Investments should not just be viewed as a means to create income to fund grants: there is extraordinary opportunity to make a difference with the bulk of the money being managed, and the government needs to start paying more attention, suggest Aatif Baskanderi, president and CEO of the Northpine Foundation, and Senator Ratna Omidvar.
In September 2021, the federal government announced a consultation process on the disbursement quota (DQ) – the minimum percentage of assets charities are required to grant out or spend on charitable programs each year. Subsequently, an increase from 3.5% to 5% for charities with assets over $1 million was announced in Budget 2022 this past April. While DQ regulations are relevant to all charities, they are extremely pertinent to charitable foundations, as, under their typical operating models, they invest charitable assets, with earnings from those invested assets granted out regularly.
Understandably, the consultation process kept many in the sector and the government focused on the DQ as a policy priority and topic of discussion, but in fact, the DQ is a very narrow and small part of the whole. Investments should be viewed not just as a means to create income to fund grants; there is extraordinary opportunity to make a difference with the bulk of the money being managed, and the government needs to start paying more attention.
The reality is that all investments have environmental or social impact: positive, negative, or neutral. Positive investments might place capital in businesses or non-profits and funds in industries such as renewable energy, affordable housing, microfinance, or sustainable agriculture. Those with neutral or negative impacts might exacerbate environmental or social issues that charities have missions to address, such as climate change, poverty, or labour conditions.
Investments can be powerful tools to achieve and accelerate charities’ visions and missions and create positive impact beyond ﬁnancial returns.
At a minimum, it is critical that investments do not undermine the charity’s vision, mission, and values, or the work of grantees they support. But moreover, they can be powerful tools to achieve and accelerate charities’ visions and missions and create positive impact beyond ﬁnancial returns. They can represent investments of capital that deliver financial returns coupled with positive social and environmental outcomes.
A significant number of foundations in Canada care about this, and that number is growing. Philanthropic Foundations Canada recently reported that it has seen a shift toward more responsible investments compared to previous years but noted that impact investing is still an emerging space in Canada, accounting, on average, for just 7.9% of total portfolio assets for foundations surveyed that engage in impact investing activities.
The asset side of the business at foundations counts on experts who know how to secure financial return, rather than those with social impact expertise.
Why aren’t more foundations doing this already? Philanthropy, generally speaking, operates in a perpetuity space with an eye to helping the rest of the charitable sector through granting. The asset side of the business at foundations counts on experts who know how to secure financial return, rather than those with social impact expertise, let alone impact investment acumen. As a result, the private sector is being propped up by charities, despite the fact that the social impact sector operates in this space too.
Foundations could unquestionably be even more effective if more of their energies and activities were directly dedicated to their charitable objectives. And they could help ensure more sustainable long-term returns and diversiﬁcation if they made more non-traditional investments.
If foundations are truly dedicated to their missions, they need to bring their whole to the table, not just a part.
If foundations are truly dedicated to their missions, they need to bring their whole to the table, not just a part. But we need enlightened leaders to challenge the norm that investment committees are accountable only for return on investment.
That said, behaviour change is not that simple. Another truth is that there is not yet a huge and reliable ecosystem to encourage this kind of investing at scale. In short, the sector needs more impact investors to ensure success. And government has a critical role to play in nudging and incentivizing more of this activity through policy.
Government has strongly signalled its interest with its recently announced second round of the Investment Readiness Program and the long-awaited Social Finance Fund launching later this year. These initiatives are helpful, but we still have a long way to go.
We need more policy incentives to facilitate a thriving and robust impact investment ecosystem.
For example, the Canada Revenue Agency, the body that regulates the activities of charities, is rigorous and interested in the granting activities of foundations but has a very light touch when it comes to their investments. Why is that, when it’s just a few percent that needs to be granted out each year, while endowed assets in Canada now represent over $100 billion? In Budget 2022, improved collection of information from charities related to investments was promised, but to date, there have been no actual details or policies proposed regarding this promise.
What if policies were implemented to encourage more impact investing, such as mandatory reporting on impact investments on the T3010, the annual return all charities must complete? Or what about a portion of impact investments being eligible for the disbursement quota if it met certain thresholds of social impact? There are numerous ways to nudge behaviour that require very little financial investment. At the end of the day, some of the building blocks are in place. There have been good government investments in the sector, and there are trailblazers in the sector leading the way. But we need more policy incentives to facilitate a thriving and robust impact investment ecosystem.
Aatif Baskanderi and Ratna Omidvar will be part of a panel at Philanthropic Foundations Canada’s national conference on how sector actors and government policy can advance impact investing in Canada. The event will take place in Montreal October 3 and 4. Learn more and register at pfc.ca.