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

3. Description and Analysis of the Canadian CI Sector

3.1 The Canadian CI Sector

The Social Investment Organization (SIO) defines community investment as investment for the purposes of financing deep-seated needs of local communities not addressed by mainstream finance, including poverty alleviation, community and cooperative development and environmental regeneration. The SIO does not provide specific statistics on sustainable venture capital or economically targeted investments due to the difficulty of verifying asset values in these investment categories. The 2004 Canadian Social Investment Review, to be released in November 2004, will report on the following CI categories: (1) micro-finance; (2) equity and debt financing for cooperatives and not-for-profits; (3) community venture capital; and (4) investments in sustainable ventures operating in local and regional markets.

The SIO excludes from its CI definition assets that have been contributed by government and charitable donations, such as those as found within the federally sponsored programs (Community Futures Development Corporations and Aboriginal Financial Institutions), as these programs are not established to generate investor returns.³

A small sector by any standard, the CI field in Canada is limited to a handful of investment-grade opportunities for the retail and institutional investor. High-impact social investors would have to be highly motivated to find appropriate at- or near-market CI opportunities, given the precarious nature of the CI sector in Canada. The field is marked by the entrance of two mutual funds—Acuity’s Social Values Global Equity Fund and Meritas Mutual Funds Inc.—both of which have committed 3 and 2 percent respectively of their funds’ assets to community investment.⁴ Both firms advise in their prospectuses that while rates of return are factors in the selection process, they will be secondary to the social criteria. Their experience in Canada is such that there are few qualified community investment vehicles that would satisfy their fiduciary responsibilities. Some credit unions, such as VanCity Savings Credit Union, offer modest return term deposits that channel community investments into environmental and social enterprises. One institutional investor has $1 million invested in VanCity’s International Community Investment Deposit, which provides up to 2 percent returns (the return is selected by the investor) on investments that support micro-credit programs in Third World communities. However, as some of the examples below demonstrate, there is an emerging track record of modestly priced market-grade CI in Canada. There are no aggregated data available on financial performance of CI in Canada.

3.2 Canadian CI Examples

3.2.1 Ecotrust Canada

Ecotrust Canada’s mission is to support the emergence of a conservation economy in the coastal temperate rainforest region of B.C. In 1999, it set up the Natural Capital Fund to provide non-bank, higher-risk loans, which today stands at $3.8 million in assets. To date, it has provided over 40 loans to entrepreneurs who incorporate socially and environmentally responsible practices in their businesses, including loans to an organic food company, a First Nation–owned sawmill, an employee-owned fish plant, a green office supply company and a botanical garden. Over three-quarters of the loans have been made to businesses on Vancouver Island, and altogether these investments have supported about 500 seasonal, part-time and full-time jobs. The Natural Capital Fund has received over $520,000 in community investments, which currently provide a return of 2 to 3 percent to investors.

3.2.2 Community Futures Development Association of B.C. (CFDABC)

Established in 1992, the Community Futures Development Association of B.C. (CFDABC) represents 33 community futures development corporations (CFDCs) located throughout rural B.C. CFDCs offer a variety of entrepreneurial programs, business counselling, loan programs and business information to community members interested in expanding or starting their own businesses. Since its inception, CFDABC has acted as an intermediary for CFDCs, managing over $23 million in debt instruments from an insurance company, a venture capital firm and B.C. credit unions. These investments have generated returns of 6 percent, 2 to 3 percent and prime minus 1 to 1.5 percent respectively. Using the CFDC job multiplier of 21 businesses financed per $1 million and 326 jobs supported per $1 million (Weicker and Co., 2002, p. 10), the SROI of these investments results in approximately 483 businesses financed and 7,498 jobs supported.

3.2.3 Community Economic Development Investment Funds (CEDIF) Programs

Nova Scotia’s CEDIF tax credit program has resulted in the creation of a number of new community investment initiatives.
BCA Investment Co-operative Ltd., based in Sydney, N.S., has a mission to build a better community through creating rewarding and well-paying jobs, to be accomplished through equity investments in local businesses. Capital raising began in 2000 under the CEDIF program, and to date the investment cooperative has raised over $1.5 million from nearly 400 shareholders. Key investment sectors include earth and resource industries, manufacturing, oil and gas, tourism and culture, and knowledge-based industries. Investments so far have created or saved more than 200 full-time jobs for Cape Bretoners.
The Scotian Windfields funds were also created under the CEDIF regime to generate investments in renewable energy assets, primarily wind power. Established in partnership with Renewable Energy Services Limited, over nine funds are currently in operation, collectively comprising a multi-community network of renewable energy development projects.

3.3 CI Impacts

While there have been few attempts to measure the social and environmental impacts of community investing in Canada, the Community Futures Program in Western Canada has determined that every $3,059 of financing supports the creation of one job. Applying this metric to the $69 million in CI results in an estimated 22,556 jobs supported or assisted through community financing vehicles in Canada. Ecotrust Canada has generated a more conservative metric at $10,000 per job, resulting in the support of 6,900 jobs for the $69 million invested. Applying Calvert Foundation’s U.S.-based SROI metric—that is, roughly 522 small business jobs are supported for every US$1-million five-year investment—suggests that CI supports 36,018 small business jobs in Canada.⁵ While each of these job creation multipliers points to significant job creation benefits, the range of estimates reinforces the need to develop standardized SROIs for the CI industry.

3.4 Economically Targeted Investing in Canada

Because ETIs are investments that fill capital gaps (through predominantly private placement markets) in underfinanced areas of the economy while earning risk-adjusted market rates of return, they are considered a community investment for the purpose of this paper. One significant distinction between the CI and ETI fields is that community investments may earn below-market returns while ETIs exclude below-market investments, consistent with fiduciary obligations. ETIs are largely an American phenomenon, having evolved over the past four decades. They gained traction in the U.S. in the 1990s when regulators made their approval of ETIs official, acknowledging their focus on collateral (social) benefits and precipitating the entry of major public pension funds into the ETI field. Institutional investors (including pension funds, foundations, mutual funds, religious institutions, insurance companies and the like) that pursue an ETI strategy typically invest in affordable housing and other real estate, technology startups, small and micro-businesses, investments preferring unionized workers, minority and women entrepreneurs, restructuring manufacturers and infrastructure or community development. The choice depends on the social priorities of the investor among other factors. Proponents of ETIs claim they produce a competitive rate of return commensurate with risk while creating collateral economic benefits for a targeted geographic area, group of people or sector of the economy (Harrigan, 2003, p. 241).

There is no accepted definition of ETIs in Canada and no regulatory framework to sanction their existence. Canadian pension funds and other fiduciaries necessarily turn to the U.S. for this justification. In the absence of a definition and measurement methodology, there is only limited tracking, trend and impact research on ETI investments in Canada. Canadian academics in this field speculate there are at most less than 20 ETIs, including the seven labour-sponsored investment funds, which have adopted a set of social standards. That said, the ETI asset base is not insignificant once the assets of the seven LSIFs ($5.62 billion) and the Caisse de dépôt et placement du Québec ($4.5 billion) are factored in, topping roughly $11 billion of known ETI investment in 2002. The federal government, through its Social Sciences and Humanities Research Council (SSHRC) program, has provided a $1-million grant to the Ontario Institute for Studies in Education (OISE) of the University of Toronto for a study of “Pension Fund Transformation,” including an investigation of ETI in Canada, in an attempt to bridge this research gap.

While there are no comprehensive statistics on ETI impacts, a number of LSIFs maintain records of their employment impacts on investee firms. Independent studies show that these funds have had a dramatic impact on job creation and retention (Perrin, Thorau and Assoc., 1998; SECOR, 1996). Crocus Fund management estimates that the cost for each job they create is on average $23,000, far less than the $40,000 average for most venture capital investment (Hebb and McKenzie, 2001, p. 146). The Crocus Fund has recently launched the $25-million Manitoba Property Fund in conjunction with co-investors the Workers Compensation Board and the Teachers’ Retirement Allowances Fund. The purpose of the fund is to invest in real estate primarily focused on the historical sector of Winnipeg’s downtown.

3.5 ETI Examples

Two additional examples of Canadian ETIs with longer track records are described below.

3.5.1 Concert Properties

Twenty-one B.C.-based union and management pension funds pooled $27 million to form Concert Properties in 1989 (originally named VLC) with the objective of financing affordable rental housing in B.C. and creating jobs in the unionized construction industry. Today, the wholly pension plan–owned real estate corporation has $800 million in assets, with a track record of creating 10 million hours of on-site employment for unionized construction workers.

3.5.2 Fondaction

Fondaction pour la coopération et le développement de l’emploi was established in 1966 by la Confédération des syndicats nationaux (CSN), the second largest labour federation in Quebec. While similar to Fonds de Solidarité and other LSIFs, Fondaction has made a particular commitment to investing in the social economy ⁶in Quebec.

Filaction (le Fonds pour l’investissement local et l’approvisionnement des fonds communautaires) is a subsidiary of Fondaction with a mandate to finance enterprises in the social economy, including local community and micro-credit funds (loans from $50,000 to $150,000). Notably, Filaction was instrumental in the creation of five regional investment funds for female entrepreneurs in Quebec. Fondaction also created Le Fonds de financement coopératif with a mission to invest between $100,000 and $250,000 in cooperative or non-profit enterprises.

In collaboration with the Fonds d’action québécois pour le développement durable (FAQDD), Fondaction established Le Fonds d’investissement en développement durable (FIDD), which supports businesses developing technologies or products that optimize the use of natural resources or that have a significant impact on the reduction of waste, pollution or energy consumption.

Fondaction participates in a number of different specialty funds, like the Fonds Waskahegen, which aims to create and maintain jobs for non-reserve Native peoples, and the Fonds d’emprunt économique communautaire de Québec (FEÉCQ), which supports employment-generating projects by marginalized individuals.

On May 31, 2003, the realized or committed economically targeted investments of Fondaction reached $144 million, financing almost 100 businesses and directly or indirectly creating thousands of jobs. Average annual returns for shareholders were 2.29 percent (excluding the tax credit).

3.6 Sustainable Venture Capital

As neither the Social Investment Organization in Canada nor the Social Investment Forum in the U.S. tracks the SVC sector, we propose our own definition: 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. Because of the lack of tracking within the SRI industry, it is impossible to provide figures on the assets allocated to social and environmental venture capital as a sector. Turning to the traditional venture capital field, Macdonald and Associates in their 2003 VC Industry Overview put the Canadian sustainable venture capital sector (specifically energy and environmental technologies) at $45.46 million invested in 2003 (26 companies) compared with VC overall at $1.49 billion and 616 companies. (Cleantech Venture Network [2003, p. 3] estimates $78 million in 2003 down from $150 million in 2002.) The statements of interest that Sustainable Development Technology Canada ⁷(SDTC) receives each funding round provide insights into the status of the SVC market in Canada: in the five funding rounds conducted since April 2002, 806 statements of interest have been received representing $5.2 billion of clean-technology project potential. The average project size is $6.4 million; 95 have proceeded to proposal phase and 37 projects have been approved for funding. Should these 37 to 95 projects come to fruition and should they result in the leverage of additional venture financing, this will represent a significant leap forward for the Canadian environmental technology sector.

The Cleantech Venture Network (2003) reports that the clean technology sector has emerged as the sixth largest venture investment category in the U.S. and Canada, behind information technology, software, biotechnology, health care and telecommunications. In 2002, investments in energy-related clean technologies represented nearly half (45.5 per cent) of all clean technology investments. The remaining investments in clean technologies included enabling technologies (technologies developed by biological, computational and physical scientists and engineers that enable better use of natural resources and greatly reduce ecological impact) (14 percent), materials and nanotechnology (13.8 percent), materials recovery and recycling (8 percent), and water-related technologies (4 percent). As of the first quarter of 2004, according to the Cleantech Venture Network (2004), the average investment deal size in the sector was up 15 percent from the previous year, to just under US$7.1 million per deal; the average investment in venture deals across all industries was US$7.5 million.

According to one industry observer, clean and environmental technologies are not a sector but an investment theme or category, with applications across all venture capital sectors. He predicts large and highly disruptive market opportunities emerging in the multi-billion dollar agricultural, manufacturing and transportation sectors, as well as in the fundamental enabling areas of energy and water (Parker, 2004). Pension funds and banks are more known for their investments in mainstream venture capital, while primarily high–net worth individuals are driving investments in sustainable venture capital.

There are a limited number of community development venture capital (CDVC) funds in Canada, which are similar to those in the U.S. (for a description of CDVC funds, see Appendix A Literature Review); at present, no statistics are readily available on this group. SOCARIAQ in Quebec provides an example of a CDVC fund that includes an ETI investor.

3.6.1 SOCARIAQ

SOCARIAQ (Société de Capital de Risque Autochtone du Québec), a $6-million equity investment fund, provides financing to new and existing businesses controlled by members of Quebec First Nations. It is a First Nation–controlled non-profit organization governed by five investors, including two non-profit Aboriginal capital corporations, the Native Benefits Plan Fund, the Mouvement des Caisses Populaires et d’Économie Desjardins and the Fonds de Solidarité, an LSIF. Established in March 2002, it is projected to invest in 40 businesses during its first five years of operation, with investments expected to range from $75,000 to $500,000 and a target ROI of 15percent.

A significant potential beneficiary of SVC, ETI and community investing is Aboriginal businesses. However, for the most part, neither Aboriginal capital corporations (ACCs) nor Aboriginal community futures development corporations (ACFDCs) receive external investments for their loan and equity programs—they are primarily capitalized by the federal government. There are a few unaffiliated Aboriginal venture capital corporations in Canada that receive outside market-rate investments, SOCARIAQ being one of them. Since there is no comprehensive data about them, little is known about them as a sector. Possible reasons for the lack of external investment into Aboriginal finance vehicles include the following:

• difficulty in understanding the regulatory framework for financing activities on Indian reserves (e.g., the Indian Act and Indian oil and gas legislation, as well as Indian and Northern Affairs Canada policies that affect land title, asset registration, security, taxation and zoning); and
• absence of standard rating for Aboriginal capital instruments.

A study conducted in 2000 for Industry Canada concluded:

Key informants see Aboriginal Financial Institutions (including ACCs and ACFDCs) as being different than the mainstream financial sector. They are smaller in terms of their loan portfolios, with fewer assets in terms and cash. Their clients are distant, more likely to be in remote locations and slightly less credit worthy. AFIs have relatively higher costs and slightly higher net interest on their loan rate. They have a greater percentage of total revenue derived from loan interest and the per cent of their portfolio in developmental loans is more than for a bank. All key informants suggest AFIs fill a gap in the products or services offered to Aboriginal business by the mainstream financial sector (Vodden and Cook, 2002, p. 1).

As AFIs are intended to provide developmental (higher risk) lending to Aboriginal businesses, they would be an ideal candidate for CI programs, save for the significant regulatory, perception and standardization issues mentioned above.