June 4, 2016


There are several ways in which governments can support the market for social finance. The sections below explain the roles that government could play to implement a social finance approach.



Policies that direct existing capital are intended to change the perceived risk and return characteristics of impact investments by adjusting market prices and costs and improving transaction efficiency and market information.

Given the nascent state of social finance in Canada, impact investment opportunities are often perceived by private investors as being more risky than they actually are. This perception is partially due to information asymmetries. That is, government often has greater knowledge of risks and opportunities in the settlement and integration sector than private investors that have limited experience with the sector. In these instances, the government plays an important role in de-risking investments to attract risk-averse investors.

A common mechanism for de-risking is the provision of first loss capital. First loss capital refers to a range of tools that governments can use to alter the perceived risk of an investment. These tools include grants for first loss reserves, guarantees, junior positions in equity and subordinated debt. All of these tools could be used by government to take the first loss on an investment. In doing so, the government can encourage the flow of private capital to these investment opportunities. The sections below describe how these mechanisms could be applied to some of the models.

Because these loans are often ‘character based’ most financial institutions require some form of guarantee to ensure against any losses that might be incurred through this type of lending. Guarantees are generally provided by government (federal, provincial, municipal) and/ or foundations and individuals.

In many cases, guarantees take the form of a loan loss reserve capital pool seeded by an initial grant. The micro-loan funds identified in our scan have not experienced significant losses in their portfolios and the loan loss reserves has been used infrequently or, in some cases, not at all. In the case of SEED Winnipeg's Recognition Counts program, the Assiniboine Credit Union reduced the amount of required loan loss reserve from 80% to 70%. This has allowed for an expansion of the SEED program.

The Nova Scotia Government provides the loan guarantee for SME lending, for up to 90% of the value of the loan. The guarantee has been successful in leveraging an overall lending portfolio to all SMEs (not just immigrant-owned) of $90M.

Many social investment funds (SIFs) struggle to attract investors in Canada if they do not have guarantees or loan loss reserves, which restricts their ability to scale. Most SIFs identified in our scan provide a credit or a return enhancement. Funds that offer guarantees or loan loss reserve to investors include the Resilient Capital Program (Vancity Credit Union), the Social Enterprise Fund (Alberta), the Nova Scotia Impact Infinity Fund (planned), the St John Community Loan Fund and the SEED Program. In most cases, the provincial government provides the guarantee or first loss capital.

Tax credits work on the return side (as opposed to the risk side). Tax credits are not suitable for attracting all investor types (e.g., pension funds are exempt from taxes) but the credits have the advantage of incentivizing retail investors to make large investments, as opposed to small donations. In the UK, the new Social Investment Tax Relief program offers individual investors a 30% tax credit for investing in social enterprise.

In Canada, the Nova Scotia CEDIF provides an incentive for residents of Nova Scotia to make equity investment in local business to achieve job creation, business development and economic development goals. The program provides investors with a 35% tax credit through RRSP eligible investments. Since its creation in 1999, the program has attracted over $60 M in investment. Investments can be made directly in businesses or in capital pools. The model has been adopted with some variation in PEI, Quebec, Manitoba, New Brunswick and Alberta.

Like SIFs, the government can play a role to de-risk social impact bond (SIB) models, often by providing a guarantee. In a recent survey of Canadian investors, the majority of respondents indicated that SIBs offering guarantees are more attractive than SIBs without guarantees, despite the lower expected returns.

Some SIBs in our scan, such as the Rotterdam SIB, provide partial guarantees, while others, such as the Belgium Duo for a Job SIB, do not. In the case of the Community Employment Loan Program, there is no need to de-risk on the lending side, as incentives to SMEs (in the form of a reduction on loan interest rate) will be provided as a reimbursement, funded by the government, after having hired a disadvantaged worker for at least six months.



Supply development policies increase the amount of impact capital. Policies dealing with investment rules or requirements, and policies that provide co- investment, increase the supply of impact investing capital by mandating such investment or by enticing investors through risk-sharing with government.

An example of how government can play an important role as a partner is demonstrated by the Community Employment Loan Program (Ontario). It is anticipated that the provincial government will use savings accrued from the program intervention to provide an incentive to small and medium sized enterprises that hire disadvantaged persons. The lending decisions will remain under the authority of the lending institutions.


Investing in capacity building funds

Policies that build demand include those that build organizational capacity, create enabling structures, and contribute more broadly to the development of impact investment-related projects and capital recipients.

An important role for government to play in a social finance approach is to promote the growth of social finance intermediaries and to address the needs among social sector organizations that intermediaries have identified in order to scale up (i.e. support of the demand side and catalytic capital).

There are several market-building initiatives that provide this form of support, such as the Social Outcomes Fund in the UK that provides capital to regional governments to initiate new social impact bonds, or the investment and contract readiness funds that helps build capacity among social sector organizations. In the UK experience, the role of the national government has been to support the social finance intermediaries and to provide capital to intermediaries for purposes such as building capacity, rather than to deliver access to capital directly to either enterprises or individuals.


*The content on this page summarizes information presented in the Social Finance for the Settlement and Integration Sector in Canada Market Assessment Report (April 2016), produced by Purpose Capital and the Carleton Centre for Community Innovation. Please consult the full report before making any attributions or references to this work.