Social Finance Ontario

MaRS Discovery District

Agenda 12:30-4:30pm

Introductions - Lynn

Social Finance Policy Context - Joanna

BREAK

Social Enterprise Framework – Tonya

BREAK

Social Finance Tools & Models – Joanna

Discussion - Allyson

Survey Monkey says….

Exploration of whether social finance can meet the current and emerging needs for the nonprofits sector.

Can we create an enabling environment for social finance in Ontario?

Explore policy and social finance models for adaptation in Ontario.

Outline

What is social finance?

Policy Context: UK, US, Canada.

Social finance is…

sustainable finance with a social or environmental goal.

Social finance aims to leverage existing capital to attract new investment for public benefit

Licensed under a Creative Commons Attribution-Noncommercial-Share Alike 2.5 Canada License

8

CHARITIES & NON-

PROFITS

GOVERNMENT BUSINESS

Hybrid Space

Taking root in a hybrid universe

Ying and Yang: social enterprise & social finance

• Community NPO’s are innovatively developing new enterprising models.

• Social finance ( loans and quasi-equity financing) is needed to start-up, operate and expand enterprising components.

Who is involved?

People looking for capital: social enterprises, community nonprofits,

charities, social entrepreneurs.

People supplying capital: retail investors who invest in a finance

product. e.g. RDSP or SRI mutual fund through a bank or credit union.

institutional investors e.g. pension funds, foundations or labour funds.

Advocates: networks & organizations, individual

champions, academia, think tanks, government.

Service Providers: legal, accountants, product supply, finance

institutions.

Social Investment Organization

Edmonton Social Enterprise Fund

VanCityChantier de l’economie Sociale

Causeway

SRI in the Rockies

Fraser Valley Centre for Social Enterprise

Ontario Non –Profit Network

PfC

Community Power Fund

Économie solidaire de l’Ontario

CED-NET

SiG@MaRS

Plan institute

Resilient Capital

Carleton Center for Community Innovation

Social Capital Partners

CCA

Alterna

Ashoka

Eco Trust

Haween

Eva’s print shop

Somali Business Development

Social Enterprise

Enabling public policy UK and US

Government Bodies

Office of the 3rd Sector

US office of innovation

US Community Reinvestment Act

Office of the 3rd Sector

Created in 2006

Lead to policy changes and streamlined funding to the voluntary sector.

As well as grants, there are other sources of investment: Social investment Risk Capital Fund for Social

Enterprise Unclaimed Assets Adventure Capital Fund

Office of 3rd Sector:Social Investment

Social investment is investment made for a social purpose organizations.

grants, loans, equity investments or other emerging forms to enable social enterprises, to develop their operations and be

Examples of social investors include: Adventure Capital Fund Community Ventures Charity Bank Futurebuilders England Triodos Unity Trust Bank Venturesome Bridges Community Ventures

Office of 3rd Sector:Risk Capital Fund for Social Enterprise

Risk Capital Fund for Social Enterprise

The Office of the Third Sector's £10m risk capital investment fund aims to improve social enterprises’ access to private and independent investment.

Supports enterprise in the stage between start-up and growing their business.

They established a fund manager, “Capital for Enterprise Limited” to manage funds for risk capital investment.

Office of 3rd Sector: Unclaimed Assets

Unclaimed Assets

Allows money in dormant accounts to be reinvested in youth programs

Protects consumers' rights to reclaim their money at any time.

“Dormant Bank and Building Society Accounts Bill, 2007.

Office of 3rd Sector: Adventure Capital Fund

Adventure Capital Fund

Launched in December 2002 with the aim of delivering a new form of long-term investment into community enterprises.

Aims to fill the investment gap that faces community enterprise, and to increase investment readiness of community organizations who want to move to enterprise.

What is stirring in the US?ISSUE:

Provides $7B a year in R&D tax credits but, a disconnect exists for nonprofits and

charities with limits to their activities.

Therefore no market place for innovation in the nonprofit sector.

IN RESPONSE:

Obama and Biden will create a Social Investment Fund Network, a gov’t supported corporation (like the CBC)

Social Entrepreneurship Agency for Nonprofits

Community Reinvestment Act,1977

to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.

to encourage regulated financial institutions to meet the credit needs of the local communities in which they are chartered, consistent with safe and sound operation.

CRA has helped community organizations win increased investments, charitable contributions, branches, and access to loans and financial services. More than $1 trillion dollars has been committed to community investments; the polices and practices of financial services have significantly changed;

Enabling public policy Canada

Nova Scotia CEDIF

Manitoba Tax Credit

New Media Tax Credit

Nova Scotia Community Economic Development Investment Funds

Since 2000, 51 Community Economic Development Investment Funds (CEDIFs) have been established in Nova Scotia.

These CEDIFs have been established as a result of the Nova Scotia Equity Tax Credit, a tax credit specifically developed by the provincial government to stimulate investment in Nova Scotia’s small businesses, co-operatives and CED organizations.

CEDIFs raise funds by issuing shares to individual investors and then invest that capital in local businesses.

The enterprises that CEDIFs invest in may or may not have social objectives in addition to economic objectives.

Nova Scotia: the Equity Tax Credit

CEDIFs are one of two vehicles through which investors can access the ETC. Individual investors can also benefit from the ETC through purchasing shares directly from eligible businesses.

CEDIFs sole means for raising capital through the ETC is through the issuance of shares to individual investors.

The main incentive of the ETC is a 30% tax credit calculated at 30% of the investment to a maximum annual investment of $50,000 (the maximum annual tax credit is therefore $15,000).

Investors are required to hold the investment for a minimum of 5 years.

Nova Scotia: Community Economic Development Investment Funds

Eligibility

either a corporation or co-operative.

cannot be a registered charity, non-taxable, or not-for-profit.

A further stipulation is that the organization must have at least six directors elected from their defined community.

Nova Scotia: Community Economic Development Investment Funds

Return on Investment

The provincial government also offers a partial guarantee on funds invested in CEDIFS.

If a CEDIF becomes insolvent within four years of a purchase of eligible shares, the province will compensate the individual investor at 20% of their initial investment .

Funds invested in CEDIFs have been recognized as pre-approved holdings for a self-directed RRSP by the federal government.

Some below market rate return.

Manitoba CED Tax Credit

9 community enterprises have been approved. Province has not received any CEDIF applications.

565 individuals have received tax credits for investing in community enterprises.

Collective investment is $1,865,000

Manitoba CED Tax Credit

Criteria

An eligible community enterprise can participate in the CED Tax Credit through a CEDIF, or through direct investment by an individual investor.

Not have gross assets in excess of $25 M

Not have net assets in excess of $10 M

Must employ no more than 200 employees.

25% of total wages must be paid to Manitobans.

Must receive a sponsorship endorsement from a community development organization.

Ontario: Interactive Digital Media Tax Credit

Eligible Ontario labour expenditures.

Eligible marketing and distribution expenses.

By a qualifying corporation with respect to interactive digital media products.

Corporations that are exempt from tax do not qualify.

Corporations that are labour sponsored venture capital do not qualify.

Ontario: Poverty Reduction Strategy

“Social enterprises are a unique business model capitalizing on the skill of low-income Ontarians.”

Will create an Social Policy Institute

Sustainable Procurement Strategy, 2009. Pilot projects will be launched through Ministry of Children and Youth for local courier and printing services.

Conduct a feasibility study for an Ontario Social Investment Exchange.

Explore a Community Interest Company model.

Finance productsHybrid Companies

Community Interest Companies

Low Profit Limited Liability

Community Investment Funds Fiducie, Chantier de l’economie sociale

Ontario Social Venture Fund

Program Related Investments

Endowments and US examples

Ontario Social Investment Exchange

Working group

Affordable Housing Models

Options for Homes

Alterna Community Alliance Housing Fund

Community Interest Companies (UK)

Tailored for social enterprise

Asset lock Community interest test

Payment of directors

Equity finance

Cannot be a charity

2225 CIC since its inception in 2005, as of June 2008

Types of CIC in the UK

Manufacturing 49 Electricity, Gas and Water Supply 18

Construction Wholesale, Retail; Certain Repair 66

Hotels and Restaurants 38

Transport, Storage & Communication 53

Financial Intermediation 19

Real Estate, Renting & Business 377

Public Administration & Defence 19

Education 402

Health and Social Work 308

Other Social & Personal Services 667

Low profit limited liability company L3C

The challenge put before the New York based Mannweiler Foundation was how to

“access the vast pools of market-driven wealth to make socially

responsible investments in … non profit areas”,

Robert Lang CEO Mannweiler Foundation

L3C is different from the CIC

Based on an existing legal structure called the LLC. Can have hybrid ownership allowing each partner to

be taxed separately according to their own situation.

Unlike a corporation, flexibility of the operating agreement allows members (rather than owners) to receive profits proportion to their investment or to the agreement.

Eligible to receive Program Related Investments.

Can have layered investments.

No asset lock and no dividend cap.

Quebec: Fiducie, Chantier de l’economie sociale.

Started in 2006 with $52 million for investments in Quebec’s social economy (community controlled) businesses.

Since beginning its operations in February of 2007, the trust has already made investments in 12 social enterprises totaling 4.5 M.

The trust invests in market-driven or market-supplemented social enterprises that are operated by non-profit organizations and co-operatives.

Quebec: Fiducie, Chantier de l’economie sociale.

1/3 of the first 12 projects have been start-ups while the remaining 2/3 are expansions.

Each of the 12 social enterprises to receive financing derives between 60-75% of their total revenue from market revenues.

Enterprises generate the additional 25-40% of their income from of other sources including government subsidies, contributions from foundations, and fundraising activities.

Quebec: Fiducie, Chantier de l’economie sociale.

Eligibility

the trust’s loan must not represent more than 35% of the total project-related costs.

Provincial gov’t agencies and those that deliver gov’t programs are not eligible.

Housing cooperatives are not eligible

Quebec: Fiducie, Chantier de l’economie sociale.

Financial Product Offerings

two patient capital loan products with 15-year capital repayment moratoriums.

The amount of the loans range from $50,000 to $1.5 M, and the average loan at present is approximately $350,000.

Operations Patient Capital & Real Estate Patient Capital

Quebec: Fiducie, Chantier de l’economie sociale.

Return on Investment

The Government of Canada’s contribution (Canada Economic Development) is non-repayable.

The other three partners (Fonds de solidarité FTQ, Fondaction CSN, Government of Québec) each received a debenture in exchange for their investment.

The debenture product offered to the three institutional investors is scheduled for repayment at the end of a 15 year period.

The rate of return for the debenture product is the principal plus interest equal to that paid on a Government of Canada Bond (greater than 10 year) plus 2%.

At present, the debenture product pays a rate of return of roughly 6.35%. (Charest, 2008)

Ontario: Social Venture Fund

2008 Ontario Budget recognized social entrepreneurs as an innovative way to advance social goals.

Allocation was made to pilot social venture investing in Ontario.

Proposed $20 million investment vehicle managed by MaRD Discovery District on behalf of MRI

Delay was announced in October 2008 as part of a “Spending Restraint”.

Canada:Community Investment Funds

Edmonton Social Enterprise Fund

Toronto Enterprise Fund

Enterprising Non-Profits: BC and Ontario

Meritas (2% of assets to community development investing = $1million)

Resilient Capital

Great Bear Rainforest Fund

Program related investments

In Canada, private foundation endowments are estimated at $10 billion and universities at $11 billion.

Blended value investments that are directly aligned with program objectives of the foundation.

Take form of loans, guarantees, equity investments and recoverable grants.

Foundations in Canada can only make PRI investments into charities. This limits social enterprise.

Public policy is required for deals to work.

Ontario Social Investment Exchange“moves beyond SRI”

Vision

Broad Vision: Improved social (and environmental) outcomes

Mission Efficiency: increase efficiency of existing financial capital (it’s

ability to generate social capital) New financial capital: attract new financial capital for social

firms Screening/valuation/assessment: assess the social impact of

non-profit firms Intermediary: act as an intermediary for social investors and

social firms (investees)

Focus Areas food security energy poverty low-income housing community economic development microfinance environment and conservation first nations etc.

Alterna Community Alliance Housing Fund

$2 million investment by the pension fund of Public Service Alliance of Canada.

Alterna Savings Credit Union acted as the financial intermediary and partnered with the Ottawa Community Loan Fund.

Carleton Centre for Community Innovation 3ci acted as intermediary.

Long-term 5-year GIC rate of return to provide low cost financing for 2nd mortgage and primary mortgages.

Bridge financing for affordable ownership developments.

Interim financing to cover the costs of construction overruns,

Pre-development financing to assist community groups in developing housing proposal.

SRI in Canada

$433 billion in SRI pension assets in 2006.

Institutional investors are coming under pressure from stakeholder advocacy to invest in SRI.

That Alterna example can be used to leverage other capital pools.

Although, the infrastructure to scale such opportunities does not yet exist in Canada.

Affordable Housing Models

Options for Homes

private affordable housing developer with 1500 units. Innovative down-payment arrangement that provides assistance to buyers.

The model is being considered by CMHC to increase stock of privately financed affordable housing in Canada.

Home Ownership Alternatives

Discussion:Ontario options

Low hanging fruit Inter-governmental working group with nonprofits Community involvement Public endorsements Partnerships, co-production, collaboration Capacity and skill building initiatives

Use what has been announced in the Poverty Reduction Strategy Procurement Strategy Ontario Social Venture Fund New permissive roles for foundations Identify and develop intermediaries

Identify Platforms e.g. affordable housing & infrastructure spending

Make our mark Develop strong accountability frameworks Engage business community and SRI community

Ontario Strategies…sustainable and effective framework

Low hanging fruit Inter-governmental working group with nonprofits Community involvement Public endorsements Partnerships, co-production, collaboration Capacity and skill building initiatives

Use what has been announced in the Poverty Reduction Strategy Procurement Strategy Ontario Social Venture Fund New permissive roles for foundations Identify and develop intermediaries

Identify Platforms e.g. affordable housing & infrastructure spending

Make our mark Develop strong accountability frameworks Engage business community and SRI community

Potential Leverage Points

Policy

Corporate Structure

Tax

Products

Social venture capital

Specialized investment products

Issues with substantial assets Affordable Housing Community revitalization (infrastructure) Energy and efficiency

Canadian Opportunities

New legislation was tabled as Bill-C4 and died when the Parliament was prorogued.

Bill-C4 is a modernization to improve governance, accountability, and administration of existing non-profits and charities that incorporate federally.

Not specific to enable community nonprofits.

Cautions

“off-loading” of government responsibility.

Values disconnect with the private and financial sectors. How can civil society organizations retain their values and culture once they have entered into partnership with the private sector?

Are we abandoning collective provision of public goods if we consider financial models other than current delivery?

Barriers, just a few of them

Ontario Charitable Gifts Act, prohibits charities from owning more than 10% interest in any business

Co-ops are not allowed to issue investment shares, in some provinces.

Limits on capital retention to be used on infrastructure and management.

We have no national charities act.

Outdated Canada Corporations Act. No action since 1917!

References

Baldwin Andrea, “Creativity, Social Benefit & Job Creations, Martin Prosperity Institute: February 2009

Bridge Richard, Corriveau Stacey, “Legislative Innovations and Social Enterprise: Structural Lessons for Canada” BC Centre for Social Enterprise: February 2009

Chernoff Alex, “Creating Capital Pools to Support Social Enterprise Development in Manitoba”, August, 2008

Community Reinvestment Act, http://www.policylink.org/EDTK/CRA/

Hebb Tessa, “Program Related Investments in a Canadian Context”, PowerPoint, 2007

Lloyd Stephen, 2008 presentation at the Social Finance Forum. Available on Vimeo

Fraser Valley Centre for Social Enterprise, “Analysis of L3C and CIC Social Enterprise”, October 2008

Wolk Andrew, “Advancing Social Entrepreneurship: recommendations for policy makers and government agencies”, The Aspen Institute: April 2008

Questions to ask

Can people who receive social assistance earn a living wage from a social enterprise that brings them out of poverty?

Is there potential for enough impact for the community nonprofit sector? Can public policy enable the nonprofit sector to attract enough capital that diversifies our funding streams