Human Resources Committee on April 28th, 2015

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

You mentioned making the State more effective and social finance taking the place of the State. Do you feel that is realistic?

[Kieron Boyle]

I think it's realistic, but the state could be much more efficient than it is. At its core, one of the things that I believe social investment has the potential and capacity to do is to broaden the sense of partnership over who is trying to achieve social impact. I think that is a laudable aim and I think that can be achieved.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

Thank you, Kieron.

[Kieron Boyle]

Social investment is only part of the answer to that.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

Thank you. Being in the chair, I have to be really strict with the timelines. We only have a couple of minutes left, but I am going to hand it over to Mr. Butt for two minutes.

[Brad Butt, Conservative, Mississauga—Streetsville, ON]

Thank you very much, Madam Chair.

Mr. Boyle, thank you for joining us today.

Can you give us some of the results that have been achieved, in your view, through programs like the youth engagement fund or the fair chance fund? Have these been successful? Have the objectives been met in these programs? What has been the benefit of having private investment in these kinds of programs?

[Kieron Boyle]

Thank you for the question.

It's too early to say. The first social impact bond in the U.K. was set up—if we're just talking about social impact bonds—in 2012. The fair chance fund and the youth engagement fund were both set up within the last nine months, so they're just getting going.

All the early indications from the social impact bonds are that they are achieving better outcomes than the counterfactual, what would have happened anyway. What we don't know yet is whether that is something that would happen if it were replicated wider or whether this is some sort of pilot halo effect because there's a degree of attention and focus upon them.

In a way I've broadened out to say what is happening around accessing investment and private investment. Quite frankly, I'd look at the hundreds of millions of pounds now that have come into the social sector that would probably not have come into the social sector anyway, and I would look to the testament of social sector organizations who are saying that access to this sort of capital, not being dependent upon declining government grants or very expensive fundraising, has allowed us to free up the time and go out and do what we do best, which is tackle social issues.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

Thank you so much.

Our time is up for today, but on behalf of the committee, I want to thank you for your very insightful and thought-provoking presentation and also for the very straightforward way that you answered the questions that were asked.

I know it's 9:30 in the evening for you right now, and you're probably looking forward to a jug or some food and a relaxing evening while we carry on. Anyway, enjoy the rest of your evening, and thank you so much.

[Kieron Boyle]

Thank you very much.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

We're now going to suspend until our next witnesses are lined up.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

We're ready to reconvene. We're now going to continue with our study to explore the potential of social finance in Canada.

For our final hour today we have Mr. Andy Broderick, vice-president of community investment at Resilient Capital and Vancity Credit Union. We also have with us by way of video conference from Toronto, Mr. Adam Spence, founder and chief executive officer of SVX.

Andy, can we have you make your presentation first?

[Andy Broderick, Vice-President, Community Investment, Resilient Capital, Vancity Credit Union]

Sure.

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.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

You have a minute left if you wanted to summarize.

[Andy Broderick]

Perhaps I could for just a second.

I'd like to say this is part of a community practice that I would argue.... I was eavesdropping, but you talk about studying this and studying that. I am concerned sometimes that there are too many people trying to solve the same problem in different ways, and sometimes it relates to building too diffuse a capacity and spreading the butter too thin.

I would say it really is time to begin to focus on how to build the capacity in the sector by gravitating investment around successful groups, groups that have shown the capacity to move money out. Measure it on moving money out and managing money effectively in the same way you would with a private sector intermediary. You really want to build strong intermediaries that have a good track record. They don't exist yet. They're starting to exist, but I think that's of fundamental importance.

If we have a few minutes, there will be some questions and there are some other groups I can talk about.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

You will get a chance, because there will be lots of questions.

[Andy Broderick]

I hope that was helpful.

[The Vice-Chair (Ms. Jinny Jogindera Sims), NDP, Jinny Sims]

Now we go over to Adam Spence.

[Adam Spence, Founder and Chief Executive Officer, SVX]

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.

[The Chair, Conservative, Phil McColeman]

Thank you very much.

I want to thank Madam Sims for taking the chair for me while I had to step out of the room for a couple of urgent matters.

By the looks of things, committee members, we will have the chance for each party to ask one round of questions because the bells will start ringing at about 5:15 today, we've been warned, for us to go to the House of Commons to vote.

For our first round of questions, let's go to Madam Groguhé.

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

Thank you, Mr. Chair.

My thanks to the witnesses for their presentations.

Mr. Broderick, in your testimony, you said that you provide capital for loans and investments in shares of companies with a social calling.

In your opinion, how is an acceptable risk defined in social finance? How do we get a handle on that?

[Andy Broderick]

Risk can be contained by good money management. In other words, it is defined by the terms under which the capital enters the market. You heard Adam talking about some that are prepared to take a below-market return. In a sense that's a certain quantification. You need to match the capital to the risk that is appropriate for it.

Again, I don't want to be evasive, but in my mind it's a very straightforward thing.

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

Could you give us a concrete example where the risk was too high and, all of a sudden, you did not proceed?

[Andy Broderick]

Absolutely. There are a number of start-up entities that do not have a proven business plan. They have not entered into operations that demonstrated the plan, and it was not so obvious a proposal that it would make sense, so we say no.

Specifically it would be around a rooftop greenhouse proposal in an urban market where the actual marketing and purchasing plan was not clear enough.

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

So, if we get on board with that view of capital loans, how do you see the place of accountability and transparency in social finance? Could you be more specific about that issue?

[Andy Broderick]

Yes. Accountability should be just as it is in the private market. In other words, I should lose my job if I lose money, and the market should gravitate away from people who take excessive risk and don't perform.