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The Globe and Mail

Impact investing growing but more effort needed: report

The Bay Street sign is pictured in the heart of the financial district as people walk by in Toronto, May 22, 2008.


One year after issuing a call to action, the Canadian Task Force on Social Finance says there is evidence that impact investing is growing as an asset class in this country.

But, while progress has been made, more effort is required on the part of governments, pension funds, and Bay Street, according to a copy of a new report by the task force that has been obtained by the Globe and Mail.

Impact investing or social finance is essentially finance with a social or environmental goal; a concept that marries the profit motive with social objectives. It includes a range of relatively new ideas, such as social impact bonds, which are bonds that are issued to private investors by way of the capital markets and are used to fund projects with a social aim, which could be reducing diabetes or integrating newly-released prisoners back into society. The bonds pay a return to the investors that is tied to the success of the project, and that return comes from the money that the project saved the government.

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Proponents of the concept say that this is the time to put it into action, with governments increasingly strapped for funds while the soft economy increases the need for social projects.

The self-appointed task force, which includes Ilse Treurnicht, the CEO of MaRS Discovery District, Stanley Hartt, the chairman of Macquarie Capital Markets Canada, and former Prime Minister Paul Martin, said significant progress has been made on a number of the recommendations that it made a year ago.

A feasibility study has been done on the task force's idea of a Canada Impact Investment Fund, which would be a fund of funds that accredited investors (pension funds, wealthy individuals and foundations) could invest in. The fund would direct the investment dollars to private equity and debt funds that participate in social sector investing, such as affordable housing projects.

What differentiates these concepts from charity or philanthropy is that investors are also looking to earn a financial return.

The task force's report also points to the creation of a Social Venture Exchange (SVX), which is underway pending approval from the Ontario Securities Commission. The SVX - which is a partnership between the TMX Group, Torys LLP, the Ontario government, Imagine Canada and MaRS - intends to provide listings of socially-minded funds and ventures that are seeking debt and equity investment.

In the meantime, a growing number of non-profit organizations are exploring the idea of raising capital by issuing bonds in their local communities, and both provincial and federal governments are tentatively weighing the option of backing social impact bonds.

However, more work needs to be done to ensure that the projects these bonds would fund can be properly evaluated, and that the degree of their success can be properly measured, to ensure that investors feel comfortable about how their returns are being determined. The task force suggests that such work represents an opportunity to create a new specialty among bankers and other financial professionals in Toronto.

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The task force is calling on the federal department of finance to simplify the Canada Revenue Agency rules that dictate how non-profits are allowed to earn revenue. It suggests that a charity should be allowed to operate a business as long as the "profits" go straight back into the charity.

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