Most investors expect a financial return when they buy a bond. But what if they could also help young offenders get back on track, increase home care for the elderly, or reduce the incidence of lung disease?
Proponents of "social finance" contend it's possible to do both. It's an idea that's been gaining traction in the U.K. and North America, and now a group of influential Canadians is trying to give it a push here.
A task force that includes former prime minister Paul Martin and Stanley Hartt is lobbying the federal government for changes that would make it easier for charities and non-profits to issue bonds and start businesses.
They argue that the creation of a social-finance sector in Canada would make philanthropists out of investors and ease the burden on government-funded social services. To do so, not-for-profit organizations would be allowed to tap into types of financing normally reserved for business, and to earn revenue. The group, known as the Task Force on Social Finance, met recently with Finance Minister Jim Flaherty.
The concept has been percolating in Britain for a decade, and recently, it has been gaining traction. Last year the British Ministry of Justice in conjunction with Social Finance, an organization affiliated with venture capitalist Sir Ronald Cohen, announced the launch of what was billed as the world's first social-impact bond.
A social-impact bond, which resembles an equity investment more than a traditional bond, is in effect a contract between private investors and government. Money raised by the bond issue pays for programs or experiments undertaken by not-for-profit organizations. If these projects achieve a targeted outcome, investors are paid out of the ensuing savings to government.
In the U.K. case, money raised by the £5-million ($7.9-million) bond issue goes to a pilot program at Peterborough Prison to rehabilitate short-term prisoners. If, as a result, re-offending drops by more than 7.5 per cent within six years, investors will receive a proportion of the money saved by keeping people out of jail, to a maximum return of 13 per cent. (Developers of the bond say every re-offender costs the state a minimum of £143,000 a year, not including the costs to the victims of their crimes.)
But in Canada, proponents say charities and non-profits must jump through hoops designed for corporations in order to raise revenue or issue their own bonds. Tax laws and guidance from the Canada Revenue Agency on what charities are allowed to do are narrower than those in many other jurisdictions, such as Australia, and have stifled innovative ways of raising money, advocates say.
The supporters add that now is an ideal time to remove those barriers. "When governments are strapped financially, as they are in an economic downturn, they should reach out to as many innovative things as they can find, and this is a very innovative way of meeting those needs," Mr. Martin said in an interview. "With relatively few changes in regulations or taxation, this could be a win-win situation."
Part of the reason for the traditional separation between charities and business is that the former are advantaged by their tax-exempt status.
But Mr. Hartt, chairman of Macquarie Capital Markets Canada, says that rule-makers need to be more open-minded.
"I think what we have to do is get our minds past the idea that charity is in one world and business is in another," he said. "There's no reason whatsoever why a charity shouldn't be able to raise financing."
The two worlds should be allowed to collide, with the proper checks and balances, he says. One of the changes sought by the task force is the creation of a "profits destination test" to ensure profits are reinvested back in the charity or non-profit and go toward its goals.
A spokeswoman for Finance Minister Flaherty declined to comment in depth on the task force's report, saying only, "We consult and receive input from numerous Canadians during our pre-budget consultations and examine them in the context of the current fiscal realities and the best interest of taxpayers."
There are already some examples of social finance at work in Canada. For instance, the Regent Park Revitalization Project, a large-scale community housing project in Toronto, was partly financed by $450-million worth of market-rate bonds that were sold to provincial governments, pension funds and institutional investors.
In 2009, Mr. Martin launched the $50-million Capital for Aboriginal Prosperity and Entrepreneurship fund, which is backed by many of the country's largest corporations and foundations including the five largest banks, Barrick Gold Corp., Manulife Financial Corp., Sun Life Financial Inc. and SNC-Lavalin Group. It aims to boost economic independence among native people through the creation of successful businesses.
But experts say Canadian efforts are only scratching the surface. Tim Draimin, executive director of Social Innovation Generation, can see a multitude of opportunities for social-impact bonds.
For example, the bonds could be designed to support and expand the promotion of lung health and disease prevention, in order to reduce the number of people affected by lung disease and potentially save the government billions in health-care spending. Lung disease currently costs the Canadian economy $154-billion a year, according to the Lung Association.
All told, the Task Force on Social Finance estimates that impact investment could reach 1 per cent of all managed Canadian assets, or $30-billion.
In the U.S., JPMorgan released a report late last year that argued social "impact investments" are emerging as an alternative asset class in the same way that hedge funds and emerging markets did.The report estimated the potential global market for impact investment at $400-billion (U.S.) to $1-trillion over the next 10 years.
In Canada, the task force's specific requests include:
- Allow foundations to invest in projects related to their goals, such as affordable housing units or a community loan fund.
- Ask provincial and territorial governments to establish legislation governing the public sale of "community bonds," which are debt securities issued by non-profits to raise financing.
- Ask all levels of government to pilot "green bonds" to finance renewable energy projects.
With a thriving social enterprise economy, Canada would also be able to tap into the resources of small and mid-sized companies, Mr. Martin said.
"We're doing very well, but could do a great deal more if some of the changes that are being recommended were brought forth," he said. "I think [Ottawa]should provide social entrepreneurs with the same opportunities, both in terms of regulation and in terms of tax incentives, that they provide business entrepreneurs."