Source: "How Canada can regain its prestige as a foreign aid leader" by Tim Jackson for the Embassy
Impact investing links public, private money for the public good.
The argument that Canada is a declining power on the world stage is a familiar refrain within government circles. The absorption of the Canadian International Development Agency into Foreign Affairs and the sale of official residences abroad have critics arguing whether Canada has lost its prestige as a country that once led international development initiatives.
Sir Ronald is a co-founder of Apax Partners, a venture fund with US$37.4 billion of assets under management as of March 31. As chair of the G8 Social Impact Investment Taskforce, he wants to mobilize private capital for the public good—and he thinks Canada has a global role to play as a marketplace and broker for new financial vehicles.
"Government is not in the best position to innovate because their whole value proposition is not to fail," he told a select group of Canadians this week.
But investors, especially those of the millennial generation, are not only risk-takers, they seek meaning in their work. And social impact investing is the ultimate pay-it-forward model of investment.
So what is impact investing, and how can it replace or supplement traditional international development? Micro-financing loans are the most traditional form of impact investing. But they are blunt instruments. More sophisticated financial tools include social impact bonds, or SIBs, and social impact funds that invest in for-profit start-ups—just as a venture capital fund might—but target companies that have a social or environmental purpose.
SIBs are a financing vehicle for social programs that flip the traditional government "pay-for-service" structure on its head. With SIBs, investors pay upfront for a program (for example, poverty reduction in a particular region), and if the fund meets its objectives, the government pays back investors their capital plus rewards them with a rate-of-return that is comparable or higher than traditional government bonds.
SIBs typically give uncorrelated rates of return between four and nine per cent while at the same time generating social returns that save lives and government fees.
Sir Ronald wants Canada to step up to the SIB plate. In a private meeting with bankers and government officials in Toronto this week, he spelled out how the United Kingdom and Japan have created social impact funds by pooling unclaimed bank assets. Big Society Capital in the UK, for instance, now has 600 million pounds of assets under management thanks to government policy that enabled banks to release 400 million pounds in unclaimed assets to the fund, while the banks topped it up with an additional 200 pounds of their own money. Sir Ronald thinks Canada could also allocate unclaimed assets to impact investing, and the banks should invest alongside government.
Canada has been slow on creating SIBs, but we are ahead of the international field with other initiatives. Canada pioneered the Social Venture Connexion, or SVX, a platform that connects impact ventures with accredited investors.
INFRONT, a program designed by MaRS in collaboration with Sarona Asset Management and Mennonite Economic Development Associates, is an innovative global mentorship project that sends Canadian venture capitalists to emerging markets where they offer technical assistance and mentor overseas funds and ventures.
I've personally participated in the INFRONT program. Earlier this year, I flew to India to meet with Aavishkaar, a Mumbai-based social impact fund that invests in startups like Nepra, a waste management company. It has not only delivered financial returns for its investors, it is also an example of how social impact businesses can improve the quality of life for some of Ahmedabad's poorest workers: its waste pickers.
Aavishkaar is an international example of best practices in the social impact investing space. It succeeded in raising private capital to fund 38 portfolio companies in India.
My role was to share and exchange ideas based on the portfolio companies they've assembled, as well as discuss financing and partnerships with Aavishkaar's principals. I'm now using my networks in Canada to help Aavishkaar leverage more money from North American investors.
Canada has a major role to play in international development. But I believe that role has less to do with traditional government financing, and more to do with public-private partnerships—in this case governments working with social impact investors to fund projects based on outcomes.
Currently over $1 trillion of assets under management in Canada have been invested using some form of responsible investing criteria according to an RBC report using 2013 data. Imagine if more of those dollars were directed specifically to social impact projects both at home and abroad. Investor money would soon exceed government allocation.
To paraphrase Judith Rodin, president of the Rockefeller Foundation: there is not enough money in government coffers to adequately address poverty, homelessness and unemployment. But there is enough money in the world to tackle these issues. It's just locked up in private investments—and we now have the key to unlock it.
Tim Jackson is Canada's sector representative on the Social Impact Investment Taskforce, and lead executive at the MaRS Centre for Impact Investing.