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Wednesday, November 24, 2010

Does “social” scare investors?

A discussion of Impact Investing and why it 
deserves more attention.

As opposed to the accepted, often confusing financial jargon we are most privy to in the financial world, impact investing is exactly what its name implies. While a standard investment calls for optimized return, impact investments are driven by the triple bottom line.

A presentation made about a month ago at MaRS Discovery District in Toronto provides a comprehensive definition of impact investing:
“Impact investments aim to solve social or environmental challenges while generating financial return. Impact investing includes investments that range from producing a return of principal capital to offering market-rate or even market-beating financial returns” (see full presentation below)
It seems the concept of impact investing has enormous potential; but if this is the case, why haven’t Canadian investors adopted these practices yet? What is the difference between the risk taken on by venture capitalists and that of impact investors? 

In theory, both parties are betting their bucks on a new, innovative idea whose future success is unknown. And if the risk is the same, is it the social purpose attribute of the investee that is intimidating investors? My instinct responds with a reluctant “YES”.

Venture capitalist Tim Jackson, Founder and Partner of Tech Capital Partners, was my source of inspiration for writing this post. He supports my questioning with the following powerful words:
“When it comes to funding innovation, however, it is frustrating to see the different, almost opposite, approaches we take in supporting traditional businesses compared to social enterprises... This process of trying new ideas, failing, and learning from them, is an accepted practice in the for-profit sector. Why, then, do we put up so many additional hurdles for social enterprises? We expect the non-profit sector to be innovative and creative, while at the same time, we make adequate funding extremely hard to attain. Then we force them to operate within a complex regulatory regime that makes entrepreneurial activities difficult.

My experience is that non-profit leaders are extremely entrepreneurial and resilient. They have to be when confronted by all of the roadblocks we put up. Funders require detailed business plans and proposals while providing little to no contingency funding, which means that non-profit leaders have no latitude to experiment. Funders ask for detailed reports on successes but don’t encourage stories to be shared about failures.
We need a way for social enterprises and non-profits to enjoy paralleled freedom to  innovate. Bill Young, Director of Social Capital Partners, suggests the three steps Canada must take before we see significant growth in impact investing activity:

1. Foundations have to bridge the divide between the grant-making side of their organization and the investment side
2. The federal and provincial bodies that regulate foundations need to make it clear that they encourage this practice.
3. Canada needs to develop financial intermediaries that can provide attractive impact investment opportunities to foundations.

Bill’s solution is both insightful and plausible. I’d like to add a fourth step to his list, with my optimistic belief that more information brings us closer to social and environmental change:

4. Canada’s social finance leaders must build an awareness strategy for institutional, foundation, and corporate investors to understand the benefit of impact investing. With solid outreach, the ‘impact’ of impact investing will self-exemplify throughout Canada, attracting all types of investors to this ground-breaking movement.

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