Canada's Original Think Tank

Report of the Standing Senate Committee on Social Affairs, Science and Technology, entitled The Federal Role in a Social Finance Fund

Report of the Standing Senate Committee on Social Affairs, Science and Technology, entitled The Federal Role in a Social Finance Fund

Report of the Standing Senate Committee on Social Affairs, Science and Technology, entitled The Federal Role in a Social Finance Fund

Senator Eggleton:

Honourable senators, I’m going to age myself, but my career in public office started almost half a century ago, in the 1970s as a Toronto city councillor and in the 1980s as Mayor of Toronto. Throughout that period, and since then, I have followed something called social enterprise. Social enterprise is the idea of creating a business along business models, a revenue-generating kind of business, but for social purpose. You might also call it profit for purpose.

In the early days, I recall it was mainly to give employment opportunities to people who were on the margins of society and people, for example, who had disabilities and had difficulty getting jobs. Certainly, in those days, there weren’t a lot of measures that exist today to help people with disabilities. Or it could be people coming out of the prison system, which, then, as now, makes it difficult to get a job.

Some of the enterprises or businesses were simple things like the delivery of envelopes, delivery of packages or, perhaps, hauling stuff. One I remember involved commodities, taking coffee, repackaging it and selling it to not-for-profit organizations as a means of giving former prisoners an opportunity to earn a living. It could also involve the recycling of materials and metals and making new things that were saleable items.

All of these things did help a lot of people and at the same time if they happened to earn extra money, they would plow the money back in to create even more jobs to try to scale up the business a bit, or contribute it to a charity that was compatible with the need to help the people who were also getting the employment.

But as time went on the idea of social enterprise gained more and more momentum and got into more sophisticated and more challenging kinds of programs that required a lot more money. A lot of the early programs were done on a shoe string, but now a lot more money was required to move them along.

If they wanted to scale up some of these smaller businesses, it again required some capital investment or they got into environmental issues which required a fair bit of capital investment.

So as the need for more and more funds for social enterprise was happening, the question of social finance then came into the picture. Social finance is what this report that I’m introducing is all about.

Out of social finance came many different concepts and ideas. One, for example, was on the provision of social impact bonds. You know, there are literally billions of dollars out there in private funds such as pension funds, for example, credit union funds and many other individuals who have considerable wealth and who want to use it for some social purpose. There are billions of dollars of funds out there that could be made available for what they also call impact investing or an investment in something that might not have the highest return on the money as some people want to get but has a social purpose involved with it. So you combine the social good with some return on investment, and you have got social impact investing.

One very interesting one that I recall from a decade ago also brought in the question of pay for performance. This was one that was done in Peterborough, England, where a prison existed and where the concern was to try to get recidivism down to a lower level. At that point in time people were coming out of that jail and about 60 per cent of them were back within a year, having committed another offence. They couldn’t get on with their life in some way. They weren’t getting the social support and counselling services and help they needed so they ended up recommitting, getting convicted and going back, so a social impact bond was issued.

There were some 17 investors in this and they made the aim of getting the rate of reoffending down by 7.5 per cent. The government of the U.K. was very interested in this: “Wow, you reduced this reoffending and you’re saving a lot of money.” I think we have all heard that it costs in excess of $100,000 a year to keep someone in prison in this country. There is a lot of money involved here, so they saw the benefit of that and they said that they would contribute some money to these investors if this target was met.

Lo and behold, the target was more than met. They didn’t just cut it by 7.5 per cent; they cut it by 9 per cent, so the investors got a return on their investment, the government saved money because not as many people were going back to prison and a social purpose was obtained, which was good for society and good, particularly, for the individuals involved. They got on their feet and got the help they needed to get into a better way of life. That’s just one example.

My conservative friends will be interested to know that around the same time, in about  2012, Diane Finley, the then Human Resources Minister, started talking about social impact bonds and these kinds of programs being something worth pursuing. So regardless of any political stripe, this has been looked upon, and is being looked upon, as something worthy of pursuing.

In spite of all this, however, the number of funds that were established for this purpose of social enterprise only skim the surface. There is still a lot of money out there that could be put to benefit. As I mentioned earlier, there are pension funds and there are people with a lot of wealth who are willing to see some of that money go into social purpose finance, so there is a lot more that can be done.

Around 2009 there was a task force set up, the Canadian Task Force on Social Finance. Paul Martin was a part of that and, just to balance it politically, the late Stanley Hartt was also part of it. It was chaired by Ilse Treurnicht, the CEO of MaRS in Toronto. They came up with a report with a good phrase that I think summarizes it all. The phrase was Mobilizing Private Capital for Public Good.

They offered seven recommendations. The recommendations included such things as suggesting that Canada’s public and private foundations should invest at least 10 per cent of their capital in mission-related investments like social enterprise. Instead of designating the money as charitable donations, these kinds of investments create jobs and create more money in profit for purpose, in other words. They also suggested exploring the opportunity to mobilize the assets of pension funds in support of impact investing. A lot of these pension funds are operated by unions for people in unions or public employee associations. Why not use some of that money for that kind of a purpose?

I’m doing this for my colleague: They also wanted to ensure charities and non-profit organizations are positioned to undertake revenue-generating activities in support of their missions and that regulators and policymakers need to modernize their framework so they can do that: not only to give money away but to help invest it to make more money for more social purpose. And, to encourage private investors to provide lower costs and patient capital, social enterprises need to maximize their social environmental impact.

There was one other recommendation and that recommendation said:

To mobilize new capital for impact investing in Canada, the federal government should partner with private, institutional and philanthropic investors to establish the Canada Impact Investment Fund. The fund would support existing regional funds — a sort of wholesale fund — to reach scale and catalyze the formation of new funds. Provincial governments should also create impact investment funds where these do not currently exist.

That particular recommendation is the subject of the report. The report was put together. We had two meetings in February. A number of expert witnesses came in and talked about the issues of social finance. It’s this report here. You should have seen it; everybody hopefully got it. Let me mention the six recommendations in the report. The report was unanimous — all parties, all concerns, all groups.

Recommendation 1

The committee recommends that the federal government create and contribute to a pan-Canadian social finance fund. The fund would operate at arm’s length from the government, thus not constraining how funds were raised or spent, other than to determine its purpose and to establish accountability mechanisms for its contribution.

We also talked about what kind of entity this might be. It could be something like the Business Development Bank, if you wanted to go to a Crown corporation, or it could be something totally outside of any realm relevant to the federal government because there is the sensitivity of being at arm’s length.

I have one other comment on the first recommendation. It would help signal to investors that the government is behind this kind of approach and is helping to provide some stability of a given fund. That is a powerful lever in terms of getting private sector funds in for public good.

Recommendation 2

The committee recommends that when assessing where to invest federal money in a social finance fund, the government look for opportunities to leverage funds from other investors.

There is also one interesting idea that they do in the U.K.; they have a plan in the U.K. whereby they take monies from old bank accounts. These are bank accounts that have been unclaimed for some period of time, and they invest that money in the social finance fund. Now if we did that here in Canada, it’s worth bearing in mind that every year the Bank of Canada is given decade-old dormant bank accounts by other financial institutions and credit unions. And a lot of them are small — a few dollars here, a few dollars there. But they sit around for a decade and if they are unclaimed at that point and time, they are shifted over to the Bank of Canada. The Bank of Canada had $678 million at the end of 2016 from 1.8 million of these little balances. That’s a lot of little balances totalling $678 million; not bad.

What happens to that money? The Bank of Canada eventually can transfer it to the federal coffers but can’t do that for a long period of time, so it invests the money for sometimes 30 years and up to 100 years. What does it invest the money in? It invests it in Canada savings bonds and treasury bills, which seems logical, but if you want a low rate of return, that’s a low rate of return.

It’s secure, yes. But without dipping into the coffers, these are funds that could be used to help leverage private sector funds. That’s just one idea that we said should be looked at, and that is part of what Recommendation 2 is about.

Recommendation 3 is actually more specific about it. It says:

The committee recommends that the federal government explore the use of dormant bank accounts as their basis of capital for the social finance fund.

Recommendation 4

The committee recommends that a portion of the federal contribution to a social finance fund be targeted to the development of new intermediary funds . . . .

Those are people who help put the funds together. People over here need the funds, people over there have the funds and you help pull them together. That’s what that’s all about.

. . . that will provide economic and social opportunities to traditionally marginalized regions and communities.

We have found that the funds that do exist to help social enterprise are largely centred in places like Vancouver and Toronto. Edmonton has a very significant fund as well. We need to spread it around for people in other parts of the country in smaller communities to benefit from those funds.

Recommendation 5

The committee recommends that the fund support institutional capacity building to ensure that organizations are capable of participating in the social finance ecosystem.

That’s a complementary one to the other one I just read; helping to build capacity in different communities across the country.

Finally —

The Hon. the Speaker pro temporeSenator Eggleton, would you like five more minutes?

Senator Eggleton: May I have two minutes?

The Hon. the Speaker pro temporeIs it agreed, honourable senators?

Hon. Senators: Agreed.

Senator Eggleton: Thank you.

Recommendation 6 is the final one.

The committee recommends that the federal government make a multi-year commitment to a social finance fund, with fixed amounts flowing periodically over years, and that the government anticipate a longer time to offer returns.

We need patient capital as part of all of this.

Those are the six recommendations on social finance. We think it’s a great way to mobilize private capital for public good. That will help to solve a lot of problems for people who are marginalized in our society, people who are of low income, people who are having difficulty getting jobs, people who need the kind of social enterprises that this finance fund will help.

Thank you very much. I hope we will adopt the report.