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Monday, December 27, 2010

Social Impact Bond Model: 7 Easy Steps

A Triple Win.

As I’ve mentioned before, social finance can be a confusing topic to explain. I am often asked, “What do you mean by new modes of finance?” or, “what does it mean to create new financial instruments?” 

The Social Impact Bond is a perfect example of one of these new financial instruments. Within the past year, the Social Impact Bond Model has been put into practice in the UK. The Canadian Task Force on Social Finance is now analyzing the successes from the UK pilot project and is working to build a strategy that enables the necessary policy changes to spread Social Impact Bond investments throughout Canada. 

In its simplest form, here is how the model works: 

1. An idea arises for a new social purpose organization or innovative project that could help solve a specific problem that the government is currently spending our tax dollars on fixing. 

2. Problem: People may think the social innovation sounds like a good idea, but the government is not willing to invest in the project because it is much too risky (or, dare I say, too innovative for them). The idea is to find a way to incentivize the government to take risks on social and environmental innovations without the fear of losing tons of cash.  

Solution: 

3. Find an investor who is willing to take a risk on a social/environmental innovation. 

4. With the three parties (The investor, the government, and the mission-based organization/project),build an agreement on the terms of the investment including specific, quantifiable metrics.

5. The Investor loans $xxxxx.xx to the NPO, social enterprise, or other mission-based organization or project. 

6. After x number of years, the success of the social/environmental venture is measured against the initial set of benchmarks.

7. If the project is deemed successful, the government pays the investor the amount (or a portion of the amount) the government saves by otherwise spending that money on the status-quo ways of dealing with the given social problem. If the project is deemed unsuccessful, the investor receives nothing in return. (Deeming an innovation successful would mean that its outcomes meet the initial benchmarks set out in the terms of the investment).

SO, the government feels no financial risk, the social innovation finally has the financial freedom to experiment with potential solutions to serious social/environmental issues, and the investor receives a return if the outcome successfully saves the government money. WIN, WIN, and, you guessed it: WIN. 

Saturday, December 18, 2010

Warren Buffett: Leading by Example

Buffett's definition of "Success"

There are many ways to be a successful leader.  There are those who are outspoken and powerful, those who derive influence as the quiet leader, and those who lead by example.  In my experience, the latter has the greatest impact on his or her followers.  When an individual acts in way that is contrary to what is expected of him/her, or contrary to societal norms, they trigger a subconscious desire in others to follow this action.  Warren Buffett is living proof of the power of leading by example.  Started by Warren Buffett and Bill Gates, The Giving Pledge is inspiring wealthy individuals around the globe to donate half their wealth to philanthropic causes. 

The following is a public letter written by Buffett in which he explains his views on philanthropy, his commitment to giving, and his definition of success:

In 2006, I made a commitment to gradually give all of my Berkshire Hathaway stock to philanthropic foundations. I couldn’t be happier with that decision. Now, Bill and Melinda Gates and I are asking hundreds of rich Americans to pledge at least 50% of their wealth to charity. So I think it is fitting that I reiterate my intentions and explain the thinking that lies behind them. 

First, my pledge: More than 99% of my wealth will go to philanthropy during my lifetime or at death. Measured by dollars, this commitment is large. In a comparative sense, though, many individuals give more to others every day. Millions of people who regularly contribute to churches, schools, and other organizations thereby relinquish the use of funds that would otherwise benefit their own families. The dollars these people drop into a collection plate or give to United Way mean forgone movies, dinners out, or other personal pleasures. In contrast, my family and I will give up nothing we need or want by fulfilling this 99% pledge. 

Moreover, this pledge does not leave me contributing the most precious asset, which is time. Many people, including — I’m proud to say — my three children, give extensively of their own time and talents to help others. Gifts of this kind often prove far more valuable than money. A struggling child, befriended and nurtured by a caring mentor, receives a gift whose value far exceeds what can be bestowed by a check. My sister, Doris, extends significant person-to-person help daily. I’ve done little of this. What I can do, however, is to take a pile of Berkshire Hathaway stock certificates — "claim checks" that when converted to cash can command far-ranging resources — and commit them to benefit others who, through the luck of the draw, have received the short straws in life. 

To date about 20% of my shares have been distributed (including shares given by my late wife, Susan Buffett). I will continue to annually distribute about 4% of the shares I retain. At the latest, the proceeds from all of my Berkshire shares will be expended for philanthropic purposes by 10 years after my estate is settled. Nothing will go to endowments; I want the money spent on current needs. This pledge will leave my lifestyle untouched and that of my children as well. They have already received significant sums for their personal use and will receive more in the future. They live comfortable and productive lives. And I will continue to live in a manner that gives me everything that I could possibly want in life. 

Some material things make my life more enjoyable; many, however, would not. I like having an expensive private plane, but owning a half-dozen homes would be a burden. Too often, a vast collection of possessions ends up possessing its owner. The asset I most value, aside from health, is interesting, diverse, and long-standing friends. 

My wealth has come from a combination of living in America, some lucky genes, and compound interest. Both my children and I won what I call the ovarian lottery. (For starters, the odds against my 1930 birth taking place in the U.S. were at least 30 to 1. My being male and white also removed huge obstacles that a majority of Americans then faced.) My luck was accentuated by my living in a market system that sometimes produces distorted results, though overall it serves our country well. 

I’ve worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions. In short, fate’s distribution of long straws is wildly capricious. 

The reaction of my family and me to our extraordinary good fortune is not guilt, but rather gratitude. Were we to use more than 1% of my claim checks on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others. That reality sets an obvious course for me and my family: Keep all we can conceivably need and distribute the rest to society, for its needs. My pledge starts us down that course.
  Each day, more wealthy individuals are joining Buffett's and Gates's "The Giving Pledge", the latest being  Facebook founder Mark Zuckerberg.  Click here to see The Giving Pledge's latest press release from December 8th.  It takes one person with a vision for action to make the seemingly impossible possible. 

Monday, December 13, 2010

Tackling Overconsumption vs. Sustainable Products

What is our answer? 

I think we can all agree that our environment is in some serious danger. I think where we tend to disagree is how to mitigate this danger, which is precisely the argument going on now in Cancun. The problem with Cancun is that loads of politicians are stuck dabbling back and forth and I’m genuinely concerned that no serious strategy will even come out of it all. What if our leaders don’t devise a solution at the next Environmental Summit? What about the one after that? 

It seems us citizens don’t have much control over the decisions made at these conferences, and if that’s the case, allow me to bring to your attention an environmental strategy argument that we consumers can absolutely take ownership of: 

I’ve been contemplating this for a while. Do we focus our attention on battling overconsumption, or do we channel our support towards sustainable product manufacturing? In an ideal world, we would have both strategies working simultaneously. But I’m trying to really delve deep here and think realistically, since our personal time and resources typically limit our arena of focus.

I am a huge supporter of the manufacturing of sustainable products. I truly see them as an investment (with my rate of return being as invaluable as the air we breathe). I believe there is absolutely room for growth in this market, but my concern is that this sustainable-product boom continues to contribute to our terrible overconsumption habits. The more I read about these habits, the more frightened I become about our world 20 years from now. 

Check this out: 

Global oil production is currently about 81 million barrels a day and is predicted to fall to 39 million barrels a day by 2030 due to diminishing resources. 

Click here for image source
• The world's annual consumption of plastic materials has increased from around 5 million tonnes in the 1950s to nearly 100 million tonnes today

• The food we eat now typically travels between 1,500 and 3,000 miles from farm to our dinner plate. The distance had increased by up to 25 percent between 1980 and 2001.

• The average American buys 53 times as many products as someone in China and one American's consumption of resources is equivalent to that of 35 Indians. Over a lifetime, the typical American will create 13 times as much environmental damage as the average Brazilian. 

These are just a few examples of the thousands of ways our overconsumption habits are causing some serious damage. SO, as consumers, should we be investing more of our time, energy, and money feeding our consumption norms with sustainable products, or should we work on flat-out buying less? 

I don’t have a set opinion on this yet; this issue is vital for our environment’s survival and deserves more of my learning attention. I am unsure about whether we can even tackle this deeply engrained habit, and if it’s not possible, then maybe we should turn to green products for the answer. What I do know, however, is that our habits determine our destiny; I know that I am thinking more carefully each time I make a purchase. 

As one of my incredible past professors would say: 

“Almost everything you do is determined by your habits. We are all creatures of habits. Fortunately, all your habits are learned, learnable, and “droppable”. A habit is an automatic response to a stimulus and is (good or bad) something you do without much thought or effort. Once formed, your habits do not go away. They can only be replaced by new habits. You form your habits then your habits form you."

Overconsumption is one of the most difficult problems our global community must overcome to build a sustainable planet. If we listen to my professor, and we really do have the ability to replace our current habits...all we need to do is to start.

Sunday, December 5, 2010

Canada’s Task Force on Social Finance: The Report Launch

Canada's Catching Up (Take Two) 

When I try to explain what I am passionate about to individuals who are unaware of the social innovation movement, I am usually met with utter confusion. Those puzzled faces really come alive when I begin my rant about social finance. 

Before I begin discussing last Tuesday’s groundbreaking event at MaRs Discovery District, I thought a good way to begin this post would be to explain what social finance actually means. Socialfinance.ca created an extremely comprehensive explanation of social finance. I suggest you take a few minutes to watch this video so that the next time you hear about new modes of finance for Canada’s social sector, you'll be ahead of the game! 




 Several weeks ago, I expressed my excitement about the creation of the Task Force on Social Finance in Canada.  If you recall, I titled the post "Canada's Catching up", since until then, we had not made strides in leveling ourselves with other countries' progress on social finance.  The creation of the task force was the first step, and I believe the event last Tuesday signified reaching the second milestone toward an active social finance market in Canada.

Last Tuesday, November 30th, I found myself surrounded by people who are not only interested in the ideals of social finance, but also genuinely believe in its importance and impact potential.  The Task Force on Social Finance launched its first report, entitled "Mobilizing Private Capital for Public Good".  The report outlines the need, challenges, and opportunities for a social finance marketplace in Canada and provides 7 recommendations on how to overcome them.  While each of these recommendations go into some depth, I thought a one-liner on each of the seven goals would provide a sufficient summary (though I do recommend you download the report!).

7 steps to building a Social Finance Marketplace in Canada:

1. All Canadian foundations should invest at least 10% of their capital in mission-related investments by 2020. (Right now they are only required to invest 3.5%!!)

2. The federal government should partner with private, institutional, and philanthropic investors to establish the Canada Impact Investment Fund.

3. Investors, intermediaries, social enterprises, and policy makers should collaborate to build new bond and bond-like instruments.   

4. Canadian governments should mandate pension funds to disclose their responsible investing practices and provide incentives to mitigate perceived investment risk.

5. Policy makers should explore the need for new hybrid corporate forms for social enterprises (example from the UK: Community Interest Company).

6. A Tax Working Group should be established to develop and adapt proven tax-incentive models to encourage lower-cost investments for social enterprises to maximize impact.

 7. The eligibility criteria for government sponsored business development programs should be expanded to include the range of social enterprises  (see page 4 of the report for a great diagram of this range.)

While I will definitely be summarizing more important pieces of this report in the future, I thought this would be a good way to introduce its purpose.  As cheesy as it sounds, I sat at the event and truly felt part of something niche that I know is going to be a huge part of Canada's economy in the future. It will not be an easy or short process, but the plan is there.  If we can make each of these recommendations a reality, Canada will  be the country chased by others.

I'm excited to see where this goes, and will most definitely continue sharing as it evolves.