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An increasing number of private investors are looking for opportunities to invest their money in projects that benefit society, and government policymakers are looking for ways to scale innovative programs and initiatives to address the most persistent and complex social, cultural, and environmental challenges in our society. Social finance is a medium for achieving these goals. 

Canada’s social finance market is growing, and it has the potential to significantly reshape the funding and financial landscape for charities. It is imperative that charities understand the implications of social finance so that they can make informed, adaptive decisions.

What is social finance?

Social finance is an investment that seeks a measurable social, cultural, and/or environmental impact as well as a financial return for an investor. To access these types of investments, charities will have to think and act differently than what they may be used to. Grants and donations, two major sources of revenue for charities, do not require the delivery of financial returns, and this has an effect on how charities operate their organization. With social finance, charities will need to explore new business models that are capable of generating both social, cultural, and/or environmental impacts and financial returns if they wish to attract investment.

For most charities, social finance will not appear to be radically different from more traditional investments, such as accessing a loan from a commercial bank and paying back the principal and interest on the loan. One key distinction is that traditional investments tend to be focused solely on receiving financial returns, and do not require the investee to also produce a social good. Another key distinction is that social finance is structured to be easier for mission-driven organizations like charities to access and manage. For example, a repayable loan made available through social finance may come with features such as lower interest rates and more flexible repayment schedules.

What are the potential benefits for charities?

Charities operate in an increasingly precarious funding environment. Grants and donations are becoming less sustainable sources of revenue for many charities. In this context, social finance emerges as a source of capital for charities that could allow them to become more resilient and sustainable.

With social finance, charities can acquire new assets, maintain positive cashflow, and develop new, self-sustaining revenue streams. This can help charities diversify their revenue sources, thereby shielding them from risks associated with reliance on a single source of revenue. Social finance can also help charities achieve their mission by providing them with affordable capital that can be used to grow their operations and scale their impact.

What are the potential downsides for charities?

Some charities that take on social finance may have a difficult time paying back investors. This can place significant financial burdens on charities, which could ultimately lead to charities losing their assets or even closing their organization. There is the risk of “mission drift” if organizations are diverting their resources to the pursuit and management of social finance investments away from activities that contribute to the fulfillment of their mission.

There are also concerns about the effect that social finance might have on the sector as a whole. Some hold the view that social finance will further the marketization of the charitable sector, as charities will have to behave more like businesses if they want to access this source of capital. Some charities hold the view that social finance will become a substitute for grants or that it will have a negative impact on philanthropy by encouraging investment over giving.

Are charities ready for social finance?

In 2018, the Government of Canada announced that it would be investing $755 million to establish a Social Finance Fund. The Social Finance Fund is a pool of money that will increase the amount of affordable, repayable capital available for a variety of “social purpose organizations,” such as charities, non-profits, co-operatives, and for-profit social enterprises.

The United Kingdom’s experience has taught us that a major challenge with these types of funds is the lack of capacity among social purpose organizations to access them. To address this, the federal government implemented its Investment Readiness Program in June 2019. The program aims to build the capacity of social purpose organizations to take on social finance investments. The goal is to develop a pipeline of “investment ready” organizations that will be able to access capital made available through the Social Finance Fund, and to take advantage of other opportunities in the social finance market.

At present, there is dearth of data on the readiness of social purpose organizations. This lack of empirical evidence makes it difficult to conclude whether charities are ready for social finance or not. To fill this gap, Imagine Canada has conducted a national survey of 1,018 registered charities to better understand charities’ current readiness to participate in Canada’s growing social finance market. The results of this survey will be presented at an upcoming webinar hosted by Charity Village on June 25, 2020 entitled, Are Charities Ready for Social Finance? Investment Readiness in Canada’s Charitable Sector. The webinar will cover a variety of topics addressed by the survey, such as awareness of and opinions about social finance, demand for social finance and how charities would use it, potential barriers in accessing social finance, organizational capacity in key social finance-related domains, and current financing needs.

Adam Jog is a Research Associate with Imagine Canada, where he is currently assisting the organization with its Investment Readiness Program (IRP) project. Before coming to Imagine Canada, Adam was a Policy Associate at The Mowat Centre. Working with the Centre’s Not-for-Profit Research Hub (Mowat NFP), he was a key contributor to several impactful reports addressing critical sector issues, such as the government-sector relationship, and co-authored the report, Committing to Action: Next Steps for Canada’s Evidence Ecosystem.