For a new Conservative government looking to make a tangible and lasting mark on our society, there would seem to be no better alignment of values and opportunity than that represented by the burgeoning social finance movement. It represents a ready-made opportunity, rooted in values of community-building, support for small scale entrepreneurship, and the role of private investment in delivering public good, that the government would do well to seize.

“Social finance”, as defined by its pioneers in the American philanthropic community, is the active investment of capital in businesses or organizations that generate positive social and/or environmental impacts, in addition to normal financial returns. It goes beyond what has been called “socially responsible investment”, which is essentially a passive approach to avoiding investing in companies that run counter to the values of the investor (think tobacco, nuclear weapons, etc.). Social finance, by contrast, is the deliberate engagement of investors (not just philanthropic or public sectors) in companies and community organizations that provide both an economic and environmental/social return.

The Canadian Task Force for Social Finance released its seminal report “Mobilizing Private Capital for Public Good” less than six months ago. But already it is generating substantial discussion in policy and investment circles, and pointing the way forward to a new way of thinking about how we create positive economic, social, and environmental outcomes in our communities. The Task Force estimated that if Canadian foundations dedicated just 10 per cent of their capital to social finance, the resulting investment in the Canadian economy would total $3.4 billion a year (and that is above and beyond what those foundations would provide by ways of grants and contributions).

Expanding that approach to just 1 per cent of all assets under management in Canada(in philanthropic, public, and private management), the Task Force sees the potential for $30 billion in investment to be mobilized. For any government looking to both promote both economic development (especially in the small and medium businesses that create so much of the employment in our economy) and the prudent use of public resources, those numbers are hard to ignore.

At its core, social finance (or its semantic cousins: “impact investing”, “mission-based investing”, etc.) is about incenting innovation. Let’s face it, we all assume that the large challenges facing our society (things like child poverty, climate change, health care, etc.) can only be solved by government or big corporations.

But it is becoming obvious to many that the diversity of our societies is the best arsenal we have in addressing these challenges, and that we need to find ways to turn the tangible manifestations of that diversity – in the form of community organizations and small businesses – into vehicles for innovation for solutions to the problems we face.

What that speaks to is experimentation and entrepreneurship, which are not things that governments or large corporations are good at promoting. Part of that is an understandable aversion to failure, especially in using public resources for experimentation. That risk capital is scarce, though, and in Canada in particular there are very few resources – public or private – to promote that kind of innovation. One only has to look at the dearth of venture capital in Canada to understand how little appetite we have for financial risk as a society. But that gap in investment can be filled by social finance, if the conditions to allow that to happen are created.

The Task Force, in its report, identified a number of concrete steps that governments could take in this regard, primarily around the tax treatment of such investments. As an example, the report points out that Canadian foundations are specifically prohibited under the Income Tax Act from conducting any “unrelated business activity”, while similar provisions in the U.S. and U.K. tax codes have been removed in recent years. Canadian governments have indicated a growing level of interest in the potential that social finance holds. The federal government made a supportive statement for social finance in its 2010 Speech from the Throne, and provinces like Nova Scotia and Quebec have set up their own social finance funds. Ontario very recently inaugurated a Social Innovation Wiki, through which social entrepreneurs can share lessons on things like access to capital.

But governments can and should do more, starting with the federal government. The upcoming Speech from the Throne would seem a perfect opportunity for a government looking to define its vision for the country to re-affirm the potential of social finance, and to lay out a roadmap for how Canada will move forward on this opportunity.

 © 2011 iPolitics Inc.

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