Social finance funds are frequently used tools by governments with the aim of accelerating the impact investing ecosystems. One of the earliest examples of a similar funding structure launched in the UK. In the early 2000s, there was a large amount of unclaimed capital accumulated in dormant bank accounts. Meanwhile, the concept of social finance was gaining attention as a means of enabling systems change. Connecting the dots, an innovative idea emerged: dedicating these unclaimed assets to social impact.
Establishing a social finance fund was complicated and took years of work to materialize. Finally in 2012, Big Society Capital launched as a financial institution, a limited company, independent of the government to act as a social impact investment wholesaler. It received additional capital from the government and major UK banks, to promote the development of the social impact investment market. This shaped the social finance market in the UK since then. In its 10-year impact report, Big Society Capital demonstrated how catalytic the social finance has been. Further details about the history of the Social Finance Fund in the UK are available here.
Financing Social Goals In Canada
In May 2023, the Government of Canada launched the Social Finance Fund, which like the UK fund, provides a government ‘kick-start’ to incentivize huge private capital investment into social purpose organizations to deliver sustainable development and social equity in Canada. The Government’s investment commitment is CAD 755 million, with much of that to be paid back to the Government at the end of the 16-year program. This fund marks a significant innovation for the Canadian impact investing market. The launch demonstrated readiness and growth potential at the same time. It proved that there are impactful investees in the market and impact investors sophisticated enough to manage capital. The market has evidence of growth and diversification, but we need further market-building and additional investment activities to play the catalyzing role.
Social Finance Fund is opening a new chapter in Canada. By bringing a large amount of impact investing capital to the market and disseminating advanced impact measurement and management knowledge across participants, it is expected to generate positive social and environmental outcomes and foster the impact investing practice in Canada. The aim is to create a self-sustaining, vibrant social finance market with diverse private capital providers where Social Purpose Organizations and Social Finance Intermediaries grow and flourish.
Rally Assets is a Canadian impact investing firm that manages portfolios towards positive social and environmental change. It is one of three fund-of-funds managers (wholesalers) for the Social Finance Fund, through its joint venture Realize Capital Partners. In this interview, Kelly Gauthier, President of Rally Assets, shares insights into the hard work that made the Social Finance Fund a reality. She also discusses her impact-first vision for the future and provides valuable tips for building a career in impact investing.
We hope you will find the interview insightful!
New Market Solutions For Old Problems
1. In 2023, the announcement of the Government’s Social Finance Fund made the headlines. However, the establishment of the fund was not an overnight process. Looking back, could you please provide more information on the milestones that led to this day?
Impact investing itself was coined as a term in 2007 and momentum made its way from Europe to Canada. Around 2010, things started to ramp up. At that point, we had some market-building organizations in Canada that had started to build the necessary infrastructure, but they were nested. Impact investing came from more of a charitable perspective and participants were figuring out how to use capital in different ways.
It was still all philanthropically funded. There were some key investors or allocators such as Hamilton Community Foundation and McConnell Foundation. They were willing to stick their necks out very early in what was seen to be at that point wildly risky and untested. But they wanted to try and invest differently. It built a different philanthropy perspective. In between philanthropy and government, we had groups like Purpose Capital, where Rally Assets started. There was a need to match people that have capital and people that want capital. Our advisory work was focused on how they can connect and what are the places that create impact or help to move the market ahead.
Fast forward a few years, 2014 was the year social innovation and social finance strategy started to build in. The government pulled together an expert panel. Out of that, there was a recommendation that all philanthropy should invest at least 10% of its capital in impact investing. That was over 10 years ago. We’re still nowhere close to meeting that target but it is a key discussion point for philanthropic organizations. There was also a recommendation to have a government fund, in a model similar to the Big Society Capital in the UK.
In 2018, the idea of a social finance fund made its way into the budget. Then, COVID-19 happened and upturned just about everything. Finally, the Social Finance Fund in Canada was announced in 2023. So, it has been a long journey from beginning to end. Many people and ecosystem partners worked throughout that process to engage the government, but also, they also did not wait for the government. The sector started to deliver results in small and different ways using different pools of capital and resources that they did have.
Changing Systems Enables Lasting Impact
2. When discussing the objectives of the Social Finance Fund, the topic of systems change often arises. However, change takes time. How can we determine if there is meaningful progress in shifting the system during our shorter investment periods?
We have to unpack the layers of systems change. The starting question is what is the system that we are changing, and it relates to the investor contribution discussions. Then we need to understand the magnitude and order of the change and how to measure it
The first systems change happened with the launch of the fund. It reflects how we get governments to think differently about how they use their assets and invest differently. The launch of a social finance fund is evidence that there have been some systems change. It is not the whole scale change in systems, but it is the first piece.
The next layer is financial systems change. Using the Social Finance Fund, can we structure the system differently? Can we then deploy the capital to diverse participants? Can we bring in different investors to invest with us? That’s the financial model systems change. Are we putting capital into the hands of people that look different than the ones that have had it before? What’s the equity and how we’re placing capital? That’s the next layer of systems change which will be delivered over the next five years.
That’s the second wave of the systems change and then the third wave is the outcomes and outputs of those fund managers and all the ventures that they invest into and all the beneficiaries that are stakeholders at the end of their system. That’s where we get to the social and environmental outcomes.
The government system, the financial system, social and environmental systems and the interconnectivity between them. This is the systems change we are targeting.
Market Growth Through Accountability
3. What do you envision the broader social finance market in Canada to look like 10 years from now?
If thinking about it in the same layers, I’d say first would be more capital and different capital in the Canadian impact investing ecosystem. We want to see different investors at the table that come from not just the philanthropic sector, not just the government, but that comes from mainstream institutions. So, one piece of evidence would be more traditional capital sitting alongside us, learning, taking risks, and being innovative.
The second would be, we’re already seeing this, more investable opportunities, more places to put capital in more regions across the country with theses that are looking at impact in different ways and certainly with a broader inclusion of equity-deserving groups through that process.
I also really hope that we have more clarity on Impact Measurement and Management (IMM). It is so important because if we can’t get better clarity and better standardization on the IMM, that’s such a massive barrier for different capital sources to stay at the table. We might be able to entice capital in with this derisking, but if we can’t get it to stay, then it won’t matter.
4. Impact investing is still usually considered as a carve-out. How can we change this perception and make it mainstream? Should we aim to demonstrate higher financial returns to encourage more investors?
I think the skeptical response to that is that regulation is the only answer. Until we start regulating what different types of investors need to do, we won’t get uniformity. I think we can do more than that. You mentioned should we be showing more return on investment. Yes, I think we need to show more return on investment for the investors where that’s relevant. But for other investors such as philanthropic investors, some of them should be only doing catalytic investing. That’s what’s aligned with their mission and that’s what the community of stakeholders needs. If we want to be investing aligned with a mission and show positive impacts on the community, some of it needs to be concessionary. What is needed is a case specific to the investors.
We are always looking first at hiring good human beings – skills are needed but people come first. Impact investing is new. Particularly in a less developed market, there’s only a limited number of places to learn those skills. I am always looking for the right human before the right employee and that person needs to feel passionate about solving these problems, have some layers of optimism around being able to fix them and have that curiosity and relentlessness to want to solve it. Because ultimately this all comes down to how we as human beings can move things forward.
Financial skills are always going to be an asset. Ultimately, we are still talking about investing so having those is going to be useful. The sector-based expertise is also helpful. In our team, some very early-day members did not have experience in impact investing, since there was no opportunity to gain that specific experience in the market, but they brought specific sector expertise such as real estate, fixed income or international development. So different pieces allowed them to understand either a sector, an impact theme or an asset class, and then build the impact on top of that.
I’m really inspired and heartened by the huge growth in interest from younger people over the last few years to work for us, and for others like us in the sector. People care deeply about fixing this world; I’m excited to continue to help them to do that.
Thank you very much for sharing your insights and vision Kelly.
