Do good and make a profit. That could be the credo for Canadian credit unions. It’s also the goal of social finance, which is why this fast-growing sector seems tailor-made for financial services cooperatives and their members.
So it’s not surprising that credit unions are big players in this emerging field. Their efforts help build co-op housing projects, they provide loans that let immigrants upgrade their professional standards so they can work in Canada and they support a wide range of community businesses.
Social finance — a definition
What do we mean by social finance? In general terms, it’s a method of managing money that delivers a social dividend and an economic return. It covers such areas as community investing, microfinance, social impact bonds, impact investing, ethical investing and social enterprise lending. The social finance approach to investment and funding shares the twin focus of stimulating positive social and environmental returns for investors and for the community. A 2013 study by Credit Union Central of Canada, Social Finance and Credit Unions: Differentiating by Making a Difference, concluded that credit unions have been undertaking a form of social finance for decades and that doing so in the future may well serve as the financial services cooperatives’ distinguishing feature.
What social finance?
In general terms, it’s a method of managing money that delivers a social dividend and an economic return
When credit unions invest their members’ money in these enterprises, they often best the competition when it comes to ROI. Case in point: a typical interest rate for a 2014 five-year Shared World fixed-term GIC offered by British Columbia’s Vancity (490,000 members, $18 billion assets) is 2.15%. Compare that with BMO’s 1.75% rate for its five-year GIC. Meanwhile, Shared World invests the funds in groups that provide affordable credit so people in poor areas of the world can get a leg up. BMO GICs? Not so much.
A disciplined approach
Social enterprises use the skills and strength of solid business – strong management, discipline and organization – to meet social goals. It’s not surprising that Vancity is one of the most active credit unions in this area. Vancity’s slogan, Make Good Money™, says it all. It is a member of the Global Alliance for Banking on Values (See “Too Good to Fail”) and it supports countless community initiatives.
One example is its 20-year relationship with another pioneer in the field, Recycling Alternative, a company that salvages and repurposes material from clients across the city. Co-founder Louise Schwarz says the venture, which began as a non-profit, started banking with Vancity because it wanted a local FI that shared its values and connection to the community. Schwarz notes her recycling firm, now a regular for-profit business, was a social enterprise long before the term was coined.
“[Vancity has] been with us every step of the way,” she says. “We have an open and candid relationship that gives us the confidence to innovate and take risks. We have conversations peer to peer. They trust that we understand the recycling business and we trust that they will give us good financial advice and service.” She adds that Vancity is a key element of the social enterprise world in Vancouver and now often brings organizations together or provides valuable contacts and information.
Vancity’s help also goes far beyond a typical banking relationship. For example, a few years ago Recycling Alternative designed, developed and built a new truck that could pick up a variety of recycled material. Then came a financial road bump. Because the truck was built in the U.S., the recycling company needed a bridge loan to finance the truck for a couple of weeks until it was moved across the border, where it would then be covered by a truck leasing agreement. Schwarz knows many banks would have not understood the request – let alone granted the loan – but Vancity moved quickly to make the financing available.
“Now, if we’re planning something, even if we don’t need money to finance it, we’ll call our account manager and let him know what we’re doing, just to tell him it will be showing up in our financial accounts,” Schwarz says.
Helping immigrants integrate
Across the country in southwestern Ontario, there’s another example of a credit union helping solve a current problem while sticking close to its roots. Libro Credit Union (95,000 members, $2.7 billion in assets) based in London, Ontario, has long and strong ties to its community and it is using its financial strength to help newcomers. One of the many projects that Libro is involved with is a loan program for immigrants coordinated by WIL Employment Connections, a nonprofit organization that offers employment support services and career development help to London residents.
Libro provides loans to immigrants who have professional accreditation from their home countries, but need to take tests or exams in order to qualify to work in Canada and are short of the money to pay for these requirements. The program has helped nurses, doctors, accountants, pharmacists, dentists and physiotherapists get on their feet in Canada.
Libro provides loans to immigrants who have professional accreditation from their home countries, but need to take tests or exams in order to qualify to work in Canada and are short of the money to pay for these requirements
“I view it as Libro coming full circle,” says Wilma de Rond, executive director of WIL Employment Connections. “The credit union was founded years ago by immigrants from the Netherlands and now it is helping new immigrants get established.”
Kate Kennedy, project manager at the Access Centre for Regulated Employment, which delivers the program, says 100 loans have been recommended, 92 approved and almost $800,000 lent at a rate of just primeplus- one per cent. While immigrants are acquiring their licences and professional accreditation they pay only the interest.
‘Loans based on character, not collateral’
“This is a return to the good old days of how credit unions started – loans based on character, not collateral,” Kennedy says.
The loans help immigrants buy textbooks, pay for exams and meet the requirements of many professional colleges that can be a major barrier.
Kennedy notes that the federal government approves highly skilled immigrants, but when they relocate in a province they can run into challenges getting the documents needed to use those skills. The Libro loans have helped more than 50 nurses with experience in other countries get accredited to work in Ontario. The program doesn’t just help university grads, however. It has also assisted hairdressers and others with proven skills who need help negotiating their way into the Canadian workforce. “We support them to enter the field where they have expertise,” Kennedy says. The program is not aimed at helping people looking for a new career. It is solely for those building on skills they already have.
Bonds with impact
The hottest topic in the social finance world these days is social impact bonds, which have been a big success in Britain and the United States. The bonds usually raise private money to support public services that meet defined goals. The idea is to transfer the risk of the failure of a social program away from the government to the investors. A study by Deloitte explained that if the programs achieve the agreed-upon social outcomes, the government pays the investors, through an intermediary, a share of the savings it has realized based on the degree to which the social outcome is achieved.
Social bonds are controversial because some critics feel governments can use them to shirk paying for programs and services that they should be funding. As well, a major question concerns how outcomes and payouts to investors are measured. Still, this funding model is gaining traction and such bonds have been studied and promised by the federal government, Nova Scotia, Ontario and other provinces. One reason they’re keen is that the money is provided by credit unions and other investors – not taxpayers – until there is a sure payoff.
Helping families transition back into the community
Last spring the first pilot social impact bond in Canada was sponsored in part by Saskatchewan’s Conexus Credit Union (116,000 members, $4.9 billion in assets). In May, a new supported-living home for at-risk single mothers called Sweet Dreams opened in Saskatoon, financed by a social impact bond involving the Government of Saskatchewan, Conexus and two individuals, Wally and Colleen Mah.
EGADZ, a Saskatoon-based inter-agency organization that provides resources for youth at risk, is also involved: EGADZ’s Downtown Youth Centre delivers Sweet Dreams’ services. EGADZ is now offering affordable housing and support to single mothers with children under the age of eight who are at risk of needing foster care. The plan is for their mothers to complete their education, secure employment, or participate in pre-employment activities such as life-skills training and parenting classes. The long-term goal: helping these families transition back into the community as a whole unit.
Under the bond agreement, EGADZ will receive $1 million from Conexus and the Mahs to deliver the program and achieve the desired social outcome, which is to keep children out of foster care. The success of the social outcome will be measured by an independent assessor at the end of the second, fourth and fifth years of the agreement. Investors will receive a return if the program can keep 22 children out of the system over the next five years provided they don’t return to it for a minimum of six months. If 17 children stay out of foster care, investors will still get a proportionate return. Anything less, however, and they won’t get a return at all. The terms show the level of complexity that investors in a social bond must intimately understand before committing to a project. Sweet Dreams is expected to save the province between $540,000 and $1.5 million over five years, based on the cost of children who might otherwise be in government care.
The Ontario government is also considering the social bond funding model. It received more than 80 submissions when it asked for pilot projects addressing three priority areas: housing, youth at risk and improving employment opportunities for persons with barriers to employment. The submissions are being evaluated and one or more projects may be launched by the end of 2015.
Making money while making a difference
Whether it’s called responsible investing, sustainable investing, green investing, ethical investing or impact investing, the underlying concept remains the same – making a difference while making money. And the movement to do so is growing. A report by the Responsible Investment Association found that in 2011, socially responsible investments accounted for $600 billion, or about 20 per cent of the assets under management by the financial industry, with pension funds representing the vast bulk of the holdings. Ethiquette®, a new Quebec-based website, supported by Desjardins Wealth Management, is hoping to expand this kind of investing even further. The platform, created by students at the University of Quebec at Montreal (UQAM), is intended to serve as a one-stop educational resource on the ins and outs of social investing.
As for credit unions, they promote social finance in a variety of ways. One way is via loans and investments that financial services cooperatives make to help social enterprises thrive. Another is through products that allow members to invest their own money directly to support projects or businesses that match their values. That might mean putting money in ethical mutual funds, such as those offered by NEI Investments, which is owned by the credit union system. It’s an appealing proposition for many members. Mutual funds focused on socially responsible or ethical investments have a strong record of matching or beating market returns – something NEI Investments has been stressing in a series of TV commercials.
Social finance can also take the form of bonds and GICs, such as those offered by Assiniboine Credit Union (111,000 members, $3.7 billion in assets). In addition to its own GICs, Assiniboine, which is also a member of the Global Alliance on Banking for Values, offers Jubilee Investment Certificates that provide loan guarantees for community economic development initiatives.
Impact investing to support social goals
In early November, the governments of Ontario and California announced a partnership designed to promote impact investing, which is specifically aimed at meeting particular social goals. They plan to work together to foster and develop the Social Venture Connexion (SVX), an online platform that allows social enterprises and potential investors to find each other. At present, 24 ventures and funds are on the SVX platform in Ontario. These issuers have raised $3.2 million in capital to date.
“We want to reduce poverty, create opportunity and advance environmental sustainability by mobilizing investment capital to impact ventures, from building affordable housing to developing renewable community power,” SVX declares on its website. Investors who seek to follow their values can also succeed financially.
Studies by the Global Alliance for Banking on Values have shown that its members are strong and profitable because of – not in spite of – a focus on values-based decisions.
The message here: doing good with your money does not mean giving up a good return. ◊