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

6. Barriers and Opportunities in Growing the CI Sector in Canada

Compared with the burgeoning CI sector in the U.S., Canada’s CI sector is weak, once LSIFs and the CDP are factored out of the ETI equation. Previous analysis points to some of the critical drivers underpinning the growth of the American CI industry. Additionally, the foregoing review of capital allocation and fiduciary issues points to critical infrastructure that needs to be in place for the successful development of a strong CI sector—one that contributes significantly to sustainable development in Canadian communities. This section puts these thoughts together as “barriers and opportunities” to the growth of community investment, including ETI programming and sustainable venture capital.

6.1 CI Barriers

• Lack of capacity—community investment funds in Canada for the most part are not only undercapitalized but also struggle for lack of consistent operating support. Mostly small funds, they are underskilled, with a modest track record and a limited regional focus. They lack reporting infrastructure and customer service capacity and are not in a position to deal with the due diligence demands of institutional investors.
• Tax and regulatory barriers—most CI investments are not RRSP-eligible, CI vehicles are structured as charities and thus constrained in their investment activities, and there is no regulatory regime—all these factors work against the community investment sector.
• Challenges in conducting due diligence:
  • Lack of standards—there are no standardized assessment procedures for qualifying creditworthy sustainable impact investments; each CI fund has a different, non-standardized methodology, program and approach.
  • Small transactions/small deal size result in higher transaction costs—products that require special handling result in slow adoption. Investors also lack the skills to conduct due diligence. The cost of due diligence is prohibitive.
  • Pricing—there are no standard comparisons against which Canadian CI can benchmark, no established benchmarks for fiduciaries and nothing that is perfectly comparable. This results in uncertainties regarding how to price CI products.
• Lack of a compensation scheme for financial advisers—broker/dealers perceive the lack of fees and commissions for CI sales as a barrier; as a consequence, there are few sales and compensation agreements executed between broker/dealer firms and sources of community investment products. One notable exception is the Calvert Foundation, which has 25 sales agreements in place with broker/dealers.
• Lack of product knowledge—it is difficult for the CI investor to find CI opportunities. There is no database and no CI investment network for the motivated investor. Additionally, the prevailing belief is that all CI investments are concessionary and high risk.

6.2 ETI Barriers

• Lack of pension fund awareness and trustee education:
  • Lack of knowledge about this type of investing in Canada.
  • Misinformation about ETI characteristics and their permissibility. The general belief is that they are illegal, concessionary and too time-consuming and costly to administer.
• Lack of vehicles and expertise for delivering products; competent ETI managers are unavailable.
• Lack of performance benchmarks.
• Lack of a track record in Canada.

6.3 SVC Investment Barriers

• Generic barriers to growing venture capital.
• SVC not seen as a viable investment category by institutional investors.
• Lack of expertise, skills and understanding on both “sides” of green VC investment.
• Startup stage of financing too high risk for most investors.
• Perceived political risk with respect to predicting the fortunes of government subsidies to the environmental technology sector.
• Few community development venture capital funds in Canada.

6.4 CI Opportunities

• Government support programs—modelled after U.S. federal and state programs, Canadian governments could proactively invest in strengthening the core capacity of the sector to better position it to receive private financing. The federal government has made a start with its 2004 Budget, by committing $162 million over five years to help establish regional patient capital funds for organizations producing goods and services on a not-for-profit basis, with surpluses going to social or community goals.¹³ Additional commitments within this envelope include promoting other sources of lending to benefit these organizations, build capacity and undertake research.
• Favourable tax and regulatory scheme—following the lead of Nova Scotia with its community investment regulations, other governments can follow suit. Community investments could qualify for RRSP tax credits, and the federal government could explore the potential of a CRA or other framework to increase the role of Canadian banks in financing and supporting community economic development.
• National network and intermediaries—a network and other intermediaries could assist the sector to further develop the infrastructure for community investments, including rating systems for CI funds, benchmarks, standards, staff training, best practice and other “how to” information. Financial intermediaries could deal with due diligence issues and help raise private capital.
• Education and awareness for retail and institutional investors—the Canadian SRI industry could launch a campaign to promote community investing, putting in place tools similar to those developed for the U.S. SRI industry, including “how to” manuals, a database on product availability, supporting data on strength and track record of community investments, resources on how to manage fiduciary issues and how to diversify and price risk.

6.5 ETI Opportunities

• Permissive legislative framework, similar to that in the U.S.
• Legislation requiring pension fund disclosure regarding their social and environmental policies.
• “Fund of funds” that intermediates cost-effectively between institutional investors and external managers and provides due diligence expertise.
• Creation of private placement returns databases, performance assessment and measurement tools.
• Education for pension managers and trustees (Falconer, 1999; Falconer, 2002).

6.6 SVC Investment Opportunities

• Education and awareness for institutional investors including success stories that demonstrate the availability of deal exits and draw attention and capital.
• Legislation requiring pension fund disclosure regarding their social and environmental policies.
• Awareness of the community development venture capital model as an alternative to debt financing programs for the community economic development sector.

This is a simple canvass of the barriers and opportunities in growing the CI sector in Canada, including ETI and SVC investing. However, it points the way to potential strategies for industry representatives, governments, investors and others seeking to generate double and triple bottom line investment opportunities and the sustainability benefits they create.