Can the private sector and market-based models play a bigger role in the traditional turf of charities and government, tackling issues like youth unemployment and childhood obesity?
The head of Canada's largest bank thinks so. So does the federal government, which last week asked charities and corporations to submit ideas on how to get businesses more involved in funding government social programs. One idea is social finance, capital geared to initiatives that deliver both a social return – like reducing homelessness or improving air quality – and an economic return.
It's part of a broad move that is blurring traditional lines between government, the private sector and charities – not just in Canada. The U.S. and the U.K. are leading the way, with other models springing up in Australia, Scotland, Ireland and Germany. More than $100-million has been raised globally in social impact bonds in the past year, according to MaRS innovation centre.
Royal Bank of Canada is the country's first big bank to establish an impact investment fund – a $10-million pool for funds and businesses with a social or environmental goal that also generate some financial return. Gordon Nixon , the bank's president and chief executive, spoke to The Globe and Mail last week after delivering a speech at the Toronto forum.
His comments have been condensed and edited.
Q: You mentioned in a speech today there's a need for new ways for businesses like yours to measure success. What do you mean?
A: There has been an evolution in the whole area of corporate social responsibility over a long period of time. But I think in many ways, partially because of generational change, and partially because of what happened in 2008, it's a new paradigm today.
Corporations can't just talk about corporate social responsibility the way they have in the past. The expectations of the public and society and governments and media is different today, and companies have to step up and take the whole area to a whole new level.
You can't be naive about it. Our primary responsibility is to generate a profit, to generate a return to our shareholders, and we're always going to be to some degree measured by that. I wish we weren't but we are. But the expectations of what our society, customers and employees expect from us are totally different today from the bank I took over 11 years ago or the bank I joined 30-plus years ago.
What really came through as a result of what happened in 2008, a lot of companies in our industry, particularly outside of Canada, lost sight of the fact that they were in the business of servicing customers.
We have been on this evolution, but it's gotten a huge kick start as a result of what's happened with the global economy, and also the younger generation and social media.
Is capitalism under attack? The answer is yes. Is it the best route to go and ultimately going to survive? The answer is absolutely yes. But it's got to shift and transform and adjust to society's expectations as well.
So it's not that capitalism is totally going to be totally redefined. But it has to evolve, as society evolves, as needs change, as expectations change.
Q: So what should governments do to support the growth of social finance?
A: What I would like to see from governments generally is to find ways to innovatively support this area. This area is all about innovation, so there are some fundamental changes that we have to make in terms of our charitable-giving rules. Today, a foundation, in theory, shouldn't invest in a social impact venture that doesn't have a high financial return component to it. That doesn't make any sense, foundations are set up to create good. Those are easy things that have to change and should change to facilitate capital in this area.
But also, areas like social impact bonds. Everybody talks about the Peterbourough prison example in the U.K. [the world's first such bond that finances a prisoner rehabilitation program] as being a huge success. But at some point, you've got to be able to talk about another dozen types of successful examples as well. And the way that's going to happen is by governments finding innovative ways to support these kinds of initiatives.
If there are areas where social entrepreneurs can provide services in a more effective way, and government has to adjust to support that, that would be a good initiative. What they've got to do is think outside the box and be a little bit innovative – the way they're expecting social entrepreneurs to be innovative.
Q: RBC has put $10-million in a new impact investing fund (plus $10-million in social investments) – that's a big chunk for the sector but still pretty tiny for the bank. What would you like to see in terms of growth in this area?
A: We want to see other banks [get involved]. We'd love to see everybody jump on the bandwagon and support this area.
You know, $10-million is not a lot of money in terms of the overall size of RBC, but you have to start somewhere. And in this area, it's a lot of money because a lot of the ventures that we will be looking to support are ventures that don't require significant dollars. With that, we've created an advisory group that will provide a little independence, that will focus the dollars into opportunities that support our areas of focus, which are water, the environment and job creation for youth in particular.
My hope is if this is successful – and it's critical we're successful, because we don't want this like the venture capital industry where you've got a bunch of dollars invested, returns are low and then the market declines.
To the extent that we're successful here, will generate our ability to redistribute those dollars...and hopefully find more dollars to invest.
Ultimately we would love to see a lot of other different organizations, including the other financials, support this area as well.
What excites me so much about this area if it's successful is, talk about a win-win in terms of charitable or social investing. If you think of a foundation that is able to invest dollars in an area that they are focused on, and get those dollars back, or get a portion back of those dollars back, and recycle those dollars to make more investments in those areas, talk about a win win.
The other area that's exciting, it's going to force a higher degree of performance metrics on the institutions that are getting dollars. And I think that's healthy to the whole charitable sector. Because hopefully it will lift the game of everybody. So the ability to ensure that dollars invested are really generating a social impact is there. If we can get it right, it can be very exciting.
We're looking for both a financial and social return.
Q: So where do you think this sector is headed in the coming years?
A: I think you're going to find more dollars available here, in some ways, than opportunities, if we make this work effectively.
There's a lot of foundations and individuals who are looking to find ways to give back. So talk about a win-win where you can actually invest in something that accomplishes your philanthropic and social goals...so I can't imagine why a foundation wouldn't sit back and direct at least a portion to [of their funds] to social investments.
The challenge is – we need some changes to the federal tax rules to make that easier – but a lot of foundations and individuals would love to have the opportunity if there was a mechanism...Ultimately if we can make this work, there will be a lot of capital out there. But it's very important to have some early success to encourage the evolution of it.