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The future of Canadian impact investing in developing countries

The future of Canadian impact investing in developing countries

January 17, 2020 at 9:41 PM - by Eugene Ellmen - 0 comments

Eugene Ellmen, former Oikocredit Director shares 6 recommendations emerging from a report conducted by CAFIID - Canada Forum for Impact Investment and Development, that "can help to develop a vibrant Canadian ecosystem for impact investment in developing countries"

During the last 18 months, I've had the privilege to work with a small, dynamic group of people to craft a roadmap for the future of Canadian impact investment in developing countries. 

The mission of the group, under the name of CAFIID (the Canada Forum for Impact Investment and Development) is to strengthen the value and volume of Canada’s impact investment in low income countries. CAFIID includes about 70 member organizations, including not-for-profits, asset managers, researchers and consultants, who are all dedicated to mobilizing Canadian capital for global sustainable development.

The work of this group was compiled into a report, entitled Canadian Impact Investing in Emerging and Frontier Markets, which was released last week at the Social Finance Forum in Toronto. One of the report’s key findings is that there is already more than $2 billion in Canadian impact assets deployed to developing countries.

It’s an impressive figure, but still only represents about 14 per cent of total Canadian impact assets identified by the Responsible Investment Association. The other 86 per cent represents impact investments placed domestically in Canada.

More importantly, this figure pales in comparison with the billions needed to meet Canada’s commitments to meeting the UN Sustainable Development Goals and the Paris climate agreement. The report starts from the premise that it will be impossible for Canada to achieve its sustainable development and climate change objectives around the world without significantly ramping up capital from private investors. This means billions of dollars more of Canadian capital committed to financial inclusion, agriculture and green infrastructure in the world's poor countries.

To get there, the report makes 16 recommendations organized into six themes, drawn on previous work by the Global Impact Investing Network (GIIN). CAFIID developed these proposals through interviews and consultations with its members, in addition to a survey to document where and how current capital is raised and deployed. Here is a summary of the recommendations:

1.    Shaping a shared agenda

To combat the lack of consensus among mainstream investors on impact investment, especially impact investment in emerging and frontier markets (EFMs), the report calls for initiatives to integrate and educate the players in the system. This would help to clarify the roles of EFM impact capital deployed by donors, foundations and NGOs, private investors and their advisors and public capital such as FinDev Canada, the federal government’s development finance institution.

2.    Market Behaviours

The report recognizes that the capital markets need to incorporate social and environmental impact management alongside the traditional assessment of risk and return. CAFIID challenges the public, private and NGO sectors to promote a broad societal dialogue on the role of capital in society. One of the concrete ways this can be done is to urge Canadian financial institutions, funds, asset managers and advisors working in the EFM impact sector to sign on to the Operating Principles for Impact Management, a new global signatory agreement fostering standardized impact investment practices and reporting. Further, CAFIID encourages the financial industry to create new compensation models for their asset managers that include measures of social and environmental impact alongside investment value.

3.    Products

The report identifies an important barrier to growth, which is the lack of EFM impact investment products available to Canadian investors, particularly individual retail investors. CAFIID urges the financial sector to support new product development through new institutional investment pools as well as retail savings options like the Oikocredit Global Impact GIC, offered through Kitchener ON-based Kindred Credit Union. This support can include Canada’s largest institutional investors, such as pension funds, banks and insurance companies, which are urged to commit impact capital to EFM regions. As well, the report calls for greater attention to “blended finance” models, combining concessionary capital from government and charitable sources with traditional private investment. This would leverage larger sources of capital by reducing investor risk or creating additional capacity by investee organizations.

4.    Tools and services

CAFIID argues that the financial industry needs to develop new tools and services to support investor confidence and capability in EFM impact investments. This includes validation by third party assessors of impact ratings of impact managers and an expansion in the availability of banking services to support capital raising, deal origination, structuring, syndication and securitization.

5.    Education and training

The report identifies a need for specific training of finance professionals in the area of impact investment, particularly in the area of EFM impact investment. CAFIID proposes a consultation with financial education bodies to address these gaps in education and training, targeting possible new initiatives by the Responsible Investment Association, the Chartered Financial Analysts Institute and the Canadian Securities Institute. The report also cites the need for training and capacity building for organizations in developing countries to increase their ability to absorb additional capital.  

6.    Policy and regulation

Another significant barrier to the growth of the sector is the lopsided regulatory system that favours large institutional capital providers. The cost of issuing impact investments, particularly those targeted to the EFM sector, is enormous and prohibitive for all but a few EFM impact managers. To address this, the report calls for a broad consultation by the Canadian Securities Administrators, the umbrella organization for Canada’s securities commissions, to ease market access to impact investment issuers without creating undue investor risk. As well, CAFIID also calls for the federal government to specifically mandate that impact investments can qualify for RRSP and other registered investments. The report also calls for a change in the underlying theoretical framework for investments that encourages regulators to disregard the social and environmental value of impact investing and focus on financial risk alone.

Together, these six challenges can help to develop a vibrant Canadian ecosystem for impact investment in developing countries. CAFIID invites “all parties in the investment system to join with us to make the changes necessary to usher in this exciting new investment approach for the 21st Century.”

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This blog was originally published here

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