. Social finance cannot yet be c<strong>on</strong>sidered a defined asset class in Canada, though this paper has indicated that there are a number of emerging opportunities that could catalyze the emergence of an industry dedicated to generating blended value returns. <str<strong>on</strong>g>The</str<strong>on</strong>g>re is evidence to suggest that a significant amount of capital is seeking to generate social returns, and that prominent investor groups are willing and increasingly able to incorporate an (social) impact dimensi<strong>on</strong> into the
Harji and Hebb Nov.10 th 2009 Draft Only traditi<strong>on</strong>al risk/reward equati<strong>on</strong>. Ultimately, what is required is the development of appropriate incentives <str<strong>on</strong>g>for</str<strong>on</strong>g> intermediaries in the social finance marketplace, such that they align the expectati<strong>on</strong>s of investors with the capital needs <strong>on</strong> the demand side. 17
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