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Social Finance Week: Investing in impact

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We’ve enjoyed being voyeurs of the impact investing interplay in the US and UK for some time now. But the writing is on the wall: impact investing is gaining momentum here too so it may be time to get acquainted. What’s all the fuss about? Why should the sector invite impact investing into its typically risk-averse sandbox? Is it worth the leap?

What is it?

Broadly speaking, impact investments are intended to create positive impact through social, environmental and fiscal returns. Investors range from foundations, traditional financial institutions, individual philanthropists and nontraditional lenders. Though some areas are deemed to be more amenable to impact investing, technically it can be put to good use for any number of projects. As for financial instruments, they too can vary depending on the situation and investor.

Why now?

No one is saying goodbye to the grant. It shall remain an integral part of the sector’s funding model. But it’s evident that traditional sources of financing are coming up short, leaving organizations vulnerable. Take the requisite obligation to pay for projects before receiving government funding or the limited grants for core operations. By turning to creative financial strategies, organizations are pursuing sustainability with an expanded toolbox.

Of course, impact investing is not new. In the UK and the US, organizations like the Nonprofit Finance Fund have been effectively making loans available to nonprofits for years now. Even here in Canada, “folks have been doing it for decades,” affirms Adam Spence of the Centre for Impact Investing, citing Quebec’s strong social economy. But it’s become more interesting now, as people start to move the agenda forward exponentially.

And it’s not hard to see why. Nonprofit leaders, feeling frustrated without capital to give their ideas wings, are looking to social finance to expand their operations, boost impact and more effectively meet their mission. It’s about advancing your mission with a new pool of capital that you wouldn’t normally be able to access,” says Spence.

Gamble much?

But what of our sector’s reputation as risk-averse, more comfortable playing the quarter slots than sitting at the high stakes table, a shot of whisky in one hand, a royal flush in the other? Should they be gambling more? Or is the possibility of incurring greater debt going to further constrain an already-handcuffed sector?

And what of these investors who, reeling from the capital markets, feel even more squeamish at the idea of dropping their capital anywhere near something called “not-for-profit”.

Spence acknowledges there was once a perception that investing in the sector was a high-risk game, that if you put money in, you had little chance of seeing it again. But many are proving that theory wrong. Sometimes it’s just a matter of being selective with where the money goes. Poverty reduction, building infrastructure and affordable housing have proven to work especially well with an impact investing strategy. Same goes for bridge financing, with social impact bonds and outcomes-based financing particularly successful.

Lend this

As a result, a growing number of investors are interested in putting capital to mission. Take the Canadian Alternative Investment Cooperative. Started in 1984, providing social enterprise and mortgage financing to nonprofits and cooperatives, CIAC today has a lending pool of $7 million, having invested in 50 different projects. The success of CIAC demonstrates that investing in community builds resiliency and that nonprofits are capable to repay their investments, says Spence.

More recently, a traditional lender caused a stir in January by jumping onto the bandwagon. RBC announced a $20 million commitment to a new social and environmental initiative, comprised of a $10 million Impact Fund and a $10 million investment into a socially responsible investment fund. The first such initiative of a major Canadian financial institution, its significance has far-reaching resonance.

And this April we saw another exciting launch, that of the Community Forward Fund (CFF). Hoping to promote a sustainable sector, CFF is addressing a gap in access to patient, working capital and bridge loans for small and medium sized organizations by making loans and arranging financing (initial loans will range between $35,000 and $250,000). CFF will also provide financial coaching, assessment tools and will help build financial skill capacity for sector organizations.

“One of the things we found was that a lot of foundations were looking for vehicles through which they could invest and lend to nonprofits,” explains CEO and co-founder, Nora Sobolov. “There’s a lot of need in the sector,” she adds, citing this as one solution of many. They won’t all work in every instance, Sobolov says but, “We need a marketplace and that’s what we’re hoping to build.”

The fund has received a lot of uptake, with a number of foundations and individuals showing interest. Take the Community Foundation of Ottawa who forged a partnership with CFF, the first step of their new Impact Investing strategy. “We’re trying to get our assets more aligned with our mission of enabling impact,” says Brian Toller, chair of the foundation’s board of governors, explaining how the strategy came about.

Already a leader in responsible investing, the partnership seemed logical. Many foundations are still hesitant about taking the impact investing step, says Toller. “It’s a mindset change.” But, for their foundation, and others willing to take the leap, it’s a worthy venture. “It’s no longer pulling us back, it’s moving us forward.”

Invest in me

There are currently 33 loans in CFF’s pipeline and they’re looking to do their first round of financing this summer, with a couple of pilot loans already complete. Tucker House is a retreat and environmental learning centre outside of Ottawa. Wanting to purchase solar panels for their building, they initially looked to grants and donations but were unable to fill a financial gap. A loan from CFF made the difference. As part of the Ontario Government’s Micro-FIT progam, the solar panels would essentially pay for themselves within 15 – 20 years. “It assures us a steady income since the sun is pretty stable,” offers executive director, Monique Lefebvre. The installation of solar panels also offers an educational opportunity for their learning centre and is in line with their longer-term vision of creating a model of sustainability.

Travel further west and you’ll find another organization making sustainable use of their impact investment. C Returns is a nonprofit dedicated to greening homes and buildings in Edmonton. To help them achieve their triple-bottom-line mission, they turned to the Social Enterprise Fund. “The Fund meshed with our philosophy and vision which was to green neighbourhoods in Edmonton and every home and community in Alberta,” explains Vice President and Communications Officer Shanthu Mano (another funder was the City of Edmonton, which is hoping to reduce greenhouse emissions).

Measuring Impact

But how does C Returns – or any investee for that matter—demonstrate impact? How do they convince investors their work is worthy of funding and then demonstrate they’re achieving the social and financial returns envisioned? To be sure, this is a point of contention for some, claiming it difficult to know when impact investing actually works - and when it doesn’t.

Is there really a way to effectively measure social impact? “Absolutely,” states Mano emphatically. For one thing, their loan proposal offers every metric they’re calculating, including the number of people and neighborhoods their work will impact. For another, measurements are pretty straightforward. “Do you want to see the creation of more green jobs?” she asks. “We’re doing that!” Want to green the construction industry? Ditto.

For C Returns, numbers speak for themselves. Calculations determine how many tones of carbon will be saved per year and per lifetime in each scenario, and what that corresponds to in savings. And so on. They also conduct a post-audit and provide quarterly reports, tracing every cent, affirming they’ve spent as intended – and with the intended results. C Returns’ diligence with metrics can be quite persuasive. Of course, “it helps to invest in people with a track record,” Mano adds with a smile.

System-wide measures

For Spence, one of the bigger challenges of measuring impact is the lack of infrastructure, of comparable systems across different organizations and countries that track it. But that’s starting to change as systems are being developed, like the recent initiative by Imagine Canada.

And then there’s SiMPACT Strategy Group, an expert on measuring, maximizing and valuing social impact. Aside from helping investors understand the value of investments and investees present their value to prospects, they’re also a network partner of SROI (Social Return on Investment) Canada, providing social value creators, evaluators and investors the language and tools to express social return on investment.

With that multi-tiered expertise in tow, SiMPACT trains organizations and people on SROI and even accredits practitioners. “It’s a useful management tool to keep an organization on track of its objective and to see value of its work and communicate it as it evolves,” explains President Stephanie Robertson.

When it comes to valuing social impact, bridging the communications gap is key, she says. “An investee usually has a clear vision of what they’re striving to accomplish but communicating that to someone with less information, less time, less knowledge of issue, gets muddled.”

To those who question whether impact is quantifiable, Robertson is adamant. Investments are typically designed or intended to change something, she explains. By describing the before and after, one is essentially measuring that change, through an outcomes-based evaluation. If people are focused on measuring change, they can ask: was the change that occurred expected? Was it more? Was it less? Was it different? How could we achieve our objectives differently?

“People who say it’s impossible to quantify impact are not focused on measuring change,” she concludes. “They dismiss the notion of output because it’s very transactional. But you have to have outputs in relation to your initial investment in order to know you’re on track to meet desired outcomes.”

The other problem, adds Spence, is people often try to monetize the measuring of impact. But it doesn’t have to be. “It’s an important and valuable way to do it but it can’t be the only way.” As for CFF, it measures its returns and impact pretty rigorously too, using a series of evaluations. After all, says Sobolov, ensuring everyone’s on track is in everyone’s interests – the investor, investee and the sector.

Elisa Birnbaum is a freelance journalist, producer and communications consultant living in Toronto. She is president of Elle Communications and co-founder of SEE Change Magazine and can be reached at: info@ellecommunications.ca.

Photos (from top) via iStock.com. All photos used with permission.

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