A recent report graced the pages of CharityVillage, giving the nonprofit community reason for pause. Titled, Strengthening Organizational Capacity, it drew its findings from an online survey of 235 nonprofit professionals in Canada, the US and the United Kingdom. Co-authored by CharityVillage’s own Maggie Leithead, and Natasha van Bentum, a sector veteran currently at Power Up Canada, the report found that while nonprofits may have heard of social finance, few understood it.

For those of us without an MBA or experience in investment banking, social finance can be a bit daunting. Okay, very daunting. Come to think of it, even experts in the field trying to configure this relatively new but growing trend find it challenging. For van Bentum, the motivation to learn more about it stemmed from her constant search for capital while working in the environmental sector. “I was totally frustrated by the very small, teensy weensy piece of the pie that goes to the environment.” As van Bentum would certainly attest, social finance is a worthy tool to get one’s head around.

The ABCs

While some differ as to the specifics, all would agree with van Bentum’s definition of social finance as “a sustainable approach to managing money that delivers social, environmental and economic benefits.” More than just a financial bottom line, it promotes double or triple bottom lines. It comprises that “space on the financial continuum between traditional financial investment with no social returns, and no economic value but high social returns,” she further explains. Products range from insured and uninsured deposits, real estate mortgages and loan guarantees to fixed income securities, stock purchases, and private equity. And the arena covers areas like community investing, social enterprise finance, micro-lending, sustainable business, and philanthropic program-related investments.

Now that we know the ‘what’, why should we pay any attention? Sustainability, for one thing. With government cutbacks having a palpable trickle-down effect on the nonprofit sector, organizations are left with the growing burden of finding and pursuing funding while meeting rising community needs. In particular, Canada’s social and environmental sectors are extremely underfinanced and, to scale up their programs and increase impact, they need access to new forms of capital. Instead of relying on conventional approaches like foundation and government grants, the nonprofit sector could benefit from a new, more creative model. And with the rise in social entrepreneurship – in many ways a response to the challenges mentioned above – it would behoove these emerging businessmen and women to educate themselves on these alternatives.

But social entrepreneurs aren’t the only ones who can take advantage of social finance. Though not for everyone, “it’s up to our imagination to figure out how this will be applied,” says Tim Draimin, Canada’s “guru of social finance”. Former founding CEO of the Tides Foundation, current Tides senior fellow, and the recently appointed executive director of Social Innovation Generation (SiG) – providing practical support for social innovators in tackling social and environmental challenges facing Canadians – Draimin is a strong believer in the potential of social finance.

Helping it along

With that in mind, the Tides Foundation co-founded Causeway, a collaboration of institutions with the objective of accelerating the provision of social finance to the nonprofit world. Among other objectives, the partnership hopes to dialogue with mainstream financial institutions to increase their awareness of social finance opportunities and the creation of new products that can earn profit while bringing in social returns. Causeway also hopes to take advantage of newly emerging areas that could play well into the social finance framework, such as socially responsible mutual funds and renewable energy investing. The initiative, supported by SiG, is sure to keep social finance moving forward.

Playing Canadian catch-up

That’s a good thing because there’s much work to be done before it’s commonly found in the toolkit of investors, foundations, and the nonprofit community. While the approach is becoming popular in Europe and is beginning to stake its ground in the Unites States, Canada seems to be lagging behind, says van Bentum. The reasons are complex but some of it comes down to legislative efforts on the part of the UK and US governments, efforts lacking in Canada. In the US, for example, the Community Reinvestment Act led to the evolution of a number of organizations that provide easy vehicles for people to invest in social finance. Meanwhile, in the UK, the focus on social finance stems from varied initiatives to create a level playing field for social entrepreneurs in their competition for dollars.

But Canada hasn’t yet taken such proactive steps. Some blame Canada Revenue Agency (CRA) rules and the fact that tax breaks are limited to entities defined strictly as charitable organizations. van Bentum and others are hopeful tax incentives similar to those enjoyed by the movie industry will soon be implemented. In fact, her survey found that 78% of respondents agreed or strongly agreed that the government will enable social finance through tax incentives or will remain completely marginal if it doesn’t. Others place responsibility for the lag on public policy, legislation or a conventional nonprofit mindset. “We haven’t created an enabling environment for this to happen,” says Draimin.

The undeveloped social entrepreneurial framework doesn’t help. “The focus on entrepreneurship hasn’t been a really prominent plank in the nonprofit communities’ self-identified value set,” he adds. Though it’s become more prominent recently, social entrepreneurship still barely compares to other places where the mindset has much deeper roots. But with the continued pressures on government and evolving societal needs, this may have to change. “The nonprofit looking forward will have to realize that the pattern of financing will continue to evolve and that exploring what social finance might mean to them will be important,” Draimin asserts.

Institutional challenges

There’s also the question of infrastructure, or lack thereof. Conventional lending and investment practices are still so ingrained in our society that few institutions have the wherewithal, expertise or configuration to put social finance seriously into motion. Just ask David Walsh. A private developer and businessman, Walsh dedicates much of his time these days to the community. Over the years, he’s amassed quite a bit of experience lending money to organizations or helping them find cash elsewhere that they desperately need. Involved with the Mortgage Outreach Corporation, Walsh established a reputation helping various nonprofits, including a daycare centre, the Grand House – a student cooperative, and the Carrot Common, under whose umbrella lies the Carrot Cache, a social finance fund that supports worker co-ops and organic farmers.

According to Walsh, though social finance is a tool he’s been offering for while, the infrastructure in Canada makes it hard for organizations to look to institutions to provide the same. “There’s a shortage of people who know how to deal with it,” he says. Amy Stein would agree. Director of finance and operations at Evergreen – a nonprofit dedicated to making cities more livable by deepening the connection between people and nature – Stein says the organization has been researching social finance options in its attempt to secure a construction loan. She admits the approach is pretty rare in the sector, but the social entrepreneurial mindset embodied by herself and Geoff Cape, Evergreen’s executive director, has opened their eyes to progressive options.

That said, the environmental nonprofit is also looking to regular financial institutions as well. “We’re interested in social finance but it’s not a well developed area in Canada,” she offers, explaining how most institutions still assess investments on very conventional grounds and don’t look at it from a social level. Evergreen’s large capital project is complex and requires lenders who’ve done this many times before. “There are established ways of doing construction lending and social finance is not one of them,” adds Stein. A small loan would be less problematic, however, and there are some experts in that area gaining ground. “With a few exceptions, you have to look at individuals or organizations that deal with nonprofits,” echoes Walsh.

Progressive steps forward

One such organizations is BC-based Vancity, Canada’s largest credit union and the financial institution of choice for the nonprofit community out west. Vancity has been engaged in social finance for a long time, if not under that specific designation then in its general activities and overall mission, says Scott Hughes, director of community business banking. “We believe by blending the values of social, finance and the environment, you’re getting two plus two equals five – or more.” The organization has also set up a community foundation, community-based banking opportunities, as well as a micro-lending program similar to the Grameen Bank.

A testament to the growing popularity of social finance and Vancity’s preeminent role moving it forward, the organization recently introduced a new position to its roster: senior vice-president of social finance, the first financial institution in Canada to do so. Over the next 10 years, Vancity hopes to adopt social finance slowly, with the eventual goal of it becoming all they do, not just a part of what they do.

As far as the public goes, Hughes sees an evolving social finance consciousness, though the number of specific examples in action is lagging. The biggest challenge, he says, lies in mindset. Whether among investors, foundations, the government or the nonprofits themselves, a change in thinking and awareness is needed. “But unless you’re close to it and see how it works, it’s not easy to get because it’s contrary to conventional thinking.” The hope is with more initiatives emerging, mindset will follow. Tim Draimin, for one, is encouraged. “It would be really exciting for the nonprofit community to have a whole range of ways of developing their long-term financials security.”

Editor’s Note: If you’d like to learn more about social finance, check out the Tides Canada Social Finance Resource Centre.

Elisa Birnbaum is a freelance journalist, producer and communications consultant living in Toronto. She is also president of Elle Communications and can be reached at: info@ellecommunications.ca.