Scan of the Community Investment Sector in Canada Coro Strandberg Strandberg Consulting Brenda Plant Brenda Plant Consulting September 2004

1. Introduction

Increasing attention is being placed on the role of capital markets and their potential for levering positive sustainability outcomes. Much of the effort to date has looked at the degree to which there are links between sustainability and financial performance. This paper looks at the issue of sustainability and capital markets from a different perspective. It seeks to assess the potential of capital markets—the trading of debt or equity securities—to generate positive social, economic and environmental outcomes for communities, regions, disadvantaged groups and underinvested sectors. In other words, this paper explores whether there is evidence that institutional and retail investors can invest proactively to fill capital gaps and advance the sustainable development of communities and regions without compromising their financial objectives.

The socially responsible investment (SRI) industry, which has emerged to become a significant force in capital markets over the past few decades, is the home for targeted investing that generates double and triple bottom line returns. Called community investing (CI), this sub-sector of mainstream investment has grown significantly in the U.S. and struggles for legitimacy in Canada. In order to provide a better understanding of this sub-field of community investing and the related asset allocation strategies of economically targeted investing (ETI) and sustainable venture capital (SVC), this paper:

• summarizes some of the key recent findings of the CI, SVC and ETI literature in Canada and the US
• describes the sector and compares the Canadian and U.S. community investment industries;
• sets out examples of best practice in community investment, economically targeted investing and sustainable venture capital;
• reviews the capital allocation processes that fund managers typically follow in deciding to place double and triple bottom line investments, including fiduciary considerations; and
• outlines barriers and opportunities in expanding the size, scale and impact of the community investment sector in Canada.

This is admittedly a significant field of study, which cannot be considered in depth in a short introductory paper. This paper is thus a high-level scan of the challenges and potential of the CI sector, which aspires to point the way for further debate and research to address the issues presented above. Conducted over one month in the summer of 2004, the study is based on recent Canadian and U.S. literature in the fields of CI, ETI and SVC and on interviews with U.S. and Canadian academic and industry leaders. The capital allocation process was developed through key informant interviews with five U.S. and Canadian fund managers representing two mutual funds and an asset management firm, pension fund and foundation. Collectively they manage over $100 million in community investments from an asset base of $3.7 billion.¹ The interviews also provided insights into the barriers and opportunities confronting the CI sector in both countries.

The rationale for community investing is that public capital markets and traditional financial intermediaries such as banks overlook or are structurally biased against non-traditional investments. Community investments are designed to fill this capital market gap. As will be discussed below, such investments can yield “at market,” “near market” and “below market” returns ² and differ from charitable donations in the expectation of financial returns in addition to social returns—hence the expression “double bottom line.”

The following analysis is primarily based on the definition of community investment developed by the Canadian SRI industry, elaborated below. For the purposes of this paper, community investment is also defined to include the related sectors of economically targeted investing and sustainable venture capital. These additional investment approaches also represent targeted investment strategies, often for institutional investors such as pension funds, as will be explored further. Specifically, ETI is defined as institutional asset allocations that obtain both market-grade returns commensurate with risk and collateral (social) benefits by addressing perceived financing gaps and underinvestment. Sustainable venture capital refers to the sub-sector within the venture capital industry that proactively invests in social and environmental technologies, processes and enterprises within professionally managed venture capital portfolios.

It is important to note that due to the infancy of the CI sector as a legitimate asset class and to the explosion of largely American innovation in this capital market sub-sector, the definition of community investment is still in evolution. As such, the approach taken in this paper should be perceived as a snapshot in time, again for the purposes of highlighting a little-understood but high-impact asset allocation strategy.

As the literature review and analysis will reveal, the CI sector is poised for growth in Canada and with it sustainability benefits in the form of jobs, affordable housing, regional development, social and environmental enterprise, infrastructure and conservation financing, clean technology and urban regeneration. For its potential to be realized, however, more research and study will certainly be needed. But, much more significantly, other programmatic support, education and awareness are essential.