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Yung Wu is CEO of the MaRS Discovery District and Stephen Huddart is president and CEO of the McConnell Foundation.

Reaction to the government’s fall economic statement focused on the tax incentives to make Canada better for business. Less noticed, but of greater long-term consequence, was a major new strategy to make business work better for Canadians.

Buried deep in his speech, Finance Minister Bill Morneau announced the Social Finance Fund, a $755-million investment to kickstart Canada’s social-finance market. In a few dozen words, he catapulted Canada to the top of a list of countries including Britain, Portugal and Japan that are already investing in this new kind of capitalism.

Social finance fills the wide-open space between business and philanthropy. It challenges the notion that financial profit and social purpose are mutually exclusive by creating new business models and investment vehicles that aim to create a measurable social or environmental benefit while also making a financial return. In the shorthand of the industry, this is called creating “impact.”

This new funding model fundamentally resets the terms of the relationship between governments, charities and businesses. Much government funding is done through grants and contracts. Now some of the public purse will be invested in projects, funds and social enterprises with the expectation of advancing priorities on social or environmental causes, while at the same time making a financial return to recycle back into the fund. This new approach expands the innovation economy and creates space for new types of organization and investment to emerge. Major entities such as RBC, Desjardins, Heart & Stroke and Vancity are already experimenting in the field.

The list of opportunities for the fund is long and varied: It could be used to stem the rise in diet-related chronic disease, finance affordable-housing projects or support Indigenous entrepreneurs. Clean technologies – set to expand to a $2.5-trillion global market by 2022 – are another area where impact drives financial return. Take energy-efficiency building retrofits, which Efficiency Canada estimates could get the country 25 per cent of the way to its carbon emission-reduction targets. They create savings on electricity bills that can generate a long-term return for investors who finance the up-front costs.

Social-finance advocates have been pushing hard for public-sector investment to accelerate the industry. It was a key recommendation of the government-appointed Social Innovation and Social Finance Strategy Co-Creation Steering Group, which released its report, “Inclusive Innovation,” in August. Fundamentally, this is about putting capital to work on solving social issues – not, as some fear, privatizing the public sector. It is essential to the success of this approach that community and regional interests are represented and fully engaged in the process.

Calls for a more ethically driven capitalism are echoing across the Western world. Whether it’s Google workers protesting their employer’s involvement with the U.S. military, pension funds divesting from fossil fuels or the push to get more women and minorities into senior positions, the message is the same: values matter. Consumers, workers and investors increasingly want to deal with companies whose ethical compass aligns with their own.

Getting the right structure and governance in place poses challenges, not least of which will be determining what counts as a social-purpose project or business. “Lives changed” isn’t a metric that fits neatly into a spreadsheet, and so robust rules will be needed to screen out projects and companies that adopt the trappings of social finance without generating real impact. It is also important that the new fund be held at arm’s length from government. One example to follow could be Britain, which created a purpose-built body called Big Society Capital in 2011. Since then, Big Society has invested £456-million ($775.8-million) and brought in a further £805-million ($1.4-billion) in co-investments, mostly from the private sector.

It’s now essential that entrepreneurs, investors, non-profits and businesspeople step up with innovative ideas to tackle social and environmental issues. With this in mind, in his statement, Mr. Morneau set aside a further $50-million to help prepare much of the Canadian business and non-profit communities that are still unfamiliar with the concept of social finance. That may turn out to be the most impactful spending in the budget.

Make no mistake, the consequences of this move will be felt far beyond the social sector. The real power of this fund will be to nudge the centre of gravity toward a new, sustainable economic model that benefits all Canadians.

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