When we first set out to explore the solution economy in 2011, we were seeking to understand the growing movement of non-governmental actors into the realm of societal problem solving. Fast forward to 2014 and we are on the cusp of the formalization of global social capital markets.
A trillion dollars is how much could be released into the solution economy every year if governments, industry and civil society are able to unlock just one percent of the world’s investment market toward “impact investing” – using private capital to finance public good.
Impact investments are made into businesses and social sector organizations, directly or through funds, with the goal of generating a measurable, social or environmental benefit alongside a financial return to the investor. These investments may involve new forms of financing for government programs – very much like accomplishing for social programs what public-private partnerships (P3s) have achieved for bricks-and-mortar public projects. Or, they may be private investments in socially-minded businesses operating in competitive commercial markets.
Either way, in order to thrive, they will require the engagement of government policymakers or program designers in creating the conditions for delivering the kind of positive social impact their promoters seek.
Since 2012, the World Economic Forum has hosted impact investors at its annual Davos meetings. The focus of these – and other global as well as Canadian initiatives – has been to devise strategies and proposals that would help to catapult impact investing from the “margins to the mainstream.”
The recent Social Impact Investment Task Force, established by the U.K. presidency of the G8, lays out in its September 2014 report a compelling vision for the future: one that sees a “third dimension” of social impact added to the traditional measures of financial returns and associated risks.
Canadian leaders of business, civil society and government were active participants in this work and since the Canadian Social Finance Task Force issued its report in September, momentum has been building. A monumental task must still be undertaken if Canada is to benefit from the potential of social capital markets.
There are an estimated 5,000 social assistance programs operating across the country, with annual expenditures of more than $200 billion. In some jurisdictions, these program expenditures have been growing at two to three times the rate of the Canadian economy. Yet, despite the scale and growth of these expenditures, most are not accompanied by impact measurement or reporting of social return on investment (SROI).
There are many areas that could benefit from the active investment of new money and expertise to create and grow markets for social impact:
• Approximately 2.4 million Canadians are out of work, representing 7 percent of the population, yet there are 206,000 jobs available.
• Healthcare costs currently absorb about 11 percent of Canada’s gross domestic product and almost half of provincial budgets; however by 2056, seniors will comprise between 25% and 30% of the Canadian population, placing unsustainable burdens on existing healthcare programs.
Meanwhile, Canadian businesses continue to hold onto cash in the search for meaningful investments. In fact, Statistics Canada data shows Canadian companies held $629.7 million in cash reserves during the first quarter of 2014, an increase over the previous quarter. Yet, our recent market sounding of the Canadian investor community found that there is a growing interest in new forms of impact investment instruments such as Social Impact Bonds. While governments proceed with caution in facilitating the policy and regulatory changes that could assist in freeing up this cash, capital remains under-employed.
The impact investment movement, while fueled by non-governmental actors, is becoming a driving force in the measurement of social returns. Guidelines like those described in the Measuring Impact Subject Paper from the G8 Task Force significantly raise the bar for those private sector players pursuing social impact. These evolving standards have the potential to compel governments to improve how they report on results achieved and, ultimately, innovate to improve SROI. If these markets mature as we think they can, it will be increasingly difficult for governments or impact market participants to avoid transparency or accountability for what is being achieved.
A study by RBC last year showed that impact investing funds in the Canadian market grew by 20 percent to $5.3 billion in 2012. But, if Canada were to achieve the increasingly accepted international community aspiration of one percent of capital markets being invested for impact, the market would be $30 billion annually.
Clearly, we have a long way to go. Institutional investors remain reluctant to consider impact investing as a way to grow their portfolios. In fact, current pension assets in impact investing are practically zero.
However, there is growing evidence the tide will turn. In fact, a Harvard Business School study found that a portfolio of high-sustainability companies outperformed a low-sustainability portfolio by 4.8 percent annually.
Canada’s National Advisory Board to the G8 Social Impact Investment Task Force got it right when it recently reported that there are two things that need to happen: addressing legislative and policy barriers; and, encouraging impact investing through “catalytic capital” measures. We are on the brink of a new movement in social innovation. One that is fueled not only by innovative governments but by a new breed of social impact investors. The opportunity to improve the lives of millions of Canadians is too great to let slip away.