A. INTRODUCTION
In March 2014, the MaRS Centre for Impact Investing and
Purpose Capital jointly released a report entitled “State of the Nation: Impact
Investing in Canada” (the “Report”). The Report is the first of its kind to provide an update on the
state of the impact investing sector in Canada. The purpose of the Report is to
respond “to a need to better understand the nature of impact investing activity
in Canada, the ways in which it is evolving and maturing, and the areas in
which it could grow or falter.” Impact investing involves a broad range of
approaches and organizations, encompassing foundations that supply capital on
the one hand and “non-profits” (which would include registered charities and
non-profit organizations under the Income Tax Act) and social
enterprises (which the Report defines as “organizations that employ
market-based strategies to accomplish a social or environmental mission”) that demand
and receive capital on the other hand. This Charity Law Bulletin provides
an overview of the findings of the Report, explains what impact investing is,
and briefly comments on how impact investing may affect non-profits.
B. WHAT IS IMPACT INVESTING?
The Report defines impact investment as “investments
intended to create positive impact beyond financial returns.” While in a
traditional bifurcated system, governments and community organizations use
grants, donations and non-repayable contributions to finance social needs, and
capital markets aim to create financial returns and capital growth, impact
investing attempts to amalgamate these functions, such that investors and investees
intentionally create a measurable positive impact that stretches beyond
financial returns. It is a method of financing new mechanisms that bridge the
public, private and social sectors in order to accelerate positive social
change. In brief, impact investing involves “intentionally investing for financial
returns and positive social impact.”
Impact investing differs from traditional investment in
three key ways. Firstly, whereas in traditional investment, investors allocate
capital where they can get a financial return, in impact investing, investors
allocate capital where they can receive a financial return and a defined
societal impact. Secondly, investees follow business models that intentionally
return both financial and social value. Thirdly, the stated intentions for
financial and social value must be translatable into a measurable social
impact.
Impact investing involves three key market segments –
those that supply capital and provide the investment, those that demand capital
and seek the investment, as well as intermediaries and enablers that facilitate
both the supply and demand and ensure that the demand is properly being met
with the correct supply. The supply generally comes from individuals,
foundations, community finance organizations, financial institutions, pension
funds and government, while demand generally comes from companies, non-profits,
and co-operatives.
The Report provides various examples of impact investing.
The RBC Generator Fund is one example, which was established as a $10 million
pool of capital for the purpose of investing in for-profit businesses whose
purposes are to tackle social and environmental problems, such as energy,
water, youth employment, and community hiring for disadvantaged groups. While
tackling these issues, the for-profit businesses continue to aim to general
market or near-market value. Another example is Renewal3, which was established
as a trust structure so that foundations could invest in mission-related
investments.
C. THE SUPPLY – FOUNDATIONS
The Report states that foundations are
among Canada’s “leading impact investors across several sectors,” and are most
active in community development, health, children and youth, education and
social services. A survey of 63 Canadian foundations conducted by MaRS found
that Canadian foundations mostly provided debt financing to NPOs and
social-purpose for-profit organizations, with 77% of surveyed foundations
investing through a third-party impact fund or capital program.
Foundations across Canada have invested
approximately $205.5 million in mission-related investments (“MRIs”) (which the
Report states “seek opportunities to align a foundation’s financial investments
with the mission of the organization, while maintaining targeted financial returns”)
and $80.3 million in program-related investments (“PRIs”) (which the Report
defines as “investments, rather than grants, made to a qualified donee…[that]
are for the primary purpose, not of income generation, but of furthering the
foundation’s charitable purposes.”). However, impact investing is spread
amongst a relatively small number of foundations, with many foundations only
now beginning to explore the concept of impact investing. While 31% of the surveyed
foundations had a strong understanding of impact investing, only 16% had stated
policies on impact investing. However, the surveyed foundations indicated an
intention to increase their MRIs by 29.5% and their PRIs by 23% over the next
five years.
While many foundations indicated that
their investments had met their financial expectations, they also indicated a
need for greater clarity from the Canada Revenue Agency about the allocation of
capital, such as MRIs and PRIs, and their ability to directly invest in impact
funds. Foundations faced challenges directly investing in impact funds, as many
impact funds are structured as limited partnerships, which private foundations
are prohibited from investing in. As such, the Report stated that “foundations
could be ideal impact-first investors in investees with high social value or
could unlock capital from other investors if their challenges can be
addressed.”
D. THE DEMAND – THE NON-PROFIT SECTOR
Despite charities generating $177 billion
in revenue between 2005 and 2009, the Report stated that the non-profit sector has
significant unmet capital needs. The Report states that 66% of social
enterprises run by charities were seeking capital between 2010 and 2012, with
half of those looking for $50,000 to $1 million. While the non-profit sector
obtains most of its funding from the government, foundations and donors, the
Report states that these sources provide an insufficient diversity and quantity
of capital. As such, impact investors “play an important role in unlocking
capital for non-profits and social enterprises that are harnessing business
models that align with their missions and that have the ability to generate
both financial returns and amplify social impact.”
Non-profits face particular problems with
accessing capital, as they cannot guarantee loans, leverage assets, or provide
exit strategies for investors. Consequently, the Report states that most
non-profits are financed through loans. However, a small number of suppliers,
including Vancity, the Canadian Alternative Investment Cooperative (“CAIC”),
the Community Forward Fund, and the Edmonton Social Enterprise Fund are
engaging in impact investment in social-purpose organizations such as
non-profits. For example, after investments from the government of Nova Scotia and
the YWCA to build a YWCA daycare and office space, CAIC took the risky position
of providing the YWCA with a second mortgage and acting as a second lender, but
did not do so at the higher interest rate commonly charged by second lenders.
CAIC has nonetheless reported that their investment has met their financial
expectations and that the daycare has had full enrolment, providing a strong
social return as well.
As the lack of diversity and quantity of
financing options is a major hurdle for the non-profit sector, the Report calls
for new corporate forms that enhance the ability of social purpose
organizations to access debt and equity financing, government enabled loan
guarantees, and patient capital pools.
E. CONCLUSION
While impact investment remains a
relatively new and emerging concept, the Report demonstrates that this new
mechanism can benefit a wide array of organizations within the non-profit
sector, including charities. Impact investing provides a method of financing that
has the potential to bring capital to the suppliers and provide capital to
those who demand it, all the while aiming to generate measurable social change.
This is a welcome development and one which hopefully the federal, provincial and
territorial governments will be encouraging and facilitating in the future in
tangible and innovative ways.
