What Does Social Finance Mean for Your Preferred Charity?
Canada’s social finance market is growing, and it has the potential to significantly reshape the funding and financial landscape for charities. It’s important for donors to understand the implications of social finance so donors can work with their financial advisors to make informed decisions.
The trend toward social finance is, in part, due to an increasing number of private investors looking for opportunities to invest their money in projects that benefit society. Another contributing factor is government policymakers looking for ways to scale innovative programs and initiatives to address the most persistent and complex social, cultural, and environmental challenges. Social finance is one way of achieving these goals.
Social finance is an approach to mobilizing private capital that delivers a social dividend and an economic return to achieve social and environmental goals. Mobilizing private capital for social good creates opportunities for investors to finance projects that benefit society and for community organizations to access new sources of funds.
Social Finance from a charity’s perspective
For many Canadian charities, securing predictable sources of funding continues to be more challenging. Grants and donations are becoming less sustainable sources of revenue for many charities, making longer-term planning and forecasting precarious at best. In this financial environment, social finance surfaces as a source of capital, which could enable charities to plan further into the future and potentially become more resilient and sustainable.
The trade off for the charity, is that they will need to explore new business models that can generate both social, cultural, and/or environmental impacts and financial returns if they wish to attract investment. Compared to grants and donations, two major sources of revenue for charities which do not require the delivery of financial returns, the shift in thinking will inevitably influence how charities operate their organization.
Social Finance from a donor’s perspective
For the donor who is motivated by doing social good and receiving a financial return, emerging investments options such as social finance, social innovation, and impact investing are likely piquing interest.
What donors will want to be mindful of is that for most charities social finance is more akin to accessing a loan from a commercial bank and paying back the principal and interest on the loan rather than an outright gift. A key distinction between a loan compared to social finance is that the latter is structured to be easier for mission-driven organizations like charities to access and manage. For example, a repayable loan made available through social finance may come with features such as lower interest rates and more flexible repayment schedules.
In 2018, the Government of Canada announced it would be investing $755 million to establish a Social Finance Fund. The Social Finance Fund is a pool of money that will increase the amount of affordable, repayable capital available for a variety of “social purpose organizations,” such as charities, non-profits, co-operatives, and for-profit social enterprises.
A major challenge with these types of funds is the lack of capacity among social purpose organizations to access them. To address this, the federal government implemented its Investment Readiness Program in June 2019. The program aims to build the capacity of social purpose organizations to take on social finance investments. The goal is to develop a pipeline of “investment ready” organizations that will be able to access capital made available through the Social Finance Fund, and to take advantage of other opportunities in the social finance market.
The course of this funding was dramatically altered with the impact of COVID-19, causing the federal government to take a second look at how quickly it can get funding out to those social services needing it most.
Is your preferred charity ready for Social Finance?
Mobilizing private capital for social good creates opportunities for investors to finance projects that are close to their heart, can benefit society, and help community organizations to access new sources of funding. However, currently there is not enough data on the readiness of social purpose organizations, which makes it difficult to conclude whether charities are ready for social finance or not.
In an effort to move toward and gain the necessary data, Imagine Canada has conducted a national survey of 1,018 registered charities to better understand charities’ current readiness to participate in Canada’s growing social finance market. Donors interested in the option of social financial might start by reviewing this survey with their financial advisor and understand this growing trend and the opportunities it may present today and in the future.