Human Resources Committee on March 10th, 2015

[Ray Boughen, Conservative, Palliser, SK]

What do you look at when you consider risk between the private and the governmental side of the world? Which risk is the one that is favoured by social finance, and why? Is there a decided movement one way or the other?

[Sandra Odendahl]

If you're talking from the perspective of a social enterprise, I think generally what we see is that government is more willing.

I'm not sure if I'm answering your question, but government tends to be, and we think is, appropriately positioned to accept more risk in pursuit of the greater good or the longer-term benefit to Canadians at large. The private sector tends to be more risk averse, especially publicly traded companies. They have to respond to their shareholders and have to explain why they are taking enormous risks.

If you are looking as a social enterprise or a community service provider, the government would be in a position to provide risk capital more than the private sector. Also, the charitable sector, foundations, etc., are usually much more accepting of taking high-risk bets on potentially really deep social impact.

[The Chair, Conservative, Phil McColeman]

Thank you.

That ends the first round. I'm going to finish our questioning by members at the first round.

I have one question myself—as the chair, I get that prerogative—and that is to ask each witness for a few brief comments about the strength of cooperatives. Do cooperatives see themselves in the same manner or with the same sophistication, you might say, as privately held companies and private businesses in the traditional financing between business and banks and financial institutions? What are your views about the sophistication of cooperatives in terms of the ground that we need to make in that space? Or do we need to make up any ground in terms of their level of business acumen?

Andy, maybe you could go first.

[Andy Broderick]

I'd be happy to. It's a fun question, but I'm not sure I'm very prepared for it. I think my colleague from Desjardins in Montreal outlined it pretty well.

You get cooperatives that are very sophisticated and bring the same commitment to execution and discipline that you find in the private sector, and you also find co-ops that are smaller and built around more informal relationships.

It's an area of the economy that offers a great deal of promise in the area of social finance. Look at what such an institution as Vancity, which brought me to Canada, has been able to create, both as a sophisticated financial institution able to execute as well as or close to as well as banks—or better, sometimes—but also, as was noted by my Montreal colleague, in turning more than 30% of our gross profits back into the work I do in trying to build new markets that will strengthen the community.

You have that with Vancity and you have it with Desjardins. You can see that when these work, they become enormously important community institutions around which you can build a lot of other activity. I saw it in Vermont around food co-ops.

[The Chair, Conservative, Phil McColeman]

Great.

Madame Harvey, would you like to make a few short comments?

[Colette Harvey]

Certainly.

Credit unions are just as profitable and perform just as well as major banks, but they have a different development model. Witnesses who spoke earlier mentioned the risks, losses and difficulties in assessing risks. However, because of the important relationships it has with its entire community, our credit union has a loan-loss rate that is lower than the overall rate for the Mouvement Desjardins unions.

We specialize in funding unions and associations that have social projects. We are able to monitor the risk analysis thanks to these close relationships we have with the community. I believe that, for credit unions, being able to keep these ties and these roots in their environment is what is most important and what provides structure. They are essential intermediaries in these environments and communities. We must preserve this business model and to do so we must keep this space vibrant throughout Canada.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

We're out of time, so Sandra, we're not going to get to your comments on this question.

[Sandra Odendahl]

That's perfect.

[The Chair, Conservative, Phil McColeman]

Maybe we can share thoughts back and forth after.

Thank you very much, witnesses. It's curious for me personally. My father was a co-founder of a credit union called Brantford Municipal Employees Credit Union. Then I became an entrepreneur and had my own business my whole working life, working with financial institutions. To draw the connections and to see where the strengths and weaknesses are and see the chain between institutions and such is very interesting, and you certainly provided us with some good perspective today. Thank you for being here.

We will suspend briefly to bring in our next panel of witnesses.

[The Chair, Conservative, Phil McColeman]

Welcome back, ladies and gentlemen.

We're continuing now with our study to explore the potential of social finance in Canada. Here joining us for our final hour are two witnesses. We have Mr. Magnus Sandberg, vice-president and general manager of Social Capital Partners. Welcome. Along with Mr. Sandberg we have with us Mr. Norm Tasevski, co-founder and partner of Purpose Capital.

Sir, I hope I pronounced your name—

[Norm Tasevski, Co-Founder and Partner, Purpose Capital]

You did a fantastic job.

[The Chair, Conservative, Phil McColeman]

Thank you, sir.

That's not bad, eh? There we go.

You each have up to 10 minutes to present to the committee, and then we'll move into questioning.

Let us start with Mr. Sandberg. You may take 10 minutes, sir.

[Magnus Sandberg, Vice-President and General Manager, Social Capital Partners]

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.

[The Chair, Conservative, Phil McColeman]

Thank you very much for that.

Mr. Tasevski, please begin.

[Norm Tasevski]

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.

[The Chair, Conservative, Phil McColeman]

Thank you very much, sir.

Now we move on to the first round of questions.

Madame Groguhé.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

Thank you, Mr. Chair.

First, I would like to thank our witnesses for their contribution to this study.

While this was not a key point during your statement, I would like to hear what you have to say regarding indicators for assessing social finance, given that we know that performance-related pay models are chiefly based on evaluating results.

In your opinion, what kind of indicators should we be using to find out whether organizations have achieved their goals and to measure the results of initiatives relating to social finance? What are your ideas? Could you share them with us?

[Magnus Sandberg]

We deal in the area of employment for people with barriers to employment. For us, the current way the system is set up—and I'm speaking to the provincial systems in terms of how the community service agencies like the YMCA and such are being paid—is that it's based on the number of people who attend training sessions and on the number of people who are placed in jobs. It's not, for the most part, based on retention of the people put in jobs.

In this intermediary role we play between the employers and the community service agencies, we had pilots with TD Bank, Loblaw, Whole Foods, and Sun Life, and when playing that intermediary role we were able to get a lot of people placed, but we failed in actually getting these candidates to be successful while on the job.

So we didn't help anyone. We didn't help the candidates. The candidates were placed in the jobs, but then it didn't work out and they were back on social assistance, and their confidence was lower and so forth. We didn't help the employers.

We stopped those pilots and said that we needed to not play this intermediary role for placements only. We said that we needed to look at the whole value chain of how people are prepared for jobs and how they are set up to be successful in the jobs. For me, it's all about retention in the area we're in.

[Sadia Groguhé, NDP, Saint-Lambert, QC]

Mr. Tavsevski, perhaps you'll be able to comment on what was just said.

In my view, one thing is clear. It all depends on the role government could play in a social financing context.

I think it's imperative to have assessment criteria and metrics. What kind of measures could we develop to get the best possible performance, in order to explain the reason for which we would involve ourselves in social financing? I know it isn't so simple, given the mix of qualitative and quantitative aspects. However, if we wish to measure the impact of costs, it is essential that we have the necessary criteria and metrics.

What do you think, Mr. Tasevski?

[Norm Tasevski]

Absolutely, and I would agree with you very much in terms of the importance of metrics and the ability to assess and quantify or at least capture the impact that's being generated by the investments.

The way I would think of this is more in how the metrics can be constructed and who is participating in that construction. The challenge we have with social finance is that it's not the same as a regular investment. When you think of a regular investment, you can do the dollars-and-cents analysis. You can know that it generates a certain IRR or a return for the investors.

Magnus spoke about employment. I can measure employment a million different ways. Is it a gradual improvement of someone who is underemployed? I could have 500 people who are going from underemployment to employment. Would it be as impactful or even more so to have 10 people who go from extreme poverty to employment?

The method by which you construct those metrics is as important as the metrics themselves. What I would offer is to include the groups that are participating in that investment opportunity and have them help co-construct the metrics that would be applied to that specific initiative, whether it's employment work with groups like Social Capital Partners that have more expertise than others in constructing those metrics.

[The Chair, Conservative, Phil McColeman]

Thank you for that.

That's the end of the five minutes.

Now we will move on to Mr. Mayes.

[Rodger Cuzner, Liberal, Cape Breton—Canso, NS]

Thank you, Mr. Chair, and thank you to the witnesses for being here.

One of the challenges that I see is how to measure and evaluate outcomes of social value and who determines what is social value. When looking at affordable housing, I would note that I was part of a presentation approaching the government to waive interest on money and to bring capital to such a project. We asked the local government to waive the development cost charges, that type of thing, so they could bring in affordable housing. I understand that, because we see the value of the social outcomes of that for youth or people with disabilities for employment and training.

You mentioned, for instance, doing something about solar energy, which is not necessarily a wise investment and does not have—right now at this point in time, but it might in the future—a social value. You've all learned that. I'm from British Columbia and you have learned in Ontario that it is not necessarily a wise investment at this stage. I guess that's the challenge. When the government gets involved we have a responsibility to taxpayers and to society to make value decisions on what is a good social outcome. I just want to ask you about that because I wonder who determines the social outcome when you're raising capital from the private sector. Is there a framework that we need to ensure that the social outcomes are positive and are of value to society?

[Norm Tasevski]

When we look to work with investors to bring them into specific funds or other types of models, the whole goal is the alignment of values. All the groups that participate in any given investment opportunity need to align fundamentally with the social outcome they are all meant to achieve. In some cases this might mean that that particular investor might not be the right fit for the outcome or for the investee who is seeking that capital. So, really, the fundamental question for me is how those values are aligned and how they are structured into the investment opportunity itself. I would always want to have all of the participants who are involved in any particular structuring to be at the table to define what those outcome metrics could be and what kind of longer term or more immeasurable kind of outcomes, like economic development and so forth, there could be. For me, it's often harder to say no or to say, your capital is fantastic but it's not actually aligned with the outcomes we're trying to achieve. Projects can often get derailed, as you say, if those alignments aren't fully thought through. So I would think of that, the value base, as the first thing to consider.

[Magnus Sandberg]

Yes, I think the topic of evaluation is a tricky one. I say that from a couple of perspectives. I think Sandra in the prior session talked about the different types of investors, from the impact first investors to the finance first investors. I think you see the same in terms of evaluation depending on the investor. You see the investors who want to have quantifiable impacts and the numbers and data behind the impact the investments are making. You have other investors who make investments and it makes sense for them to have social impact that they can see, and that's enough for them. So I think first of all you see who the investors are and then you align the evaluation approach accordingly. I think you can very easily over-engineer the evaluation. However, I want to compare that with how we do evaluations today, with the current interventions and projects offered by the government and non-profits and so forth. I think the data is very poor. So I think this field of social finance can actually enhance the data. In some initiatives they want to get them to the point where we can say, with investment in X charity versus another charity, you have 2% better impact in this charity versus that charity. There are initiatives that want to get to that point. I think it's incredibly difficult and I think we should be quite happy if we're getting to the point where it's better than it is today.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

Mr. Cuzner.