A common (and sometimes vehement) comment on the Funds Generator proposal is that charities need money now. To set aside seed money to invest and compound for decades is to remove those funds from helping now. And yet, not setting aside even a relatively small proportion of donations as seed funds deprive future charities of potentially enormous gifts.
This article explores a compromise that simultaneously meets today's and future needs.
Expanded thinking
Given enough time, Bensway offers an inexpensive solution to increase available charitable funds by several orders of magnitude. I call this Funds Generator proposal "Bensway" in honour of Ben Franklin, who inspired this effort via his great posthumous experiment.[i]
Recall that the Bensway proposal repeatedly invests seed funds until the payout date, when half the total transfers to the seed funder's selected causes and charities. The remaining investments in the other half of the fund continue to grow until the next even larger payout.
Supporting rationale, benefits and size of payouts have been discussed often in this blog, but the nature of the Bensway investments has not. I'll admit to paying little attention to the investments, as even the most straightforward portfolio of ETFs (Exchange Traded Funds) could generate the needed returns. So it is overdue to expand our thinking into the nature of Bensway investments.
Seed funders would abhor Bensway investments not aligned with their values even if they eventually generate huge gifts to charity. It would be a conflict of interest! At a bare minimum, therefore, Bensway investments should be socially responsible. Ideally, these investments could support causes related to the funder's charitable missions.
For example, assume a Bensway donor wants to support their local community and plans gifts to their community foundation. While funds grow, local businesses that generate positive social impact would be an ideal target investment for this donor's funds. Long-term equity investments are practical as Bensway payouts are separated by many years.
Expanding our Bensway thinking to require positive outcomes from investments provides another bonus. Investments in socially positive enterprises immediately help society, all the while enabling repeated payouts years later. The complaint that society needs seed money now is addressed at the start by investing to support important social causes.
All we need to do is find the appropriate investments. Fortunately, there is a large and growing opportunity with Social Impact Investments.
Social Impact Investments are an answer
Social Impact Investments is a term that describes a range of finance and investment approaches that intentionally aim to create a measurable positive impact on society or the environment while making a financial return for the investor. Social impact investments are not donations or grants.
Individuals, foundations, institutions, or governments can make social impact investments, and so could Bensway!
Via Benjamin Franklin's 200-year legacy, Franklin showed the way with his own form of social impact investment. His trusts offered loans to young apprenticed artisans as a boost to start a business. Franklin intended via this legacy "to be useful even after my Death, if possible, in forming and advancing other young men that may be serviceable to their Country in both those Towns" (Boston and Philadelphia).[ii]
Franklin's legacy of social impact investments compounded his seed funds into major gifts to Boston and Philadelphia at the 100 and 200-year mark. Expressed in 2022 dollars, his roughly $283 thousand invested in 1791 grew to become gifts in 1891 of $11.2 million and $13.9 million in 1990.
History of Social Impact Investing in Canada
Social Impact Investments is a relatively new term yet boasts a rich history in Canada. Some historical milestones of social impact investment are:
The birth of the credit union movement in the early 1900s which provided financial services to underserved populations and communities.
The growth of community loan funds in the 1970s and 1980s which supported community-based initiatives such as affordable housing, Aboriginal-led businesses, and social enterprises.
The creation of socially responsible investment (SRI) funds in the early 21st century which used negative and positive screening of environmental, social and governance (ESG) risks to align a portfolio to specific values.
The emergence of impact-first investing in the 2000s which focused on one or more issue areas where social or environmental needs may require some financial trade-off.
The development of thematic investing in the 2010s which focused on one or more issue areas where social or environmental need creates a commercial growth opportunity for market-rate returns. Examples include clean technology financing, microfinance, and social impact bonds.
Social Impact Investing in Canada Today:
Social impact investing is currently a growing and vibrant market in Canada, with promising signs for new opportunities and innovations.
According to a Table of Impact Investment Practitioners report, Canada has over 200 social finance intermediaries, including social enterprises, social finance investment funds, social impact bonds, community bonds, and more. These intermediaries manage over $5.6 billion in assets and have deployed over $2.4 billion in capital to address various social needs nationwide.[iii]
The most common types of investments are debt (64%), equity (28%), guarantees (15%), grants (13%), and hybrid instruments (11%). The average investment term is 7.5 years, ranging from 1 to 25 years.
Additionally, on May 29, 2023, the Government of Canada announced a new multi-year initiative valued at $755 million to support social impact investing in the country. The Social Finance Fund is a groundbreaking, long-term initiative to advance the growth of the social finance market in Canada. The Social Finance Fund expects to attract $800 Billion more in private investments to tackle persistent challenges like access to affordable housing, food insecurity, and poverty.
What trade-offs apply to Social Impact Investments?
The chief trade-off is the potential for a lower financial return from Bensway gifts when investment goals move from profit-only to social impact investments.
In reality, the level of return on investment for impact investments depends on many factors, such as the risk, the duration, the sector, and the market conditions.
Some studies have shown that impact investments can perform competitively with or even outperform traditional investments in some cases. For example, a Global Impact Investing Network (GIIN) report found that impact investing funds launched between 1998 and 2010 delivered an average net internal rate of return of 6.9%, comparable to or higher than similar-sized funds in emerging markets.[iv]
Bensway seed fund contributors want a legacy designed to last well beyond their earthly time. Contributors to Bensway do not need speedy returns. What if the funds take longer to grow but deliver social impacts every year? What is the concern of someone who has passed away?
A win-win solution
Social impact investments offer a win-win resolution of the conflict between the need for money now and setting aside money today for future payouts.
Win # 1: Social impact investments ensure social/planetary benefits start immediately and continue throughout the program.
Win # 2: Social impact business profits create the eventual payouts of enormous gifts for the seed funder's desired charities
By enabling the seed funder's immediate and long-term beneficial uses, the Bensway social impact investments program is a win-win.
[i] Franklin set up a microlending business with a contribution from his estate designed to last 200 years. Get the whole story with your subscription to my monthly emails here.
[ii] explorepahistory.com/odocument.php?docId=1-4-2DE [iii] About – Table of Impact Investment Practitioners (tiip.ca) [iv] The GIIN
Photo by Clark Tibbs on Unsplash