Social Finance is a concept whereby financial investment tools are applied to social good. It’s hardly a new concept but in the last 15 years or so, Social Finance, sometimes referred to as Impact Investing, has received close attention by governments around the world as a way of bringing private investment capital to big social challenges. Low and no-interest loans, community benefit agreements, social enterprises and social impact bonds are part of a suite of “products” investors are being offered that are delivering solid returns socially, environmentally and financially. Most big financial institutions are now offering financial products that, at a minimum, meet responsible investment standards, because their clients are looking for them – particularly women.
The Government of Canada, as well as several Canadian provinces, has been looking into, supporting and testing social finance concepts for several years now. Since 2011, Social Finance has made an appearance in almost every federal budget. The 2021 Budget, tabled on Monday, April 19, followed suit. Starting on page 207 (2-0-7!), chapter six, under the section, “Strengthening the Cities and Communities We Call Home”, the Federal Budget makes provisions for the following three areas:
1) The government is proposing to launch planned disbursements of the $755 million Social Finance Fund and deploy up to $220 million over its first two years.
2) To ensure charities, non-profits, and social purpose organizations have the skills and capacity needed to access social finance opportunities, Budget 2021 proposes to renew the Investment Readiness Program for $50 million over two years, starting in 2021-22.
Finally, under its own section entitled, “Consulting on a New Canadian Social Bond” the Budget 2021 states:
3) “Social bonds are an opportunity to connect socially conscious investors with Government of Canada bonds that support social objectives such as reducing homelessness and improving access to high-quality early learning and child care.”
What exactly do these commitments mean?
Launching planned disbursements of the $755 million Social Finance Fund –
In 2018, a task force convened by the Federal government tabled a report entitled, Inclusive innovation: New ideas and new partnerships for stronger communities. In response, the 2019 Federal budget committed to establishing a Social Finance Fund with $755 million in funding over 10 years, and a $50 million Investment Readiness Program. Between 2019 and the beginning of the pandemic, the government has undertaken the Investment Readiness Program which was meeting with success, however, the Social Finance Fund itself has yet to be rolled out and the Investment Readiness program is set to expire this month. Essentially, the government is re-committing itself to rolling out this fund and has offered specifics about the proportion it plans to deploy over the next two years, even while no details have yet been announced as to what form this disbursement will take.
Renewing the Investment Readiness Program for $50 million over two years, starting in 2021-22.
In short, what this means is that the government is extending the funding it has identified to help charities, non-profits, and social purpose organizations develop the tools and skills they need to participate in these social investments. All these entities have extensive experience in submitting funding applications, maintaining accountability to funders, donor acquisition and retention and communicating their impact. That said, a social investment framework demands charities, non-profits, and social purpose organizations demonstrate an ability to negotiate with the private sector, to partner with research and academic institutions to rigorously measure return on investment (social, environmental AND financial), and to develop a heightened level of investment knowledge and capacity among staff and voluntary Boards of Directors. Essentially, to be an effective participant in a social finance investment arrangement that generates market returns for investors, many charities, non-profits and social purposes organizations need to develop new, or enhanced skills and tools, which they currently do not have.
Consulting on a New Canadian Social Bond.
What is interesting here is that the commitment is to consult – there is no money attached yet. Social Impact Bonds (SIBs) are extremely complex to design and relatively speaking, fairly new. They are not technically bonds in the pure financial definition, but rather carefully constructed contractual bonds between several partners. The basic idea is that private investors commit upfront money to pay for innovative, evidence-supported social or environmental programming delivered by social service, community or socially purposed entities. SIBs tend to focus on more proactive solutions (meaning it offsets something that hasn’t happened yet), which governments can be challenged to fund. [Tangential aside – our current pandemic predicament is a timely, albeit painful example] Generally speaking, when desired outcomes are delivered these investments can deliver longer-term, sustainable savings to government and “responsible” returns to investors. Not surprisingly, they have their fans and their detractors.
The Federal government’s first official foray into SIBs was a partnership with the Canadian Heart and Stroke Foundation (CHSF), an interesting choice given that health care delivery in largely the preview of the provinces.
Beginning in 2016, the bond issued by the CHSF with funding from the Public Health Agency of Canada, saw 11 investors including corporations, charitable foundations and private individuals, partner with a series of front-line service providers. 7,000 Canadians aged 60 or older with pre-hypertension were enrolled in a six-month program to help them adopt healthy behaviours and control their blood pressure. High blood pressure is essentially a gateway to a whole host of health-related challenges for Canada’s ageing population. The direct costs to our collective health care system are enormous. If we could proactively intervene at the pre-hypertension stage and introduce successful strategies to help seniors step back from this particular precipice, we collectively stand to save a lot of public funding in the future.
Late last year, the results of this SIB were announced. Exceeding its goal of stopping blood pressure from increasing among program participants, a significant decrease in blood pressure results was achieved. The bond investors received more than a 7% return on their original collective investment of $3.4 million. Given both the potential to apply this model to other social and environmental challenges, it is good to see it included in this Budget. It’s also good that no money will be released just yet, because this tool is not universally appropriate to all issues.
That being said, there is yet another interesting aspect of this particular announcement around SIBs.
As stated, the budget, “proposes to explore the potential for social impact bonds to complement the government’s existing debt program.” In other words, it is the government’s intention to explore SIBs as a component of its Debt Management Strategy. The fundamental objectives of debt management are, “to raise stable and low-cost funding to meet the financial requirements of the Government of Canada and to maintain a well-functioning market for Government of Canada securities.” This positioning of SIBs within the government’s debt management framework is an interesting signal that the government sees possibilities in exploring how this tool might be used to more significantly to fund social and environmental goals through well-intentioned and responsibly invested private capital. As stated in the Budget tabled this week, the Government predicts that enabling these kinds of investments has the potential to bring about $1.5 billion in private-sector capital to the table to tackle some of our most pressing social and environmental challenges.
That could be very interesting indeed!