:
Thank you very much for the opportunity to present to your committee.
I thought I would take a couple of minutes to tell you a little bit about the RBC social finance initiative to give you some context, and then jump into a description and explanation of how we see the different parts of the market and what our observations are regarding the role of government in helping to move forward this area of finance.
I'm going to start by clarifying the way that we define social finance. We understand social finance to be the use of private capital in financial markets for social good. The other thing that I think is an important context-setting piece is that we look at the social finance marketplace as having three distinct portions, similar to any financial marketplace. There's the supply of capital on one side, meaning the money that flows into social finance and social good. On the other side are the enterprises, the companies, and the organizations that demand and require the capital in order to deliver social good. In the middle, of course, you have intermediaries.
The supply can be, for example, high net-worth individuals, governments, banks, and angel investors, etc. On the demand side you can have for-profit companies that are delivering social good, non-profit companies, projects, and cooperatives, etc. Then in the intermediary bucket we would include things like financial institutions, funds, and any intermediary that facilitates the flow of capital between those who need it and those who have it.
With that context, the other piece that I also find very helpful, at least in our business, is looking at the range of social finance. The way that we understand social finance is that when you are taking private capital and using it for public the good, there are a number of different ways that those investors, those with the supply of capital, look at where to place their capital. It can range anywhere from traditional responsible investing, perhaps be screening publicly traded companies and picking the ones that are the least harmful in their sector, all the way through to what we would call “impact investing” or “venture philanthropy”, where you're actually looking at placing money for really deep social impact, and where you may not be as concerned with returns. It's important to see that there's a continuum in the types of investors and people who are looking to provide money in the social finance space.
In 2012 RBC launched our social finance initiative. Our intention with the initiative was to be in a position to catalyze social finance in Canada. We wanted to do it through four pillars.
The first pillar was that we were going to be investors in the marketplace. We set aside a small pool of capital, $10 million, specifically to invest in early-stage companies with a social or an environmental mission—but they had to be for-profit companies.
The second pillar was to demonstrate the power of foundations and endowments to participate in this space. We made a commitment to take at least $10 million of the RBC Foundation's endowment and invest it for the social good. In fact, we're currently at about $15 million of the endowment. It's invested more along the lines of responsible investing, but it is still something that is not that commonly done with endowment and institutional money.
The third piece of the initiative is the powerful piece for a large corporation like RBC, and that's to catalyze social finance by helping drive thought leadership and partnerships. This is a really key piece, helping to develop this side of the market and those who need the money into more investable enterprises. We call this “accelerate the accelerators”, which is providing some funding and partnership to start up accelerators that help cultivate better entrepreneurs and better social enterprises.
The last pillar was to look at the opportunities in RBC to incorporate social finance into our core business, which of course is capital markets, wealth management, asset management, etc.
Those are the four pillars of the initiative. Of course, the way that we're looking at success is, how are we catalyzing social finance? How much money have we invested for impact? How many social entrepreneurs have we helped?
We're also looking specifically at delivering social good in a number of sectors through our investments. We're looking at employment, specifically for youth and the hard-to-employ. We're looking at water, and we're looking at energy.
Of course, we're looking at how this looks to our businesses. There's a very deep amount of interest in this among our wealth management colleagues. Of course, we also want to make sure that, where appropriate, we are cultivating the relationships and positive views of RBC's leadership in the sector.
That being said, we have actually invested almost $4 million for impact. We've been putting money out the door for about 18 months. We have seven investments. We also have six strategic partnerships with start-up accelerators. We see that through our investments we have helped 80 hard-to-employ individuals get work just in 2014, etc. So we're tracking a number of different pieces of data.
The important thing about this, though, is what we've learned along the way, which, indeed, is the focus of this initiative.
I will sum up in a couple of points what we've learned.
The first thing we have learned is that the supply of funds for social finance in Canada is growing rapidly from a very small base. We've learned this through a couple of different research papers we did last year. There's about a trillion dollars in responsible investment assets under management in Canada, but only about $4 billion to $5 billion of that is the deep impact investing, the kind of investment money that drives deep social impact.
We've also seen that institutional investors, the foundations and endowments, are resistant to impact investing. In some cases there are reasons for it, which I'll talk about briefly in a minute.
We also found that in Canada almost 45% of high-net-worth people think that making a positive social impact is very or extremely important. Interestingly, 75% of the people under 40 think that. We think there's a wave coming of deep interest with private money and in putting that money into the social good.
We found that the top barriers to the growth of impact investing in Canada include a shortage of high-quality opportunities for investment money in this space. Very importantly, particularly in the context of government, is inadequate measurement and the inadequate data available on social and environmental impact and social and environmental status, so that you know whether you've made an impact.
What does this mean for the role of government?
I've picked my six favourite things.
I will start with the supply of money. In terms of the supply of capital for social finance, there are three things that government can do to play an important role, and in some cases has started.
First is is credit enhancement. In banking, this means guarantees. This is first-loss capital. It basically means backstopping investment money into a sector where you want to see investment. In particular, this is important for de-risking some of the riskier, early-stage-type investing that smaller retail investors, who can't afford to lose a lot of money but who might want to participate in social finance, might be more inclined to do it if it were somehow backstopped to some extent.
The second way government can play a role in supply development is a really important one. It's around clarifying the fiduciary duty of institutional investors. The way it stands right now is that trustees of pension funds and endowments in Canada, depending on the jurisdiction, are uncertain if they are breaching their fiduciary duty by investing for social impact rather than strictly for returns.
The third way is to make capital available to fund intermediaries. This is the model that Big Society Capital in the U.K. is using, making money available for funds and not necessarily putting government money directly into the enterprises.
It would also really help if government were to make accurate community-level social data widely available. For example, what is the social impact of investing in something? What is the dollar value of a particular social problem, and what is the return to society of solving it? For example, it returns $50,000—I'm making the numbers up—a year to keep one person out of prison. It returns x thousand dollars a year to keep a kid in school for another few years, etc.
In short, what is the social dollar value of the various social problems? Make that information available, make it easy for people to know when they've solved that problem and for the government to know how much impact that has on the taxpayer and on social costs.
:
Welcome from foggy Vancouver.
Mr. Chairman and committee members, I'd like to thank you for this opportunity to appear before the committee to discuss the use of private and institutional financing as part of a strategy to improve social outcomes and strengthen communities in Canada.
I provided a deck, I think a little bit late. Actually, I'm not going to speak to the deck, but if anybody has questions about it, I'd be happy to answer them during the question period.
I've served as vice-president of community investment at Vancity since September of 2010. Vancity, with over $19 billion in assets and a half million members, is based in British Columbia and is the largest credit union in Canada. We were founded 68 years ago to provide social financing, essentially providing financing for people who could not get mortgages from the commercial banks on the east side of Main Street in Vancouver. It turned out to be a very good business. It was both a good social investment and a good business proposition. Vancity as a cooperatively owned financial institution sees itself as a social enterprise and takes its community investment role very seriously, so seriously that we have a vice-president for community investment. That's me, and I have a staff of 30.
Our team works on many levels to increase access to capital for our members and their communities. In particular, we're focused on affordable housing, local and natural organic food, energy efficiency and renewable energy, and indigenous communities and social finance or social venture capital. We help our credit union put its balance sheet in the service of these members' communities. We're really sort of the business development side of things.
At Vancity, we track our commercial loan portfolio and our commercial investment portfolio for its impact, with a goal of converting as much of that as possible to areas we've defined. At this point about 40% of our portfolio of $2 billion is in social impact investment.
Four years ago, with the support of the Province of British Columbia and the Vancouver Foundation—speaking here to one of Sandra's points—we set up the Resilient Capital program, which was a credit-enhanced fund. We raised about $15 million from 24 different investors, including educational institutions, unions, the government, and private sources, including high net worth people, and put it in a fund to support social enterprises. We've made about 26 investments out of that fund.
We participate and help guide the multi-sectoral BC Partners for Social Impact, a province-wide social finance round table. We are playing a role in participating in the national advisory task force on the G7 on social finance, and we've been co-convening a national social finance investment table.
I personally have been working most closely on Resilient Capital with a new intermediary, New Market Funds, which is described in the handout I gave you, and I've been working closely with Community Forward Fund, which is a Canada-wide community loan fund.
Before joining Vancity, I served as CEO and president of Housing Vermont, which really affects the way I look at the work I do. It's a non-profit that owned the Green Mountain housing equity fund and Vermont Rural Ventures. Essentially, this is a non-profit investment and development company. We raised about $125 million in private capital and managed private investment portfolios, consisting of affordable housing and public facilities, of about $350 million in assets.
Funds were deployed by Housing Vermont to address housing, economic development, and social needs, in connection with the federal and state incentives that existed in the United States in the form of new market tax credits, low-income housing tax credits, and other state and federal programs, which supported the move of private capital into these areas of community need.
From my perspective, this is key to the success of any movement to social finance. It's the merging of the discipline and ability to execute that's found in private capital markets, with a purpose of community investment and non-profit and charitable purposes. What we created at Housing Vermont is what started 68 years ago at Vancity. Anything the government can do to help facilitate that union by creating an enabling environment for social finance will result in more private investment in positive social and community outcomes.
The field of social financing in Canada is really just beginning to get organized. As such, the agenda is not focused. There's a good deal of wheel spinning. I'm sure you've been hearing all sorts of interesting testimony. The first problem is that there's very limited capacity within the community. I think Sandra spoke to that in terms of helping prepare or make the investees more investable. I'd also point out that the non-profit sector is very primary in its understanding of capital and how to deploy it.
Community capacity has largely been responding to government funding, which has a different risk management profile than private capital, or has have been responding to philanthropy. Again, neither model really works for managing private capital.
There's a great deal of chatter going on about social impact bonds. My experience based here in B.C. and in the United States is that I remain skeptical about the enthusiasm for two reasons. First is a general lack of clarity about what a social impact bond is. From an investment point of view, we're talking about contracted payments or a pay-for-performance scheme. The second problem, which I think is probably more important at this early stage in social finance, is that in an environment where there's a focus on reducing government outlays, on saving government money, it's a tough environment in which to introduce social impact bonds. It could be used as a way to disrupt or reduce the provision of critical government services rather than improve their delivery or efficiency.
I would encourage only cautious investigation of such programs, but would strongly advocate that you work directly to support the development of a more robust community finance infrastructure in Canada.
This work begins, I believe, with the CRA and changing the regulatory regime that currently makes the merging of private investment and charitable goals exceedingly difficult, from such things as making it clear that charities, foundations, and institutional investors can invest in limited partnerships, to removing any direct or indirect prohibitions on non-profits' creating and holding net revenues.
Non-profits and the community sector in general need to build their balance sheets. If they're going to manage private funds successfully, as has been seen in the United States and in Great Britain, this work needs to begin with a strong focus on building that balance sheet. In both the United States and in Great Britain, there has been great latitude for non-profits and charities to engage their work with private capital as partners. That kind of environment has to be created, and that's front and centre of the primary steps that need to be addressed.
Another important enabling tool would be modestly modifying the reporting requirements for financial institutions, with apologies to Sandra. It should be required of all financial institutions and credit unions to report on their level of investment in community against a common standard. It's not critical that such investment be required; it's just critical that it be reported on. The market itself, as Sandra's pointing out, where so many people under 40 are really interested in making sure that their money is put to good use, will help the more formal financial markets figure out how to do that in the right environment. Creating a regulatory environment that encourages financial corporations to report on more than just a single bottom line is critical.
Finally, the federal government should do more to support the critical role played by intermediaries—which again goes to Sandra's point—such as Royal Bank, Vancity, and entities as small as new market funds in the Community Forward Fund.
As the federal regulations in regard to credit unions are being drafted, I would ask you to keep in mind—and I think this is before Parliament currently—that Canada does not really need more small banks. The requirements of Basel III were designed to overcome the failings of large banks in global finance and should not be the instrument that kills the difference that credit unions bring, namely their focus on building their members' communities.
These institutions and others will become critical to building the community capacity necessary to manage private capital and also necessary to creating the fund managers who can speak and be accountable to private investors.
In the United States and Great Britain, social finance has become robust markets raising and deploying enormous amounts of capital and service of multiple bottom lines. If the Government of Canada successfully creates such an enabling policy environment, it will have big returns.
I'm happy to respond to questions on my remarks around the deck I've provided.
Thank you.
I would like to thank committee members for having invited us to participate in this meeting.
The Caisse d'économie solidaire Desjardins is a cooperative financial institution which is a member of the Mouvement Desjardins, the biggest cooperative financial group in Canada. With assets of $227 billion, the Mouvement Desjardins is considered the fourth safest financial institution in North America by the magazine Global Finance, and the second most solid in the world according to the Bloomberg financial information agency.
With assets of $737 million, the Caisse d'économie solidaire Desjardins has, for 44 years, played a major and preponderant role in Quebec when it comes to social finance. Its assets have more than doubled over the last 10 years and its loans to social businesses have increased by 122% over the same period.
The membership of the caisse is made up of 3,000 associative or cooperative companies from various sectors of activity and of 12,000 individuals. It serves as an intermediary between savings—that is to say supply—and funding for businesses from the social economy—that is to say, demand. Desjardins offers investments with social returns. Deposits are guaranteed by the Deposit Insurance Corporation of Quebec. In 2014, savings in our institutions amounted to $617 million and loans came to $622 million, including $477 million used to directly finance projects with a social impact.
The caisse offers borrowers a wide range of credit products, term loans and lines of credit. We generally underwrite these loans to support the activities and development of social projects.
The caisse is also a very active member of Cap finance, the Réseau de la finance solidaire et responsable, which recently appeared here. The caisse collaborates with its natural financial partners from the associative or union networks to obtain the non-guaranteed portion of the financial package, that is to say, patient or venture capital.
The caisse is the biggest institution in Quebec's social economy financing network. It makes up more than 40% of the total volume of social financing. In Quebec, according to the latest statistics, the social finance sector represented $1.4 billion. In Canada, according to the Responsible Investment Association, the social finance sector amounted to $4.3 billion.
I would like to give you some examples in this regard.
The caisse plays an important role in the development of collective housing. It provides financing for nearly 10,000 units of social housing in Quebec. In 2014, this sector represented more than 50% of the loan portfolio, a value of $262 million.
The caisse has long been a financial partner of the Fédération des coopératives du Nouveau-Québec. Its funding to this institution amounts to $30 million. We have also set up financial services counters for the Inuit population in various villages. This is a project that is currently being carried out with the Mouvement Desjardins. The social impact of this is access to a bank account for an isolated population spread over a vast area.
The caisse is a solid and viable financial institution. Ever since its foundation, it has aimed to use finance to create a more just economy. In an economy at the service of people, finance becomes a means and not an end in itself. What distinguishes the caisse from a philanthropic organisation is that it seeks to remain profitable. This is necessary to the survival of the projects it funds.
The surpluses gained through its credit intermediation activities are in part capitalized to ensure that it is financially sound. From the very beginning, members agreed to have the part of the surpluses they could receive individually returned to the community as collective dividends. For a number of years, this has meant nearly $1 million per year provided as donations. Through these donations, the Caisse has been able to co-found an innovative services exchange network in Quebec for people living in poverty. This Quebec initiative, called l'Accorderie, has spread to France and Morocco.
Housing, access to financial services, reintegration into the workforce, literacy, health services, homelessness, food security and the environment are some examples of issues that businesses funded by the Caisse have addressed in order to find solutions.
Social finance exists because there is another economy, that is, the social economy. The Caisse sees social finance as an alternative to traditional finance. Social finance belongs in a mixed economy, along with the private and public economy, to support the development of entrepreneurial initiatives driven by the wish to meet the needs of people and communities, and not only first and foremost by a striving for profit and personal enrichment.
This social economy and the social finance that supports it deserve to be recognized and encouraged. We welcome this committee's initiative and hope that social finance and the social economy will be acknowledged and supported by the federal government through programs such as start-up programs, envelopes for research and development for social economy businesses, training programs for both administrators and managers in cooperatives and associations, and finally, research programs to document the impacts of social businesses and their innovations.
Thank you.
:
Thanks. That's a great question.
The Responsible Investment Association report that you're referring to just came out a few weeks ago. It was done by the RIA with support from RBC corporate and RBC's global asset management group, the people who develop mutual funds and products for investors.
Yes, we see that there is a little bit of a chicken-and-egg scenario going on. There are not a lot of investable financial products out there for investors who are looking for a certain risk profile, but on the other hand, those financial products will never be developed if people don't start to put some money into them. The way we're trying to address it, frankly, is through things like the report we did with the RIA and other reports—I have a handout that's an excerpt from a report we did, “Financing Social Good”—to mainstream some of the concepts around social finance, presenting them in a language that is the same language that the traditional finance and investment community uses.
Certainly that was the first thing that struck me when I entered this space. It was like all those people doing social good were speaking a completely different language. I thought, “My goodness, we need a translator here.” We're trying to serve as a translator to make sure that the community sector and the finance and investment sector speak the same language, or, if not, can at least translate. We're doing that through some of the partnerships and some of the research pieces.
I think data and hard facts are the only way to break down some of the misconceptions, misunderstandings, and maybe trepidation about getting into this space.
:
Thank you for this opportunity.
I believe that the speakers in prior sessions have talked about social finance at large, social enterprise, social impact bonds, and how to unlock capital for foundations, and so forth. All those topics are very important and are very promising, but I will perhaps take the discussion in a slightly different direction.
At Social Capital Partners, we often ask ourselves how we can engage the mainstream, the private sector, in social finance and social impact. What are some win-win scenarios and models that would motivate scaled private sector players to improve our society while not compromising their financial return? The answers to these questions might unlock the biggest opportunity for scaled impact and return on taxpayer dollars.
I will tell you about a concrete model from a practitioner's perspective that we've been working on, but the point that I want to make is that we believe that there are many more opportunities to engage with the private sector if we think creatively about this emerging field of social finance.
But first, I will tell you briefly about Social Capital Partners. We are a non-profit started by philanthropist Bill Young, who was a member of the Canadian social finance task force that has been referenced in prior sessions. We have been immersed in the social finance field for about 14 years and we started off investing in and helping to start social enterprises.
After five years we learned that social enterprises can have a real social impact while mostly financed by earned revenue, but they are difficult to scale, because start-ups are hard and even harder with this double bottom-line focus of financial return and social impact.
We realized that we could only do one deal a year, since we had to dig into the business model and ensure that there was a sustainable revenue model. That is the point at which we turned our attention towards the private sector and already-scaled business models. We provided attractive financing to entrepreneurs who wanted to buy or grow a franchise location like a Mr. Lube or Boston Pizza. In return for receiving our money, the entrepreneur committed to hiring a portion of its staff from community service providers like YMCA and Goodwill, etc.
We tied our financial return to our social impact, so for every hire they made, the interest rates on the loan went down by x percentage. Today we have an investment portfolio of about 80 businesses and, on average, 25% of the total staff in each business are employees who are hired through our program. These employees might have a disability or be new to the country or are youth at risk.
We play the intermediary role between the entrepreneurs and organizations like YMCA to make sure that job seeker matches are successful from the perspective of both parties. A couple of the original hires we helped place have now risen through the ranks and we think that they will soon be in a position to open their own franchise. We would, of course, be delighted to provide the financing.
We proved this model works from an impact perspective but also financially. Our portfolio yields return rates of 7% and our default rate is 2.4%. We asked ourselves, now what? How do we grow our portfolio from 80 loans to 10,000 loans? We said, imagine if the banks would provide this social finance product in all of their branches. Imagine if the banks would offer their standard loan product of, for example, prime plus 2% but customers have the opportunity to lower that interest rate by half a percentage per hire they make through a community hiring program. You might ask who is covering the cost of the interest rate reduction? I will answer that in a second.
We did some modelling together with Deloitte, and if you take someone off social assistance or some other government support, depending on the population groups and the support systems, and put them into employment, on average the government has saved about $6,000 per person after six months of employment.
Compare that to the cost of lowering the interest rate half a percentage on a typical $200,000 loan, a cost of about $3,000. We believe that there is a clear business case for government to cover the cost of the interest rate reduction of half a percentage per hire when the savings are twice the amount compared to the cost. The interest rate reduction will only take effect once the hire has has been employed for six months, so there is very little risk involved for the government. It's a straight pay-for-outcome model, leveraging components of a social impact bond—which I know you've had presentations on in the past—but minimizes the complexity that comes with the structure of a social impact bond.
We presented this to the Ontario Ministry of Economic Development, Employment and Infrastructure and they want to pilot this. We have engaged the banks over the last few months, and we actually had a design workshop yesterday for what the pilot could look like with three banks that have shown interest in being part of this. We're doing the same with credit unions in a couple of weeks.
Looking at the opportunity—and I'm not here to pitch this, but to make a point—with 10,000 loans, Deloitte estimates net savings to the government of about $140 million, 40,000 roles being filled by vulnerable persons, up to 2% interest rate reduction for employees, and the hiring support provided by community agencies and selected financial institutions being able to provide lower interest rate loans compared to its competitors to help drive social impact. We believe this is a compelling picture, but the point that I want to make is that, when you start to engage the private sector players in win-win scenarios, you can get to scaled social impact quickly.
I think there are a number of exciting trends and models emerging and, when they intersect and converge, we could see some very interesting results. The models that I'm thinking of are social finance, shared value promoted by Michael Porter, collective impact, innovation labs, nudge, and behavioural insight theories. In fact I think the White House announced last week a nudge unit similar to the nudge unit in the U.K. government.
We don't have time to go into all this, but to me the bottom line is that it is all about changing behaviour, encouraging new ways of working, and involving new players. In our experience we are changing the behaviour of employers to hire people with disabilities, new Canadians, at risk youth, etc. through providing a fairly inexpensive nudge in the form of an interest rate reduction and through leveraging the distribution channels of the banks and credit unions to go from engaging 80 employers to 10,000 employers.
Lastly, along these lines we think it would be very, very interesting to explore already existing government programs aimed at the private sector and add a social twist to it. One example is the Canada small business financing program. The government is essentially guaranteeing up to 80% of the loan provided by financial institutions to small and medium-sized organizations that the banks wouldn't necessarily otherwise provide loans to because they're too risky. Imagine if on top of that we add a social twist, whether it's hiring, it's environmental solar panels on the roof of the businesses, or what have you, we think that could be a very interesting model. There are many similar models like that and, again, looking into who they are and what that could look like would be very interesting.
Thank you.
:
Thank you very much. Again, thank you for the opportunity to speak to the committee on this very important topic.
My comments will echo many of Magnus's comments about the role of the private sector in enabling social finance. I'll begin by offering the committee my perspective on social finance that might be a little bit different from some of the other comments you've heard so far.
For me, the first think I think about is who actually participates in social finance or who the participants are. When I think of social finance, the idea of investing to achieve both social and financial returns, or blended returns, is often championed by the charitable or non-profit sector. However, social finance is not the exclusive purview of the charitable sector. When we think of blended returns, it is equally as valid to think of social finance as it applies to the activities of for-profit incorporated organizations and ventures similar to the ones that Magnus had identified.
In fact, a growing number of companies have, as their raison d'être, the desire to fundamentally tackle social problems that are present to society. Legal forum in that way is therefore not a precondition for social finance.
The second part of my perspective centres on social finance as more than just those that participate in the investment activity. An entire ecosystem of actors participates in social finance in one form or another, and in some cases, there may be several agues of separation between the actors and the investment activity.
There is a very small example. I teach a course on social entrepreneurship and impact investing, a subcategory of social finance, to engineering students at the University of Toronto. People would think social entrepreneurship and engineering students might be an odd place for a talk on social finance, but it's actually a fantastic opportunity to expose a different category of individuals to the concept of social finance.
I also advise a group called ABC Life Literacy. In fact, I believe that Gillian Mason from ABC will be speaking to this committee later this week. Gillian is interested in social finance not only as a possible recipient of social investment but also insofar as her organization may be able to support others to engage in social finance.
Business incubators, advisory firms, legal firms, monitoring and evaluation initiatives, government agencies, all of these and others provide some form of value to helping develop the social finance ecosystem in Canada. Social finance, therefore, represents a clustering of different forms of economic activity.
Third, social finance can be viewed as an instrument that is helping to breakdown traditional firewalls between economic sectors.
A gentleman by the name of Antony Bugg-Levine, the CEO of the Nonprofit Finance Fund and a noted speaker and file leader in social finance, often speaks of the bifurcation of our world in which we invest in one case only to make money or private gain on one side, and we solve social problems through charity or public good on the other.
Social finance breaks these silos down. With social finance, private sector actors with the right motivation and intent can invest for private good alongside private gain. The role of government in this model also changes. With social finance tools, government can now focus on incentivizing private actors and establish the conditions by which they can finance public good.
My firm, Purpose Capital, was founded with this perspective in mind. My business partners and I launched our firm with a goal of mobilizing all forms of capital—financial, physical, human and social—to accelerate social progress. We aim to bridge and divide between businesses and organizations, looking to make the world a better place, and investors seeking a blended or compelling financial and tangible social impact.
Our experience with social finance takes many forms. One of our practice areas specializes in advising asset owners in the development of social finance strategies.
I'll offer an example of our work with the Inspirit Foundation. Inspirit Foundation's mission is to inspire pluralism among young Canadians of different spiritual, religious, and secular backgrounds. This is achieved through a national ground-making program and a commitment to mission related investing, or MRI.
Purpose Capital has worked with Inspirit Foundation since January of last year to define, implement, and monitor their MRI program, which strikes 5% of their endowed funds toward mission and fulfillment.
We are pleased to be an ongoing part of Inspirit as they shape and deepen their commitment to impact investing. We look at investors like Inspirit as the ideal group to participate in social finance. They have both the assets to invest and a deeply ingrained desire to align social impact with their investment strategies. However, they are the exception and not yet the norm when it comes to impact investing or social finance.
For other investors there is the need for firms like ours that take a more active role in removing either perceived or actual barriers to investment.
A second practice area of our firm specializes in creating or co-creating opportunities for social finance investment. We work with asset owners not simply to advise them, but to structure opportunities.
I will offer an example of our work in this case. This one is still in its infancy, but its creativity is something we're proud of and it embodies the perspective I spoke to earlier. It's called the resilient communities fund. RCF is an initiative that aims to rethink how affordable housing is financed and built. Instead of focusing on what I would call the usual suspects in affordable housing development, which are governments and non-profit agencies, to finance the affordability RCF focuses on profit-focused real estate investors. Through RCF, investors purchase investment properties with an RCF mortgage and lease those properties to someone in affordable housing need.
Our mortgage product is linked to an endowment fund that bridges the affordability gap for the tenant. The tenant pays what they can afford and the investor receives market rate return.
Private citizens themselves become investors in social finance, taking the burden off governments and charitable organizations so they can invest in other forms of housing and programming.
With these experiences in mind I will offer the committee some thoughts on how the federal government may participate in social finance.
First, government should think of itself as an enabler of social finance. By an enabler I mean the government should consider how it may help to create the conditions for a flourishing social finance ecosystem. This does not imply governments as a funder. Rather I see a more powerful role of government as an incentivizer. One specific incentive is time. The old adage of time is money applies to social finance as much as it does to traditional finance.
I think of our work in affordable housing and focused real estate as an example. A more rapid project approval process for socially impactful real estate projects could fundamentally change the economics of a project. From a government process perspective, enablement can be done either the easy way or the hard way. I always default to the easy way first. In this case it may mean prioritizing small changes to government policy that do not require regulation changes or new legislation.
A second role for government is as an investment catalyst. One structure the committee may consider is a catalytic capital fund. Catalytic capital structures bring together different categories of investors, what we would call the social first investor and the finance first investor, into the same investment opportunity. One investor category invests capital and agrees to absorb a certain preset level of loss. In doing so other investment groups reduce the risk associated with the overall investment opportunity. Due to the reduced risk an investor group receives a return that is more in line with their risk return expectations, which is typically the market rate.
Thinking of catalysts, I will offer one final example to the committee and that is of the Big Society Capital. You might have heard of Big Society Capital from other speakers before this committee.
Big Society Capital is a socially motivated financial institution out of the United Kingdom. Big Society Capital invests in the social finance ecosystem in the United Kingdom, which in itself is a fantastic thing. The more impressive thing is how they were able to be capitalized. The initial capital seed for the Big Society Capital fund was English dormant bank accounts. Dormant bank accounts are those where the account holder has ceased to access, whether they may have passed away as an example. After a certain custody period UK banks forward these bank account funds to a series of intermediaries, and then those funds eventually are sent to Big Society Capital.
Why is this relevant to our discussion? In Canada dormant bank accounts account for approximately $532 million as of December 2013. The Bank of Canada holds these funds for a 40-year custody period, and then funds held prior to that custodial period are transferred to the Receiver General of Canada. I think it would be an amazing thing to see if the federal government may be able to replicate or somehow catalyse a form of Big Society Capital in Canada as a demonstration of their commitment to the growth of social finance.
With that I will end my remarks. Thank you.
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I would say that it all depends on the type of structure used.
As an example, one of the groups that we work with is the angel investment community. By angel investors, I'm referring to individuals who would finance or take the highest risk associated with a particular investment. In some cases, I've seen angel investors who are completely passive with regard to an investment. They just put their capital in, and let the entrepreneur be the entrepreneur.
In fact, with some models, there's more autonomy for that type of investor than you would ever get with a government funded granting program or a charitable program. It depends on what you mean by autonomy, but In a lot of ways, the level of involvement that's needed in order to satisfy the conditions of a grant can often create barriers to autonomy for a lot of groups.
So what about autonomy in terms of the ability of entrepreneurs to be creative with their investment? If an entrepreneur were able to negotiate a particular set of terms in order to ensure autonomy with the investor, he or she would find that a lot of private sector actors who place capital with the entrepreneur at the direct level rely on that entrepreneur to be successful. They are trying to create the conditions for autonomy and independence. Often, they place less restriction on how that capital can be used and what kind of outcomes they're looking to achieve. In other cases, organizations that look for grant capital or philanthropic capital have to align with the requirements of the funder. In many cases, they have to change the way they run their business, or they have to compromise their vision in order to satisfy the terms of their granting partners.
It's a complex question. It depends on the source of capital, how it's used, and who's actually participating.