May 2018 Charity & NFP Law Update
On May 10, 2018, the Standing Senate Committee on Social Affairs, Science and Technology (“Standing Committee”) published a report entitled The Federal Role in a Social Finance Fund (the “Report”). The Report follows the Standing Committee’s study of a social finance fund and discussions with the steering group that co-developed a Social Innovation and Social Finance Strategy with the Government of Canada. While the Report was produced in response to an Order of Reference adopted by the Senate on December 14, 2017 authorizing the Standing Committee to “examine and report on issues relating to social affairs, science and technology generally,” it falls in line with the Federal Government’s initiative over the last several years to investigate whether and how to support social finance initiatives in Canada.
The Report describes social finance as “an investment made for the purposes of achieving a beneficial and quantifiable impact on society and/or the environment; and an economic return,” as well as “mobilizing private capital for public good.” While social finance is not a new concept, the Report outlines a more recent phenomenon of social finance being used in the context of social challenges that have been traditionally dealt with by the public sector. In this regard, the Report indicates a need for a financing “ecosystem” to bridge the divide between the need in the charitable and not-for-profit sectors for funds and the supply by impact investors thereof.
The Report also discusses social finance funds in Canada and abroad, and outlines two types of social finance funds. The first model “helps 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,” and while these are less risky investments, the Report indicates that there are regulatory constraints preventing charities and not-for-profits from investing in them. The second model is the “seed fund model,” which blends philanthropic capital and donations under the assumption that the majority will not grow. However, investors may receive up to 70% of their costs back through a combination of charitable donations and tax credits.
With regard to the role of the government in social finance, the Report states that all witnesses agreed that the government was instrumental in creating, growing and maintaining the sustainability of a social finance market in Canada, both through supporting existing social finance ecosystems and through creating new ones. Witnesses also agreed that the risk for private investors could be reduced through guaranteed government loans.
The Report provides six recommendations concerning what the Federal Government can do to stimulate social investment. These recommendations include that the government: create a pan-Canadian social finance fund operating at arm’s length from the government; seek opportunities to leverage funds from investors when assessing where to invest in the social finance fund; consider using dormant bank accounts as the basis of capital for the social finance fund; target a portion of its social finance fund contribution to intermediary funds used to help marginalized regions and communities; ensure organizations are capable of participating in the social finance ecosystem by supporting institutional capacity building; and make a multi-year commitment to a social finance fund.
While it remains to be seen how the Federal Government will act upon the recommendations, the Report is an encouraging step forward towards creating a more robust social finance model in Canada.