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

2. Literature Review : Summary

The following is a summary extract from a more complete literature review on community, economically targeted and sustainable venture capital investing in Canada and the U.S. (see Appendix A for full literature review).

2.1 Community Investing

Traditional financing focuses entirely on financial returns while charitable financing seeks social returns. This leaves a gap in community financing as illustrated in the following figure:

While risk and rates of return vary widely, CIs finance seemingly high-risk transactions in a prudent and effective way. Nonetheless, even allowing for the differences in scale, the U.S. dwarfs Canada in its innovation in bridging this funding gap with CI:

• There are 800 to 1,000 community development financial institutions (CDFIs) in the U.S. representing US$14 billion (2003 statistics). CI assets have expanded by 84 percent since 2001, when they were estimated at US$7.6 billion.
• There are 50 or so community investment funds identified to date in Canada, representing $69 million in Canada for 2002, down from $85 million in 2000.

In the U.S., government legislation and programming have been key drivers of the community investment industry. Canada lacks a broad framework of national legislation and government programming to encourage CI.

2.2 Sustainable Venture Capital Investing

The sustainable venture capital market is still maturing, and it is mostly in expansion-stage financing as startup-stage financing is even higher risk. Fund sizes and deal sizes are still relatively small, and there is no clear story to tell about their financial success and only incomplete stories about their social or environmental impact.

A few conditions are deemed essential to the growth of SVC:

• successful exits from deals and more consistent and reliable financial returns data;
• awareness and education on both “sides” of SVC investment; co-investors (Sustainable Development Technology Canada represents the approach of the federal government on this industry requirement); and
• environmental mitigation regulation imposing internalization of externalities by polluting sources to further facilitate investment in this sector.

2.3 Economically Targeted Investing

SVC or community investing by pension funds and other institutional investors is often referred to as economically targeted investment. ETI forms an investment perspective that, with all else being equal, recognizes collateral benefits such as the creation of jobs, affordable housing or regional economic development. Advocates of ETI argue that the present and future financial health of trust funds is inextricably linked to the economic health of their communities.

Some key points from the literature are set out below:

• Unlike the U.S., Canada has no broad legal framework that clarifies and establishes parameters for economically targeted investing.
• A 1995 U.S. General Accounting Office (GAO) survey found that most ETI programs in the U.S. were outperforming their benchmarks.
• In Canada, between 1991 and 1996 close to 17,000 jobs were created by 420 venture-backed companies at an exponential growth rate of 26 percent per year.
• While private and public sector pension funds in the U.S. were typically responsible for approximately 50 percent of all new venture capital on an annual basis during the 1990s, only a handful of extremely large public sector pension funds in Canada are engaging in private placement investment.
• Labour-sponsored investment funds (LSIFs) control more than 50 percent of the available venture capital market in Canada. Federal and provincial tax credits act as incentives for investment in these funds.

It becomes evident that in the U.S., as in Canada (with the LSIFs), where there is a legal structure and government support, ETIs represent an effective strategy for job and wealth generation.

2.4 Social Impact Metrics

Social impact methodology, like the CI sector, is very much a work in progress, though attempts to further quantify the social and environmental venture field promise to go a long way in bridging the information gap in the social capital marketplace.

A generally accepted standard (such as those for accounting) for social impact accounting does not yet exist. Attribution analysis is an issue, so current working metrics tend to look at outputs rather than true impacts. The social return on investment (SROI) is one method of assessing social value, while the “blended ROI” is perhaps the ultimate goal in metrics as it integrates both social and financial returns to create a blended value proposition.

The balance of the paper delves into the CI sector in more detail, providing further background to the emergence of this asset class within the investment industry.