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Good afternoon, ladies and gentlemen.
Welcome to meeting number 52 of the Standing Committee on Human Resources, Skills and Social Development and the Status of Persons with Disabilities.
Just before we begin this meeting, which is carrying on with our current study, I'd like to introduce a gentleman who is here in support today. He's sitting at the back of the room. His name is Mr. Gilbert Dionne. Mr. Dionne is here, as was mentioned in our prior meeting, to support any of the community members who choose to use the paperless SharePlus system on your iPad. That has become an option. Mr. Dionne is here, and if you require assistance throughout the meeting or at any time, please indicate that to me, and we'll have Mr. Dionne notified. He'll move towards your position and he will assist you with whatever question you may have.
As I mentioned, we're here continuing with our current study exploring the potential of social finance in Canada. We have two witness panels today.
As we've heard many times throughout the course of our study, the United Kingdom has emerged as a world leader in social innovation and social finance. We're very pleased to have with us for the first hour, joined by way of video conference and representing the government of the United Kingdom, Mr. Kieron Boyle.
Mr. Boyle has a lengthy resumé working across the United Kingdom in government, but he joins us today as the head of social investment and finance at the U.K. Cabinet Office.
Welcome, sir. You will be presenting to us. Because you are our single witness here, I'm going to allow a lot of latitude and allow you to take as much time as is reasonable to present. We normally allow our witnesses 10 minutes, but certainly you're welcome to go over the 10 minutes if you wish. If you choose to do that, maybe I'll give you a signal when you're around 15 minutes, and we'll cut it off at that point.
Is that acceptable?
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Thank you for the opportunity to have this discussion today. It's a real pleasure to be able to do so. Certainly the governments of the U.K. and Canada work closely together on many issues, social investment and social finance not least amongst them.
My name is Kieron. I am a civil servant. I work in the Cabinet Office, so our Office of the Prime Minister.
You'll excuse me for being a bit confused about what tense to speak in, at the moment, on the basis that we are in an election period in the U.K. We have a government; we don't have a Parliament. What I'll be speaking to is the broader policy sense of what has happened over the past 15 years or so within the U.K., rather than within any particular political government or specific political party.
The caveat over, there are a few things I'm hoping to cover today. I also really look forward to the discussion. There are three points I want to cover through the course of this presentation.
The first is narratives—how narratives have been a very strong part of the U.K. experience of social finance, and what narratives have been deployed by a variety of political parties and governments in support of this agenda.
The second is to pull out the U.K. perspective. I've sat on the social impact investment task force set up under the auspices of the G-8, and we've seen across the G-8 countries the important role of policy. I'll pull out some of the distinct policy developments in the U.K. that I think have been quite important for the development of this field.
I'll finish with a perspective on how, as a government, respective governments have tried within the U.K. to use the field of social finance to improve public services and services to the public within the U.K.
I'll give myself the challenge of doing all that in under 10 minutes, but do please let me know if I've gone way over.
A crucial point, I guess, is to talk about definitions. Definitions are everything here. Essentially, within the U.K. there seems to be two broad definitions that sit around the world of social finance. The first one seems to be social finance being about repayable capital that helps social organizations increase their impact. That's very much from the investee's perspective. There's a broader one that we used in the G-8 task force that was talking about social investment being investment that intentionally seeks and measures financial returns and social returns.
I think they're both right. It just pulls out the fact that there's a breadth to this. So much of this field depends on where you sit.
I said that narratives were important, so perhaps I could just give a sense of how this field has developed within the U.K. over the past 15 years. The field has developed out of a strong history and a strong sense of political support for the social economy and social sector organizations. That's really where this field has grown from. It has grown from a sense that as we look at the sorts of policy challenges that face governments in the U.K. and, I would argue, most developed countries, we have challenges where, when we look at demographics and we look at the types of social problems, they are complex, they are costly, and they are deeply interconnected. There's a question of whether public services, and particularly public services provided by the state or by a large government service, can actually be effective in tackling a number of those. There's been a particular and sustained interest in the role of social sector organizations within the U.K. in helping government tackle some of those challenges.
One challenge we've seen in the U.K. is that when you speak to a number of these social sector organizations about what will help them be more successful, or what some of the biggest barriers are that they face, they have historically said that it's access to finance. Now, some of that is reported. It might not be the biggest barrier, but certainly for a lot of organizations they feel it's the big barrier that they're trying to tackle.
I give that long story to say that this is how the field in the U.K. grew. It grew out of trying to tackle essentially the finance gap that exists for social sector organizations that trade and use businesslike approaches to tackle social problems. I think over the course of this discussion, we'll probably pull out that the field around the world is much broader than that. I think the field around the world is increasingly looking more agnostic about the types of organizations that are achieving social impact and looking at the role of finance in helping a broader range of organizations have a social impact. But within the U.K. this very much grew out of supporting finance into civil society or the third sector.
I said that the role of policy has been important. Within the U.K. there's been at least 15 years of sustained focus on how we can support the emergence of social finance and how social finance can be effective in supporting social sector organizations. I point out that it has existed across political parties. So the majority of the work that was started around support for social investment was started by the Labour government under Tony Blair and picked up and accelerated by Gordon Brown. Then our recent coalition government, headed by Prime Minister David Cameron, essentially carried on a lot of the work, and I'll pull out the bits in particular that were carried out. But that is to say that there has been a sustained focus on this that has, among other things, allowed people like me, grey bureaucrats and policy-makers, to really look at and see and learn from what has been tried in the past, what worked from that and what didn't work, and how we should shape public policy as a result.
I won't go into a great deal of detail on all the policy interventions, but essentially there's a framework that we have used over the past six or seven years to think about how government can support the growth of the social investment market. That framework has three elements. The first has been about how we can attract capital into this market. How can you crowd in socially intended capital? The second barrier has been how you build demand for that capital. Put crudely, how do you grow the pipeline of organizations that are looking to take on investment to help them increase their social impact? The third area is how you connect the two. How do you build an enabling environment for social investment to take place?
I'll just very quickly go through some of what I feel are important developments within the U.K. On the supply side, a large initiative has been the development of an organization called Big Society Capital. Perhaps we can go into them in some detail later. Big Society Capital is a wholesale social investment fund, which we colloquially refer to as a social investment bank but really it's a wholesale fund. It is capitalized with dormant bank accounts that have been set up to cornerstone a lot of investments into the market.
We have also focused on the role of government subsidy in other ways, in particular tax relief and the role of tax relief in supporting social investment. Last year the coalition government launched a social investment tax relief, which I can go into more detail, but essentially it's trying to attract more private investors into smaller high-growth social ventures.
Then we've also been exploring—just to pull it out as it might be an area to discuss later—some of the ways in which alternative finance can support the social investment market. There's been a lot of work exploring the role of crowdfunding and peer-to-peer financing, and how that can support crowding in capital into a market.
The demand side is a more crucial area from my perspective in terms of the distinct role government can play, we focus a lot on capacity building, specifically to enable organizations to take on investment. Two recent programs that we trialled within the U.K. were part of a broader investment readiness program. The first one focused on larger organizations. This was called our investment and contract readiness fund, a pilot program of £15 million. Essentially that focused on organizations that had been trading for a while but needed some ground support to build up the sorts of business models or financial planning or back-office capabilities that would enable an investor to place money into them. For that pilot every £1 of government grant we put in succeeded in unlocking over £27 of private investment, which if nothing else has made it—and I've checked—the most successful U.K. business support program out there.
We also focused on earlier-stage social ventures, and backed by the Cabinet Office, a number of social incubators, essentially business accelerators that were typically combining public money and then private money, often from large corporates, and putting that into accelerated programs for very early-stage organizations that were looking to have a social impact. I can talk about how, very recently, the U.K. government set up a new foundation to try to build in some of that capacity building for the long term as a sister organization to Big Society Capital.
Also, on the demand side, we focused quite a lot on how we can open up public markets for social enterprises to deliver within. I won't get into a lot of detail on social impact bonds now, but that's essentially where they sit. I will go into some detail on an act in the U.K. called the Social Value Act. It's a very important development, in my opinion. The Social Value Act essentially said to commissioners of services within the U.K. that they have to consider the social value of a service when commissioning it, beyond, for example, just pure economic or short-term cost issues, the idea being that for many commissioners thinking about value in the round, this often means they're getting better value for money than just a very short-term focus on the cost of a service when commissioning it. We feel that things like that are just as important as these initiatives around crowding in finance.
Just very quickly, on the broader environment, I'm always kicked for saying this. It's the boring but important stuff typically. It's looking at very complicated questions such as fiduciary duty, such as the responsibilities of trustees, be they foundation trustees or pension fund trustees, and on what basis they are allowed to invest, and what things they can think about other than pure financial returns. Put very crudely, there are some complexities within the U.K. system, and I know from some experience in speaking to Canadian colleagues that some are replicated within Canada.
Just to give a U.K. example, there's a complexity that I can walk out of this room now, I can be accosted on the street by a charity asking me to give £10 to them. That's great, we can both do that. If they ask me to invest £10 with them, technically we could both be arrested then and there. The reason is that when I'm investing £10, this has stepped into a different realm of public policy and a different realm of regulation. It's the regulation on investments, where essentially punters like me are protected against certain levels of risk. But this is a complex world. If I'm willing to give my £10 to a charity, what risk am I being protected against, given that £10 is a 100% risk investment? So it's those sorts of issues that we're trying to get into.
Finally, one of the things that we noticed from the U.K. was that countries around the world are all looking at these sorts of issues. There's a lot for us to learn from one another. That was essentially behind David Cameron's intent to put social investment on the G-8 agenda, under the auspices of the G-8 to set up a social impact investment task force, essentially just to observe what is happening in each country in this field so that we can share best practices and learn from one another.
I said I'd finish with a third point, and I'm getting very close to my 10 minutes here. The third point is that the U.K. experience has predominantly been around how you build a social investment market from a public policy perspective. We're now increasingly looking at how we as government work with, alongside, and through that social investment market, with and alongside true social enterprises.
One of the areas that brings us to is social impact bonds, or as I like to refer to them, social investment partnerships. Essentially, what are the opportunities where social investment can enable us to think about delivery of services to the public differently, enable us to innovate, at times enable us to attack issues through early intervention, rather than dealing with downstream consequences? Perhaps we can move into that in time and in discussion.
Hopefully, that's given a broad sense that within the U.K. this narrative has grown out of supporting the social sector, but it is now, I think, a much larger perspective on how social investment and the social economy are a large part of our economy as a whole. We focus in terms of policy on crowding in socially intended capital, building demand for it, and thinking about the enabling environment. Now it feels to us like an increasingly urgent challenge for governments: how do you work with and alongside these markets to deliver better services to the public?
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Thank you, Madam Sims. I'm just capturing that. It's a brilliant question and a deep and complicated question in the U.K.
There is no single social enterprise legal form within the U.K. There are different types of forms that social sector organizations take. Crudely, there is a family. There are charity forms—and some charities trade and some charities don't—and then there are a series of forms such as member-owned societies, so co-ops, and industrial and provident societies.
Ten years ago in the U.K., a new legal form called the community interest company was developed. Essentially it was a response to the idea that a charity form—and charities within the U.K. are not allowed to issue equity—was too restrictive for some organizations that wanted to achieve social impact.
This is a regulated form. There is a community interest company regulator that essentially checks that community interest is being achieved by this form, but essentially the form itself is asset-locked. Typically it has been used, for example, when a public asset has been transferred to an organization—it might be a church hall, for example, or a school hall—and the idea behind it is that it's asset-constrained.
There is a very interesting question within the U.K. at the moment. We're starting to see that many businesses that are trying to achieve social impact are not choosing to take the form of charity, co-op, or community interest company. The reason is that these are all asset-constrained organizations. All of them have limitations on the equity they can release.
Some entrepreneurs are saying that puts too great a burden on them. They feel that they lack access to the same sorts of markets that can help commercial organizations scale and grow. We're starting to see a much more mixed economy within the U.K. Some organizations feel it's important to be able to say that they have certain mission locks and that those mission locks are about their assets essentially being locked. They have constraints, for example, on their profits and their dividends.
Some are saying that it's less important for them to be able to communicate or to be held by those mission locks. Still, they want to achieve social impact. For example, they're looking at things such as writing, within their articles of association, a strong social mission.
I think from a policy-maker's perspective, within the U.K. we feel that all of these areas have pros and cons, and in a way the policy-maker's challenge is to think about how clear the signalling between them is so that people can move from whatever and can set up the right sort of organization for the impact they're trying to have.
Just very quickly on the tax side, the majority of the tax benefits that we've advantaged to this area within the U.K. have actually been about replicating within the social sector the same sorts of tax reliefs that work for purely commercial organizations. For example, our social investment tax relief is modelled on an equity release scheme that applies to small, high-growth potential commercial businesses. It's an equity release scheme so, for example, it doesn't work for our charities that are not allowed to release equity. Therefore, we've made almost exactly the same tax relief but it works on debt.
Part of the reason we did that and modelled it so similarly was the result of design work we did with independent financial advisers who told us that they would find it easiest to talk about this tax relief if it looked very similar to whatever else was out there. In a way, anticipation of public take-up has guided how the coalition government has designed the tax relief at its base.
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It's a very similar question, and a very live question within the U.K., Mr. Eglinski.
I will be careful here. I'm a civil servant, so obviously I can't speak for different political parties' philosophies in this area, but perhaps I can speak about how the debate has gone within the U.K.
The debate's essentially been about whether this is about a replacement of the role of the state or about the state essentially allowing itself access to different methods and ways of working that mean, with the same intent, its having more impact.
Certainly those who are proponents of it within the U.K. speak about the latter, and will speak, not about government ceding responsibility, but rather government saying, “Our responsibility is often to set the outcomes we would like to see, but we would like a rich diversity of organizations delivering against that.”
Those who challenge that have said, firstly, “Is that true?” Secondly, they have questioned how effectively these markets are working in particular, although within the U.K., both on the left and the right, I think there is a strong degree of support for outsourcing to the social sector. Some on the left have questioned whether these sorts of models of outsourcing are truly getting through to the social sector or are being captured by large commercial firms, often, they would argue, to the disbenefit of the most vulnerable.
Those are some of the policy challenges that people like me look at. Certainly the narrative around social finance has been that it might be a way of addressing some of those risks of outsourcing, but it would be fair to say that within the U.K. there's still a very live and active debate on that.
Hi. I'm very pleased to be back—or pleased to be here in person. Last time I appeared before the committee, I think it was a time of year I wouldn't have wanted to be here, but on a day like today it's lovely. Thank you for having me.
To be clear, I'm the vice-president of community investment at Vancity. I'll give you a little bit on Vancity. We're a $19-billion financial institution. We're a co-op, member-owned. We have a business model that's unique and I think worth spending just a second on, because it's where our interest in Resilient and having a VP of community investment comes from. It's not always the most common thing in a large, or fairly large, financial institution.
Essentially, Vancity grew out of an experience where capital wasn't reaching markets that it needed to. There were members, people living in Vancouver, who couldn't get capital. Without going into the origin story, which even I am getting tired of, it is really the foundation of the credit union; it hasn't been lost. Central to the way they look at their business is that the best business really is finding markets where capital hasn't been going. It's not avoiding those markets but actually identifying them and moving into them in a thoughtful, managed, and evaluative way.
That's my job. I'm in charge of business development for Vancity in terms of community investment. Our overall big, hairy, audacious goal is to have as much as possible of the $19 billion of our members' money invested into capital-restrained areas of the economy, capital-restrained communities, places where the investment will really make a difference in terms of how the people in British Columbia live and how people in the communities of our members live and survive.
Resilient is just one example of that, and I think it's an interesting one. It also leads into I think some national issues around the development of the sector. You can call it social finance or you can call it community investment, but it's an increasingly important sector, I think. As governments have re-evaluated their roles, have tried to get more thoughtful about what those roles should be, and have been under, to be honest, economic constraint in terms of investment, it becomes I think more important to be mindful of how to build capacity in communities to move capital in effective ways. Resilient is one small example of that.
Resilient is one of a number of funds across Canada—there aren't very many, probably eight or 10—that are attempting to provide capital to social enterprises, non-profits, businesses that are working to improve the environment. They could be for-profits as long as they have a mission base to them. It's where private capital hasn't gone, where they can't generally get bank financing. This is sometimes referred to as impact investing, social finance, community investment—you hear all those terms. In Canada it's about a $500-million market, probably a little under that. In the western economic world, it's about $50 billion and growing considerably. I was just in Chicago last year, and the opportunity is really quite amazing.
At any rate, with Resilient we started from a couple of assumptions. We wanted to have a risk-adjusted return. Essentially, we were not asking for the investors to make any charitable donation. This was not based on a charitable outcome. We were having people actually invest in Vancity by buying a term deposit, a five- to seven-year term deposit, and getting a return on that term deposit that was consistent with what the market would give for a fully insured product.
The next issue is how do you make sure that if we by chance...? Our regulators might think we're doing less conventional lending; therefore, it's riskier. In other words, we're lending to these social enterprises or for-profit start-ups that generally can't find capital. Well, I might argue about the risk, but we did set up, in deference to that, a loan loss provision. In broad terms, it was about a $15-million fund. We had about 20% of that fund available as cash from donations to securitize it. Half the donation came from Vancity and the other half came from the Vancouver Foundation. Basically it was a de-risk strategy.
In other words, because we're first actors in this and we wanted to show that there wouldn't be high losses, but we didn't really want to put the burden on the provincial insurance company that insures Vancity, we set up this loan loss, the belts and suspenders to protect the Province of B.C. and protect our members.
With those two things we went out and raised money. We raised, as I said, about $15 million. Let me give you a quick summary of who invested, because it is important. These are the first actors in this sector.
We had 23 investors. We did not try to go retail. This was not aimed at average members. We were really trying to increase the familiarity and comfort of institutions with this kind of investment. There were seven foundations, two unions, two universities, two private companies, three non-profits, and seven high net-worth individuals that participated.
Essentially, the goals of Resilient were to provide this capital pool to help some of these B.C.-based non-profits and companies do their work. The other thing was to educate capital that was coming in about how it could be done in a way that was risk appropriate. In other words, you could get a return that was appropriate with the level of risk you were taking, and you could watch your capital activate important things in the community, watch it bring change.
The actual investees.... So far, of the approximately $12.5 million we want to put out, we've put out about $10 million in the last three years. It could all be out. We're actually being a little slow and thoughtful because in some ways we're trying to develop a portfolio that is more broadly representative of the sector, so it's a mixture of equities, a mixture of non-profits, a mixture of energy company start-ups. It's a risk mixture that's appropriate too.
We fully anticipate and hope we have a loss of around 5% to 10% because we wanted to be on the edge there. That's why we set up the loan loss. So far the loss has been under 2%, but it has been very thoughtful and intentional in terms of how we've gone about it.
So we have invested money in 23 groups, ranging from as disreputable a group as Corporate Knights in Toronto—I'm teasing, but this is a national fund. We've done a couple of things outside of B.C. We took a small equity investment in Corporate Knights. We have Salish Soils, a first nations joint venture, which is on the Sunshine Coast of British Columbia; as well as Tree Island Yogurt, a new organic yogurt producer in the Cowichan Valley of Vancouver Island.
There's broad diversity. There are some non-profits, some charities. We helped a group that works on land preservation bridge finance, essentially, for the acquisition of an important piece of land. They had a good fundraising history, but in general, most banks won't lend on that kind of collateral, on historical experience.
Anyway, it is a real, intentional approach to trying to set up the idea that you can have an effect on your community with a risk-appropriate, non-concessionary investment. As a company, you can go and find the capital you need to grow, because this was aimed at growth capital for certain organizations. Then, we really wanted to educate the investors as to the impact they were having, so we tied in a website and a private log-in for the investor community.
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Madam Chair and committee members, I'd like to thank you for the opportunity to appear before you today. I just want to also thank you for taking the time to study social finance and its potential benefits for all Canadians.
I also hope that I'm not coming at you live in high definition.
Just in terms of my remarks, I'll provide a bit of background on my work, our perspective on social finance, and some recommendations on how government can enable the marketplace. Today, I represent both the MaRS Centre for Impact Investing and Social Venture Connexion or SVX.
The MaRS Centre for Impact Investing is a national hub focused on building the Canadian impact investing marketplace. We educate stakeholders through research and events. We co-develop impact investing products and strategies, and we support ventures looking for investment as well as investors looking for investment opportunities.
The SVX is housed at the centre. We would describe it as a full-service impact investing platform that supports and connects impact ventures and funds with accredited investors who are looking for investments that would demonstrate both a positive social and environmental impact as well as the potential for a financial return. Think of it as a matchmaker and capacity builder for social enterprises and investors.
Over the past year, we've supported 28 ventures and funds. They've raised $3.5 million on the platform. We see it as a cross-sectoral innovation led by MaRS, in collaboration with the TMX Group, Torys LLP, KPMG, the Government of Ontario, the J.W. McConnell Family Foundation, and others. We're a restricted dealer with the Ontario Securities Commission and the Autorité des marchés financiers in Quebec.
It's the first platform of its kind in North America, and we're currently working with partners to be able to expand into other provinces including British Columbia, as well as the United States and Mexico. We started our work because we feel we're faced with pressing problems at a local, national, and global level, from poverty to climate change to chronic health challenges. From community power ventures to affordable housing projects, there are a number of entrepreneurs who are building business models to tackle these problems and turning to investors for support. But there are a lot of barriers that these impact entrepreneurs and investors face, including capacity, time, and cost.
Impact ventures often lack access to capital and investment readiness, and on the other side, impact investors lack the resources to find and review these impact opportunities for investments.
So what do we do?
We conduct research. We identify ventures, funds and investors that meet our criteria. We educate. We provide tailored support to ventures and investors through training and templates on topics including impact investing, pitch readiness, and due diligence. One of our flagship programs in Toronto is called Impact8. It's an investment readiness accelerator for ventures.
We also review ventures and funds. Investors using our access criteria look at them in terms of their management, their governance, the finances they're offering, and their impact. Finally, we connect. We create connections between issuers and investors online, through in person events, webinars, and one-on-one meetings.
An example of one of the ventures we work with is Komodo OpenLab. They're a Toronto enterprise that develops low-cost inclusive technologies that facilitate the daily lives of people with disabilities. Komodo allows Canadians with mobility barriers or communication barriers to use their smartphones to carry out complex and simple tasks, from managing a business to ordering a cup of coffee. One of their challenges was access to capital, so we have helped them get ready for investment and connect with investors, and allowed them to achieve their desired impact.
Alongside SVX, MaRS is also developing a seed stage fund supported by Virgin Unite and a number of foundations, including Mindset in British Columbia.
In addition to that, we also organize international venture delegations and partnerships, sending ventures to New York City, San Francisco, and beyond, to secure investment and business development in coordination with local Canadian consulates. We've also helped to bridge partnerships between other jurisdictions like Ontario and California, with the Governor's Office of Business and Economic Development in California, and the Ministry of Economic Development, Employment and Infrastructure in Ontario.
When we think about social finance, our definition aligns with many sector stakeholders. We see it as investments that are made into companies, organizations, and funds with the intention to generate a measurable social and/or environmental impact along with a financial return. These investments typically require patient capital expecting reasonable returns, as capital may be provided to support solutions to our most pressing challenges, including sustainable agriculture, affordable housing, health and wellness, clean technology, and education. For example, a $5-million loan to help finance a 30-unit affordable housing project in Montreal would be an impact investment, as would a $1-million equity investment in Investeco's sustainable food fund.
Social finance does not replace good public policy, good public investments, or good philanthropy, but it is a necessary complement to these approaches.
Social finance is not new. Canada has been a market leader for decades, from the Desjardins movement of the early 20th century, as well as institutions like Vancity, to the Mennonite Economic Development Associates in the fifties and sixties, to the emergence of leaders like BDC and TMX Group.
What is new is the momentum. That momentum is building in Canada and around the world in terms of institutional and government engagement, capital mobilized, and young and experienced talent motivated by this emerging movement. There are challenges that are limiting this momentum, including the perceived risk, regulatory and policy barriers, and a limited number of intermediaries to manage funds and build market capacity. We also need champions from all sectors to build and advance market development, and ultimately to achieve the impact that we are seeking.
Government can really play an important role in the development of the marketplace, particularly to unlock new capital. In line with the recommendations of the national advisory board to the G-8 social impact investment task force, we believe the government’s role is to create an enabling policy and regulatory environment, to provide catalytic capital to build capacity and leverage private and philanthropic capital, and to provide leadership on social finance.
Let me just dive into a few of these examples.
We think government can unlock a significant pool of foundation capital with enabling policies and regulations. Canadian foundations have $45.5 billion in assets. An allocation of 10% would unlock billions to tackle our most pressing problems.
While impact investments can be considered generally a part of a balanced portfolio, a number of impact investments are off limits for foundations. We certainly welcome the recent announcement allowing foundations to invest in limited partnerships. It is a good first step toward reducing these limits. We also believe foundations should be allowed to make below-market rate investments, where appropriate, to advance their charitable objectives, ensuring no part of these investments, or any associated opportunity costs, would be considered as gifts to non-qualified donees. These kinds of investments at below-market rate are needed.
Early-stage social enterprises or non-profit organizations seeking capital may not be able to offer risk-adjusted market returns. Many of these kinds of social finance arrangements require capital with different risk and return expectations for different investors. For example, a foundation might take a first-loss position in a fund or infrastructure project to leverage additional capital. In 2005, New York City and several foundations, including Rockefeller, contributed $28.8 million to a capital pool that would absorb losses in the event of a loan default on the New York City Acquisition Fund. This first-loss guarantee helped to attract a number of banks, including Bank of America, Wells Fargo, and J.P. Morgan to raise over $150 million.
In addition to this enabling policy, we also believe there is a role for government to provide catalytic capital. The concept is simple: catalytic investments are those that trigger the future flow of capital to a desired company, asset class, sector, or geography. We would recommend that the government establish an impact investing matching program as catalytic capital to support existing and new funds through direct co-investment, credit enhancements, or incentives. In addition, grants may also be required to support the development of intermediaries that would unlock new investment.
This is a proven approach to incentivize investors, unlock institutional investment, de-risk investment pools, and create leverage in order to access and attract new capital. It has already been done in priority areas, including the federal government’s venture capital action plan and Nova Scotia’s community economic development investment funds. The U.K.'s Big Society Capital is a great international example.
Alongside the potential allocation of new resources, the federal government could also use existing and available capital from dormant bank accounts and/or provide a clear mandate to relevant crown corporations or relevant departments to support this type of investment.
Finally, beyond enabling policy and catalytic capital, the federal government can make social finance a public policy and political priority. Social finance can be integrated across all government ministries, departments, and agencies, from Aboriginal Affairs and Northern Development Canada to Western Economic Diversification Canada. You are all seeking improved outcomes, from better health, housing, and education, to investments in local businesses that also achieve economic, social, and environmental impact.
There are many models for this approach, from the leadership of the Prime Minister and the Cabinet Office in the U.K. to a comprehensive plan like the Government of Ontario’s social enterprise strategy. You may also seek direct partnerships with other national governments on practical matters, from research to venture exchange to co-investment in industry infrastructure.
The key message I want to close with and deliver is that there is a broader definition and bigger opportunity for social finance in Canada. The federal government can play a vital role in breaking down barriers and accelerating market development through effective policy, capital, and political leadership.
We are faced with many pressing problems. Surely, we can confront them if we orient government, community organizations, businesses, and capital toward achieving greater impact.
I look forward to your questions.
Thank you.