This is the first blog in a series of Good Ventures, Good Deals blogs by the Social Venture Exchange (SVX) for SocialFinance.ca to showcase the breadth and depth of the social venture sector (for profit and not-for-profit) in Ontario, highlighting innovators, their business models, their commitment to social and environmental justice, and their successes and challenges in accessing capital to advance their mission. The blogs will also highlight social finance or impact investment deals to demonstrate to investors, ventures, service providers, policy makers, and the general public the positive social and environmental impact such investments have enabled, while generating multiple bottom line returns to the investors.

Small scale can be successful and sustainable

When Petra Kassun-Mutch (formerly Cooper) set out to start her own dairy, her goal was to revive small-scale cheese making in Ontario. By starting her own dairy, she wanted to prove that small-scale cheese making could be a successful and sustainable business. She wanted to see Ontario on the map for artisan cheeses, and she took it upon herself to do so.

Fast-forward just two and a half years and Fifth Town Artisan Cheese Company (Fifth Town) is a $1.3 million enterprise, producing handmade goat, sheep and cow milk chesses in a 4,800 square foot facility that is situated on 20 acres of agricultural land on the eastern ridge of Prince Edward County. It is also the first dairy in the world and the only industrial project in Canada to qualify for LEED’s (Leadership in Energy and Environmental Design) top platinum standard. Since its opening in the summer of 2008, Fifth Town has won over 30 awards for its cheeses as well as its sustainability initiatives, including the 2009 Ontario Premier’s Award for Agri-Food Innovation Excellence. What’s more, all of Fifth Town’s cheeses are made with Prince Edward County milk that is Local Food Plus (LFP) certified which means that the farms have environmental sustainability plans in place and manage their herd in accordance with humane animal management practices. The dairy is equally conscientious about the packaging for its cheese which is either biodegradable or recyclable, with labels printed in water-based ink on post-consumer paper using environmentally friendly adhesives!

Even before beginning construction on the facility, and as part of her efforts to revive the Ontario small-scale cheese industry, Petra co-founded and led the creation of the Ontario Cheese Society (OCS) in 2004. The OCS works with all the links in the cheese supply chain to facilitate opportunities for collaboration, advocacy, and the promotion of Ontario artisan, regional and farmstead cheeses to wholesalers, distributors, retailers and consumers. In April 2010, Fifth Town also became one of Canada’s eight founding B Corporations (Benefit Corporations). Fifth Town’s certification score at 124.6 was higher than the average certified B Corporation’s score at 105 and the qualifying bar of 80 required for the certification, reflecting the dairy’s strong commitment to its sustainability mission.

Embedded social and environmental mission

In the parlance of social innovation and social finance, Fifth Town is what can be described as a social purpose business. In other words, it is a business that has a social and/or environmental mission embedded into its DNA. This mission is not ancillary to or outside of the business, but rather at the heart of the business’ activities. It is not a strategy that the business employs, but the business itself.

An erstwhile publishing executive in New York and Toronto, Petra was resolute in her desire to weave social and environmental responsibility into the very fabric of her dairy. “The reason is simple. The quality of our food is inextricably linked to the quality of our environment. For example, you cannot have safe, high quality milk if your animals do not have access to clean water and non-toxic feed,” she says.

Going local and going green

Petra chose to locate Fifth Town in Prince Edward County because of the County’s growing reputation as a culinary tourism destination. Since her husband was raised in the County, Petra also had some personal knowledge of the challenge of rural economic development in the region. She wanted to have a positive impact on the County and saw Fifth Town as a lever in overcoming some of the County’s economic challenges. Today, by sourcing all the required milk supply from local, family-owned, small-scale dairy farms, Fifth Town is directly contributing towards the economic well being of the County and its residents. Currently, 93 cents of every dollar spent in the making of Fifth Town cheese stays in the local area. In addition, the facility that constitutes the dairy’s processing, retail and educational space is a model for substantiality. Having undergone an intensive third party audit to ensure it meets the highest environmental and social responsibility best practice standards, the facility further formalizes Petra’s commitments to environmental and social responsibility. An additional benefit of operating a sustainable business has been Fifth Town’s ability to attract and retain its small but talented team of employees who sought Fifth Town themselves as their preferred employer.

The choice to go “green” did not come cheap, however. The LEED certified facility came at a cost of $2-million, and $400,000 of this went towards higher cost, eco-friendly materials such as Forest Stewardship Council-certified wood, Agilia cement (low extraction impact/low GHG cement mix), Durisol block construction (wood chip/epoxy blocks instead of concrete block), non-toxic paints, recyclable steel, eco-friendly, seamless and food safety approved trowel on epoxy walls, high efficiency lighting and triple-pane windows, and low-flow faucets. The 9,000 square foot geo-thermal field and the 12 tonne heat exchanger keep costs low for heating the space as well as the water used for processing the cheese. The geo-thermal system is also used for cooling the facility and the dairy cases, caves, and wrap room walk-in. Hydro for the facility comes from wind and solar installations which is supplemented by Bullfrog power, which in turn sources power primarily from wind power installations and green hydro sources.

As a result of these investments, Fifth Town’s longer-term utility and water costs are much lower than other facilities, and as energy prices rise, this will become a competitive advantage. Already, with 2 years of data in hand, Fifth Town’s energy bills are significantly lower than that of a typical dairy.  In fact, Fifth Town runs on approximately 69% less energy than a similar facility designed to standard building code specifications. It also uses 62% less water due to a 10,000-litre rain cistern and the ability to recycle much of the water used for cleaning and sanitation. As a result, the average water usage by Fifth Town is approximately 6,500 litres per week; the average Canadian household has been said to use 400-600 litres per day! Given that Fifth Town also has an average of 13 to 19 workers on site plus over 5,000 visitors a week in the summer, all of which affect water use, one can do the math on the resulting impact on the preservation of a precious resource.

The challenge of seeking patient capital investors

Despite what one might presume to be an obvious attraction of such a business to investors, Petra did not find it easy to secure financing from angel, venture capital or private investors to start the business. Many thought that a small-scale artisan cheese manufacturing facility in a rural county was a 1970’s idea that would not succeed financially. In addition, a rather traditional, capital intensive, manufacturing-type of business where one makes and caries inventory of a physical (and perishable) product is not a popular use of investment cash for those looking for low investment, fast return, internet-style ventures. Petra therefore had to rely mainly on family savings and a variety of conventional loans to invest into the business. But even conventional lenders were hard to convince. Most could not get behind the investment in “green”, and limitedly valued the facility and the land against standard building code valuations.

However, once the facility was operational, and the reputation for Fifth Town’ cheeses started to grow, more people became convinced that this could work.  They started to believe.  And so, in 2009, the dairy successfully applied for and received an interest free loan under a federal government stimulus plan, allowing it to expand operations.

With growing demand for its products, which are sold nationally at select gourmet grocery stores and cheese boutiques, Fifth Town has additional capital requirements to put towards its working capital and near-term expansion needs.  However, access to capital still remains an important challenge. Petra believes that the traditional risk/reward analysis as undertaken by investors is not applicable to businesses like hers. First the payback takes longer. “This is not the type of investment for someone looking for exceptional returns in 18 months. If you have heard of Slow Food, you can think of this as Slow Business. But the returns are there.  And the foundation of the business tends to be more resilient as its customers are more loyal and less likely to switch on the basis of price. In fact, they often go out of their way to buy the product and will make special efforts if the company experiences a difficult period,” she explains.

Also, social purpose businesses can in fact pose a lower risk to investors given the embedded positive social and/or environmental impact of their activities. “Investors can relax a little in knowing that you are less likely to be sued or fined for environmental infractions and the costly damage to your reputation that can come from this,” she adds.

In Fifth Town’s case, and despite the economic downturn of the last couple of years, the dairy is not only steadily moving towards profitability, but also helping sustain the operations of the partners along its supply chain.

Looking ahead

In addition to need for capital, Fifth Town faces the challenge of limited supply of high quality local milk for the production of its chesses in its chosen catchment area (within 100 miles of the dairy). Petra also identifies three distinct challenges in the small-scale dairy sector in Canada, including the current “one size fits all“ regulatory environment and existing distribution networks that favour large scale (and often unsustainable) cheese production, as well as the challenge of sourcing experienced talent.

A resourceful and energetic eco-entrepreneur, Petra is optimistic about the sector and Fifth Town’s role in it. Her work through the OCS and Fifth Town has already begun to show measurable results in reviving the Ontario artisan cheese sector. An advantage of being a small sector within a larger industry has meant that the Ontario artisan cheese sector is less affected by the challenges faced by the larger cheese industry such as those resulting from increased consumer awareness and concerns of agricultural substantiality. Petra is confident that as the broader agricultural market faces a future of great change, and potential, Fifth Town and Ontario artisan cheeses will continue to see double digit growth in demand, and be faced with what she calls “good” challenges of capacity and distribution.

Special thanks to Alexandra Pattee, SVX Research Associate, for research support, and Petra Cooper, Founder and CEO, Fifth Town Artisan Cheese Company.

The Social Venture Exchange (SVX) is introducing a new Social Finance Fellowship program open to current graduate and undergraduate students, as well as working and retired professionals, to support venture and fund analysis for the pilot phase of our exciting project in 2011.  This may be your opportunity to use your skills to help local ventures tackle wicked social and environmental problems and to support the development of social finance in Canada.

PURPOSE OF POSITION
The Social Finance Fellows are primarily responsible for conducting blended value analysis (social, environmental and financial) on potential listed social ventures and impact funds for the Social Venture Exchange (SVX) initiative.

RESPONSIBILITIES
The Research Fellows are responsible for the following activities and deliverables:

• conducting financial and social-environmental impact due diligence on at least five (5) listing prospects, including impact funds and social ventures (non-profits);
• guiding ventures and impact funds through the listings process; and
• providing support to affiliated projects and programs in social finance, including blog posts for SocialFinance.ca and research support for Causeway Social Finance.

QUALIFICATIONS

• excellent writing and research skills;
• relevant experience or education in finance;
• work experience in financial analysis an asset;
• ability to work independently and in a team environment;
• ability to multitask; and
• a passion for social and environmental justice.

TERMS

This is a four (4) month volunteer internship position from February to June 2011. This is a part-time position (15 – 20 hours per week).  Arrangements can be made for a full-time placement based on the interests and ability of the successful candidates. There are two (2) Research Fellowship positions available. The position is open to current undergraduate and graduate students, as well as working and retired professionals.  However, candidates cannot complete their work solely during evenings and weekends.  Given the nature of the work, the Research Fellows must be able to work at least a portion of the time during the day.  Please email if you have specific questions about the terms.

HOW TO APPLY
If you have a passion for social finance, experience that aligns with the responsibilities and qualifications, and you are excited to work as a part of a creative team, please send your resume with a cover letter to us by Monday, January 31^st at noon via e-mail to aspence@marsdd.com. Please address all correspondence to:

Adam Spence, Manager, Special Projects
Social Innovation Generation (SiG) at MaRS
101 College Street, Suite 145
Toronto, ON   M5G 1L7

Thank you to all applicants for your interest in this position. Please note that only those selected for an interview will be contacted.  If you have any questions about this opportunity, please contact Adam via email.

You can download a complete copy of the posting through the SVX website.

First-ever Social Finance Census on nonprofits and social purpose businesses in Ontario offers intriguing insights into emergent sector

Toronto, ON (December 7, 2010) – The Ontario Nonprofit Network (ONN) and the Social Venture Exchange (SVX), an initiative of Social Innovation Generation (SiG) at MaRS released a new report today outlining the results of Ontario’s first-ever Social Finance Census at the Centre for Social Innovation (CSI). The Census data on 250 social ventures, from nonprofits to social purpose businesses, demonstrated a mature and growing sector that is innovative and entrepreneurial.  However, the ability of these ventures to tackle social and environmental problems is constrained by limited access to capital, legal and regulatory barriers, and other resource needs.  In total, capital need is estimated at $170 million for the profiled ventures.

“The increased public profile of social enterprises and social purpose businesses in recent years corresponds to a real growth trend,” said Lynn Eakin, Interim Network Director of ONN.  “But we also have a long tradition of social venture activity in Ontario.”

According to the research, nearly half of the social enterprise and social purpose business respondents started operations in the past five years. Additionally, one-third of nonprofit respondents without social enterprise activity have plans to start a new venture in the next two years. This recent growth comes in a sector that is also quite mature. One in five social enterprises has been operating for over 25 years, and one in four social purpose businesses have been operating for over 10 years. Social venture activity has become very important: 86 per cent of nonprofits with social enterprise activity indicated that they are trying to earn more of their revenues through such activities. For one in four of the nonprofits with social enterprise activities, such activities contribute more than 50 per cent towards the parent nonprofit’s operating budget.

“Despite recent growth, social ventures have significantly inadequate access to capital, preventing them from effective start-up, growth, or continuation of their operations,” said Adam Spence, Manager, Special Projects, SiG@MaRS.  “As a result, there are tens of millions in unmet capital need for ventures that could be tackling our most pressing social and environmental problems.”

Social ventures reported that a major barrier to success was access to capital: approximately 80 per cent of social purpose businesses, 75 per cent of social enterprises and 70 per cent of nonprofits currently not engaged in social enterprise reported that access to capital is a significant challenge. The impact of increased access to capital could be tremendous. For example, 80 per cent of social purpose business respondents stated that they could more effectively achieve their mission with improved access to capital for growth, infrastructure, or working capital.

The majority of social ventures need additional capital in the next two years: 66 per cent of nonprofit social enterprises and 61 per cent of social purpose businesses.  Fifty seven (57) per cent of nonprofits without social enterprises need capital to start-up a venture in the next two years.  The demand for capital is significant. The aggregate average capital need amongst survey respondents is estimated at $170 million. This only represents a portion of capital demand in Ontario, as survey respondents represent a sample of social ventures in the province.

There were also interesting trends in the individual level of capital need and desired source of financing. Half of all capital need was for individual amounts of between $50,000 and $1 million.  In addition, approximately half of all nonprofit respondents and 70 per cent of social purpose businesses would be interested in pursuing debt financing. Over half of the social purpose businesses stated that they would be willing to issue public or private equity to meet capital need.

“We could create a tremendously positive impact for our community with a relatively small investment,” said Alex Kjorven, Development Manager at ACCESS Community Capital Fund.  “Our impact is not limited by our vision, our business plan, or our track record, but by our inability to access funds from mainstream sources.”

Beyond financing, Census respondents reported on barriers and other resource needs.  Other highlights of the report’s findings include:

• Half of all nonprofits selected one or more legal and regulatory considerations as barriers to engaging in social enterprise;
• Greater certainty regarding the application of legislation and regulation that govern social enterprise activity is needed for 65 per cent of all nonprofits (62 per cent for those currently pursuing such activity, and 66 per cent for those not yet pursuing such activity);
• Forty eight (48) per cent of social purpose businesses reported the lack of financial market intermediaries to facilitate the flow of capital as a major barrier;
• For over 45 per cent of all nonprofits, lack of business development support is an important barrier to social enterprise activity; and
• Eighty-three (83) per cent of social purpose businesses, 63 per cent of nonprofits with social enterprise and 65 per cent of other nonprofits are interested in social and/or environmental measurement tools to measure the impact of their work.
  

For more information on the Social Finance Census including the full report and executive summary, please visit http://ontariononprofitnetwork.ca or www.socialventureexchange.org.  The Census follows the release of the Canadian Task Force on Social Finance, a blue ribbon panel that offered seven key recommendations on building the social finance marketplace in Canada.

ABOUT THE ONTARIO NONPROFIT NETWORK
The Ontario Nonprofit Network (ONN) is a network of networks composed of charitable and nonprofit organizations providing public benefit across Ontario. ONN facilitates cross-sectoral collaboration helps increase the Sector’s capacity to participate in public policy discussions so that we can move towards an environment able to support the changing needs of nonprofit organizations in Ontario and, by extension, the communities they serve. ONN’s participation in the Social Finance Census was funded by the Law Foundation of Ontario. ONN is an incubated project of the Centre for Social Innovation. For more information about ONN, please visit www.ontariononprofitnetwork.ca.

ABOUT THE CENTRE FOR SOCIAL INNOVATION (CSI)
The Centre for Social Innovation is a dynamic space in downtown Toronto, Canada. Our mission is to spark and support new ideas that are tackling the social, environmental, economic and cultural challenges we face today. We’re creating the spaces that social innovation needs to thrive and we’re contributing a few of our own ideas along the way! For more information about CSI, please visit www.socialinnovation.ca.

ABOUT THE SOCIAL VENTURE EXCHANGE (SVX)
The Social Venture Exchange (SVX) is an initiative of Social Innovation Generation (SiG) at MaRS, supported by the TMX Group Inc., Causeway Social Finance, and the Government of Ontario.  The mission of the SVX is to develop and pilot a regulated market to connect social ventures and impact investors.  For more information on the SVX, please visit www.socialventureexchange.org.

ABOUT MaRS
MaRS is where science, technology and social entrepreneurs get the help they need. Where all kinds of people meet to spark new ideas. And where a global reputation for innovation is being earned, one success story at a time. For more information, please visit www.marsdd.com.

-30-

For further information, contact:
Adam Spence, Manager, Special Projects, SiG@MaRS, Work: 416-673-8186, Mobile: 416-543-0897, Email: aspence@marsdd.com
Lynn Eakin, Interim Network Director, Ontario Nonprofit Network (ONN), Work: 416-642-5786, Mobile: 416.818.5521, Email: lynn@ontariononprofitnetwork.ca

Media representatives are invited to attend. Copies of the full report and executive summary will be available at the event.  The report release will feature an information session including an interactive discussion with local social ventures.  A second information session will be held at the MaRS Centre on Wednesday, December 8th (8 – 10 am) for those that cannot attend the launch event.

ABOUT THE ONTARIO NONPROFIT NETWORK
The Ontario Nonprofit Network (ONN) is a network of networks composed of charitable and nonprofit organizations providing public benefit across Ontario. ONN facilitates cross-sectoral collaboration helps increase the Sector’s capacity to participate in public policy discussions so that we can move towards an environment able to support the changing needs of nonprofit organizations in Ontario and, by extension, the communities they serve. ONN’s participation in the Social Finance Census was funded by the Law Foundation of Ontario. ONN is an incubated project of the Centre for Social Innovation. For more information about ONN, please visit www.ontariononprofitnetwork.ca.

ABOUT THE CENTRE FOR SOCIAL INNOVATION (CSI)
The Centre for Social Innovation is a dynamic space in downtown Toronto, Canada. Our mission is to spark and support new ideas that are tackling the social, environmental, economic and cultural challenges we face today. We’re creating the spaces that social innovation needs to thrive and we’re contributing a few of our own ideas along the way! For more information about CSI, please visit www.socialinnovation.ca.

ABOUT THE SOCIAL VENTURE EXCHANGE (SVX)
The Social Venture Exchange (SVX) is an initiative of Social Innovation Generation (SiG) at MaRS, supported by the TMX Group Inc., Causeway Social Finance, and the Government of Ontario.  The mission of the SVX is to develop and pilot a regulated market platform to connect social ventures and impact investors. For more information on the SVX, please visit www.socialventureexchange.org.

ABOUT MaRS
MaRS Discovery District is a large scale, mission driven innovation centre located in Toronto and networked across Ontario, focused on building Canada’s next generation of technology companies. MaRS works closely with entrepreneurs to grow and scale their ventures into global market leaders in life sciences and health care, information, communications and digital media technologies, clean tech, advanced materials and engineering, as well as innovative social purpose business.  For more information, please visit www.marsdd.com.

-30-

For further information, contact:
Adam Spence, Manager, Special Projects, SiG@MaRS, Work: 416-673-8186, Mobile: 416-543-0897, Email: aspence@marsdd.com
Lynn Eakin, Interim Network Director, Ontario Nonprofit Network (ONN), Work: 416-642-5786, Mobile: 416.818.5521, Email: lynn@ontariononprofitnetwork.ca

The next leg of the journey led me to Takoma Park and Tribeca in my trusty, well-tuned 2002 Toyota Corolla to meet with visionary state senators advancing benefit corporation legislation, including Senator Jamie Raskin and Senator Daniel Squadron. My aim was to learn about model US legislation to further advance understanding on legislative options for local, sustainable ventures in Ontario, building upon the great work MaRS has already done.  Beyond the delights of Dunkin’ Donuts and Denny’s on a 2,482 km road trip, I was determined to bring back important insights for local policy makers and entrepreneurs.

What are the common features of benefit corporation legislation?

There are a number of common features:

1. Purpose: Public Benefit. Benefit Corporations must have the purpose of creating a “General Public Benefit”, defined in Maryland as, “…a material, positive impact on society and the environment, as measured by a third-party standard, through activities that promote a combination of Specific Public Benefits.”  This public benefit must be reflected in an entrenched social mission within the businesses’ Articles of Incorporation. 

2. Independent Third Party Standard. Beyond social mission and demonstrated impact, a benefit corporation must meet the standards of an assessment regime set by an independent third party to ensure data quality and credibility.

3. Reporting: Annual Benefit Report. Legislation requires benefit corporations to produce an Annual Benefit Report within 120 days following the end of the corporation’s fiscal year, including a narrative description of its General Public Benefit and an Assessment of its Specific Public Benefit.

4. Directors’ Responsibilities and Legal Protections. One of the critical components of benefit corporation legislation is the description of Directors’ responsibilities.  The Directors of a Benefit Corporation must consider the effects of their actions not only the interests of the shareholders, but also on other stakeholders (employees, customers, community, and local/global environment).  This provides Directors with legal protections to make decisions that do not solely take into account profitability.  Otherwise, as it stands in traditional US corporate law, a Director could be sued by shareholders for dereliction of financial duty as a Corporate Director if they made a decision that did not necessarily maximize profits.

It is important to distinguish benefit corporations and B Corporations (or B Corps).  Benefit corporations are a legal corporate form for businesses, as enacted by relevant legislation.  B Corps are a company that has brand affiliation with B Lab once a business has successfully completed their assessment and accreditation process.  B Corporation has been identified as one of the third party standards that can be applied in order to register as a benefit corporation.

Why is benefit corporation legislation an important innovation?

Benefit corporation legislation is experiencing rapid adoption in the US: it has been approved or drafted in nine (9) US states, including Maryland, Vermont, New York, New Jersey, Pennsylvania, North Carolina, Washington, Colorado, and Oregon.

The legislation provides an easily understood and well-defined legal form for the for-profit social purpose business or sustainable enterprise.  The legal form provides a powerful platform for defining a loosely categorized but burgeoning industry, building sector awareness, and providing future functional supports for ventures and investors.  Within a week of going into effect in October 2010, 12 benefit corporations registered in Maryland.  Although benefit corporations do not have preferred tax status, future consideration will be given for reduced rates.  However, the new legal form does provide a ready platform for municipal tax credits and preferred government procurement status.  (In the future, perhaps targeted investment incentives?)

A key theme from my conversations was the belief that this legal form was an important response to the disruptive economic transition.  In New York, it was seen as a means of attracting innovative enterprises and investment capital to build a more sustainable economy in hard hit areas like upstate New York and marginalized neighbourhoods in New York City.  In Maryland, it was seen as a transformative and necessary corporate form that reflects the original, historical intention of corporations that could do well financially and do good for society.

Ultimately, these characteristics have driven bi-partisan, stakeholder, and public support for the legislation.

So what?

Benefit corporation legislation is a compelling option for local policy makers with great potential for local social and environmental ventures.  In the future, you may register as a benefit corporation.  It may also be another means of identifying ventures with demonstrable impact for prospective investors. Over the next month, I will be preparing a short discussion paper with more detailed analysis.

Thank you to the remarkably friendly and inspiring legislators and their staff in Maryland and New York for being so generous with your time.

It was a fascinating adventure into the world of fair trade foods, remote solar design and installation, sustainable artisan seafood, and affordable drip irrigation guided by a remarkable group of entrepreneurs.  They were kindly willing to share their business models (aka “the secret sauce”), guide me through their operations, and discuss their philosophy, origins and future plans.  Unsurprisingly, they weren’t just about coffee, sun, fish, and water.

This post will offer some insight into their ventures, identify commonalities between them, and pose questions that arose following the discussions.

Driptech
I waded my way through the ever-buzzing crowd at SoCap to meet with Peter Frykman, CEO and Founder of Driptech, and one of America’s most promising social entrepreneurs.  Based in Palo Alto, California, the company manufactures affordable drip irrigation for small-plot farmers in developing countries (particularly China and India) as a means of alleviating poverty.  The kit costs roughly $300 for a one acre farm, or one-fifth the cost of traditional systems.  Peter’s calmly stated goal: one million farms using drip irrigation in the developing world within five years.  This is not a man that could be accused of hyperbole.  He’s clearly sharp and practical.  What started as a relatively simple idea for a Stanford mechanical engineer turned entrepreneur may change lives for a million families in a very short time.

Alter-Eco Americas
After an engaging conversation with Peter, I wandered over to the bustling vendor booths at SoCap to chat with Wes Selke from Good Capital, Chairman of the Board for Alter Eco Americas.  Based in San Francisco, but with partnership operations in Paris, Rio and Sydney, Alter Eco Americas is an importer, wholesaler and brand owner of a broad range of Fair Trade, Organic and Carbon Neutral products including chocolate, rice, sugar, olive oil and quinoia.  Their goal is to gradually close the gap between rich and poor, so-called developing and industrialized countries.  You can find their tasty products all across North America (with exceptions including Ontario) at natural food stores and places like Whole Foods.

Sungevity
Following the SoCap conference, I made my way early in the morning across the Bay via BART and the local bus to the sunny orange Oakland office for Sungevity to meet with Bill Stark, Marketing Manager and solar evangelist. They are in the innovative business of remote solar design, installation, and leasing of systems, serving customers in California, Arizona, and Colorado.  Their vision is to bring affordable, clean solar energy to as many homes as possible.  The extraordinary and seamless structure of their front and back office operations, from marketing and system design to contractor management and customer care makes the business run like a supercharged solar-powered machine.

CleanFish
After a brief respite and checking into my new, thrifty, and neat accommodations, it was a brisk walk through the streets of San Francisco to meet with Tim O’Shea, Founder and CEO of Cleanfish.  The company is a broker and marketer for sustainable, artisan seafood for the North American market, featuring products from Texas Redfish to Wild Nunavut Arctic Char.  Tim’s vision is clear: a global sustainable seafood system, decreased reliance on industrial fisheries and ultimately, a revitalized ocean ecosystem (allowing the oceans to rest).  Our vast ranging conversation revealed his passionate commitment to this vision, as an individual enterprise and a catalyst for a broader sustainable seafood industry through the newly created CleanSource, LP Fund.

There were a number of interesting commonalities with each of these companies:

• Young firms with track records. All of the companies were relatively new enterprises that began their operations between 2004 and 2008.  Despite their relative youth, they were all relatively mature firms with successful business operations, proven revenues, and marketable products that have been broadly accepted by consumers.
• Remarkable growth. Although actual revenues are not publicly available, it is safe to say that these ventures are experiencing double digit revenue growth.
• Commitment to mission. The B Corporation social mission standard is not a gimmick, it’s a functional component of the DNA of these companies.  They didn’t change their mission to become a B Corp, they were benefit corporations with a defined social mission right from start-up.
• Commitment to quality. It is an interesting characteristic of sustainable businesses in Canada, and evidently, of benefit corporations in the US: they want to provide the best quality product or service possible.  They don’t want to be seen as “soft” businesses, but as a higher quality and cost competitive alternative to the mainstream.
• Balance between people, planet and profits. These companies strive to balance people, planet, and profits, each with relatively equal weight.  Make no mistake, these are American companies, so they are looking to make money.
• Movementarians. The ventures are a fascinating, dynamic combination of enterprise and activism that extends beyond the bounds of their business.  From CleanFish’s campaign/philosophy of “Vote with your fork” to Sungevity’s successful Put Solar on the White House campaign to the goal of one million farms with affordable drip irrigation, these companies seem to manifest an enterprising movement with noble aims and a clear means to achieve their goal.  They are also part of a broader movement, described by one leader as a shared identity with enterprises that are, “…transitioning to a sustainable economy with meaningful wealth creation that mandates the triple bottom line in business.”
• More than just employees. Perhaps as a result of the appeal of being a part of a broader movement, or the convincing nature of their leaders (ie. “I came because of Bill.”), folks seemed to be choosing to work at these ventures because of a vocational attraction, similar to the draw for non-profits, public service, or even major professions.

One of the key questions that I asked myself after the visits was: are these benefit corporations by nature of their own business or is it a function of their business sector? In other words, could any fair trade, solar, seafood, or water company be classified as a benefit corporation?  Upon reflection, a comparison of their business to other’s in their sector, and careful review of the multi-factoral B Corp accreditation process, the early conclusion would be that they are a unique breed of business defined not by their sector, but by their own unique products, mission, and people.

So what’s next?

It would seem that the next and necessary major leap that these types of enterprises need to take is a simple and ongoing demonstration of their positive social and environmental impact at a local or global level.  There is clear proof that they have met a standard for sustainable and beneficial practices.  Beyond the bottom line, it is vital for the collective narrative and future progress that these companies chart and report their quantitative and qualitative impact.  For example, how many farmers are using affordable drip irrigation, and how has the product helped improved quality of life?  I would love to watch their progress as they head towards a million farms and see the change in quality of life they drive alongside small farm partners around the world.  Fundamentally, if it is an enterprising movement, what progress is being made towards poverty alleviation, just labour practices, climate change, and sustainable oceans?

More to come in a few weeks after a visit with legislators in Maryland and New York to chat about benefit corporation legislation…

There are a number of long-standing enterprise forms in Ontario (and Canada) with a mission to achieve positive social or environmental impact, including co-operatives and non-profit organizations.  You may be familiar with producer, housing, or worker co-operatives, from Organic Meadow to the Urbane Cyclist in Toronto.  You may also be familiar with non-profit (charitable) social enterprises, from Goodwill Industries to Habitat for Humanity Restore.

Can a for-profit company solve social and environmental problems?  If these good companies can exist, can they be economically viable (even profitable) while meeting their mission?  This is the premise of the benefit corporation, an emergent form of sustainable for-profit enterprise with a defined mission to generate demonstrable, positive social and/or environmental impact.

It is an idea with great potential.  We want to find out how they work and whether the concept is scalable here.  So, over the next few months, I am on a journey in search of the benefit corporation.

What is a benefit corporation?

B Corporations are,  “…unlike traditional responsible businesses because they: meet comprehensive and transparent social and environmental performance standards, institutionalize stakeholder interests, and build collective voice through the power of a unifying brand.”  B Corporations are accredited by the U.S. non-profit organization B Lab, based in Philadelphia, Pennsylvania. Their standards are quickly developing into the North American standard for social and environmental performance measurement, providing the most well rounded evaluation and representation of businesses having a positive impact.

There are already 315 B Corps globally, representing roughly $1.5 billion in annual revenue.  The vast majority are based in the United States, but there are a few located in Canada, including Fifth Town Artisan Cheese and Renewal2.

Governments are taking note of the potential of benefit corporations.  It has been approved as a new corporate form in legislation in Maryland and Vermont.  There are a number of other states pursuing legislation, including New York, Pennsylvania, North Carolina, Washington, Colorado, and Oregon.  It is also being advanced as a legislative option by organizations in BC and Ontario.

Why does this exercise matter?

As an entrepreneur, the benefit corporation concept may provide you with an edge in the marketplace to access new capital or market your enterprise to a growing group of conscious consumers.  It could also provide you with a means to improve your ability to generate a positive impact at a local or global level, and connect you to a vibrant community of entrepreneurs.

As an impact or mission-aligned investor, it may help you learn how to identify companies that have proven, positive impact.  As a policy maker, this exercise may you provide further context on a legislative option that could simultaneously advance social, economic, and environmental policy objectives.

Fundamentally, for all Ontarians and Canadians, it is hoped that benefit corporations can act as another pillar of a just economy including social enterprises and co-operatives.

How will we search for the benefit corporation?

Over the next few months, I will travel by plane, car, train, and on foot:

• Visiting benefit corporations in the United States and Canada to understand their business operations;
• Identifying and meeting with enterprises in Ontario that are potential benefit corporations;
• Learning about benefit corporation legislation in the US to advance understanding on legislative options in Ontario and across the country.

The first leg of the tour will be a series of visits with B Corps in the Bay Area through the SoCap10 conference, including the friendly folks at Driptech, CleanFish, and Sungevity.

Let me know if you have any questions for folks on the tour.  I’ll be blogging along the way.  I hope that you will join me on this journey.

Photo credit: As found on Flickr.com, photo by Roland Urbanek.

In a few weeks, illustrious movie supervillain Gordon Gekko will make his somewhat less than triumphant return to Wall Street.  He will likely return humbled, then reveal his true self (ie. Greed is good.) before changing his ways or getting caught.  It could go either way, but it’s predictable. We are looking for bizarro Gordon Gekko.

We need to understand the local investor interest for impact investing (or “good” investments with social/environmental impact and financial return that provide capital for social enterprises, social purpose businesses and non-profit infrastructure).  So, we are building a basic profile of institutional investors and asset owners/managers in Ontario and determining their level of current activity and potential interest in impact investing through detailed survey profiling via the Social Finance Census. This survey work will allow us to understand the current and potential supply of capital that is available for impact investing, and therefore, the supply of capital that is available for local social and environmental ventures.

We do know a few things about impact investing at a global and local level that provide a base for our profiling work.

We have a rough understanding of the long-term potential of impact investing at a global level.  Given the size of today’s screened social investments, it is estimated by the Monitor Institute that impact investing could grow to one (1) per cent of total managed assets, or a total market size of $500 billion. [A current figure is difficult to nail down.  Blueprint Research and Design and GPS Capital Partners estimate that $4-5 billion of these total assets are mission related investments (MRIs) and program related investments (PRIs), which would be a portion of the impact investing space.]  According to a recent report released by Hope Consulting, there is currently a $120 billion market opportunity for impact investing amongst high net worth individuals.

It is much more difficult to determine the current and potential capital supply for impact investment locally.  We do know that it likely counts in the hundreds of millions.  In Canada, it is estimated that the community investment marketplace is equal to $1.4 billion in total managed assets.  (Community investing is fairly analogous to impact investing, with some differences.) This marketplace includes 487 organizations managing assets from $7,000 to $280 million.  The vast majority of these funds (66 per cent) are Community Futures and First Nations Funds, which receive capital from various levels of government.

We know that Canadian foundations are engaged in impact investing.  A recent Canadian study of nine major foundations in Canada discovered that there were $32 million in community/mission investing assets in their endowments, representing four (4) per cent of their total assets. These foundations reported a total of 50 current community/mission-related investments.  We also know that there is significant activity in BC and Quebec.  In 2004, social economy enterprises and collective housing projects in Quebec received $330 million in investments through Solidarity Finance institutions.

But this is just the tip of the iceberg.  We do not have a full and detailed picture of the current and potential supply of impact investing capital in Ontario and across the country.  We believe our profiling work will be vital to building that picture.

When coupled with our profiling work on the demand for capital amongst social and environmental ventures, we hope this data will help demonstrate interest within and beyond the investment community, encourage tailored financial product and marketplace development, and ultimately drive investment for ventures that produce positive social and environmental impact.

Once that’s done, the hard part will be coming up with a new script and title for Wall Street 3.  Until then, we have other work to do.

We have decided to ride this wave of popularity to launch the first ever Social Finance Census. At the risk of stoking further controversy, I will say that this Census is not mandatory. However, although this Census is voluntary, you cannot exercise the Hogan’s Heroes defense for non-completion of the survey. And don’t worry, this census will not ask you intrusive questions such as whether you have a Team Jacob poster in any of your bedrooms, inquire whether you had waffles for breakfast before heading to work, or query whether you actually floss on a daily basis.  These are important details, but altogether irrelevant to our work.

So what exactly is the Social Finance Census?

The Social Finance Census 2010 (#sfcensus) is an initiative to gather vital data on non-profits, charities, social enterprises, and social purpose businesses in order to build a strong profile of the sector. The Census involves a set of surveys with basic and in-depth questions tailored specifically to issues of financing and regulation. The Social Finance Census aims to:

• build a profile of innovative non-profits, social enterprises, and social purpose businesses in Ontario;
• determine the sector’s current sources of capital, its future capital needs, and the challenges it faces in accessing capital;
• determine the potential that exists to provide the sector with new and alternative forms of capital to foster the sector’s growth;
• analyze regulatory and resource barriers for development; and
• conduct a preliminary assessment of the sector’s measurement of its social and/or environmental impact.

As with the national census, the data collected will be confidential. Unless you explicitly state that are willing to have your basic data mapped (name, address, social mission, etc.), it will be anonymously aggregated into the pool with all of the survey respondents.

So why is the Social Finance Census important?

This Census will provide hard facts and numbers to complement the powerful narrative of our collective work. We cannot effectively plan for the future, advance progressive positions to government, or accurately portray the depth and breadth of our work without data. The Census addresses this underlying gap: there is a fundamental lack of comprehensive, universal data on social finance in Ontario, and indeed, across the country.

Accordingly, the Social Finance Census will:

• provide the sector with data to support planning and coordination;
• demonstrate the size and operations of the sector to the public, government, and potential supporters; and
• ultimately, help to attract investment and talent to the sector.

Who is involved in the Social Finance Census?

A strong group of organizations have pulled together for this effort. The Census is a project of the Social Venture Exchange (SVX), a joint initiative of Social Innovation Generation (SiG) at MaRS, the TMX Group Inc., Causeway Social Finance, and the Government of Ontario. A key collaborator on the project has been the Ontario Nonprofit Network (ONN) with grant support from The Law Foundation of Ontario. In addition, we will also be working with SocialFinance.ca on the promotion of the survey and dissemination of results. Many eminent individuals and organizations also have contributed their time and expertise to ensure the project is a success.

How can you help with the Social Finance Census?

The success of this effort will rely on you. There are three easy ways that you can help with the Social Finance Census:

• Fill it out: If you are a non-profit or social purpose business, please take a few minutes to complete the survey that matters to you.
• Promote it on your website or blog: You can post a link to this page on your website, post a blog item with the information above, or even download and post a small button, large button, or banner promoting the Census on your website or blog.
• Promote it on Twitter: Encourage innovative non-profits, social enterprises, and social purpose businesses to complete the survey by promoting the Census on Twitter using the hashtag #sfcensus, and by promoting links to the survey for non-profits (http://bit.ly/bmrp1c) and social purpose businesses (http://bit.ly/a2dnPx).

You do good work. Stand up and be counted.

It’s about a different kind of displacement.

There has been a building level of awareness and literacy on impact investing in the past few weeks, given increasing news coverage from outlets from the New York Times to Raleigh, Durham and Chapel Hill’s News and Observer.  [We’re still waiting for front page coverage in the Financial Post, or the Globe/Toronto Star’s Business section.]

As we increase awareness, we need to tackle some early concerns right away as we begin to build interest in this space.  One of these concerns is outlined in what could be called the theory of displacement.  Roughly conceived, this theory postulates that:

Individuals and institutions with available funds and an interest in achieving social or environmental improvement will choose profit-generating enterprises over charitable organizations.

Simply put, all things being equal, if someone has the choice between making money and losing money with similar “good” outcomes, they will choose to make money.  So, even if we have a social conscience, we’d still be the good children of Adam Smith and maximize our profits.  I’ve had conversations with folks who share this belief.  They worry that a movement in this direction will only take money away from charitable causes.

But there are many reasons this theory cannot hold water.

1. Strong connections. Canadians will always direct funds to charities because of personal and religious connections to particular issues and causes.  The motivation to give is often founded in a fundamental system of beliefs, or direct personal experience with something that has touched their lives.

The primary target of funding to charities in Canada proves this point.  Over two thirds (70 per cent) of these funds are directed to religious, social services, or health related organizations.  The bonds or requirements of religion, the impact of an illness on a family member, or the experience of a job loss are deeply personal connections that compel Canadians to give.  These connections are extremely resilient and are unlikely to be broken by the potential for a financial return.

2. Practicality. There are very practical reasons that we support charities – they are the only vehicle for some forms of civic activity.  Canadians, and indeed, citizens around the world, direct money to charitable institutions like churches, shelters, humanitarian relief and human rights organizations because they are the only means of providing necessary support to achieve certain social aims.

We simply cannot achieve necessary social and environmental progress solely through enterprise or innovation.  Our aims can only be achieved through effective and progressive public policy and a well-functioning charitable sector functioning in concert with enterprises with a social mission.  Each of these is necessary, but they are not independently sufficient conditions for achieving social and environmental progress.

For example, if we were to examine poverty reduction as a desired social outcome, it requires the combination of good public policy (ie. economic and income security measures, labour protections, and fair wage policies), social enterprise activities (ie. social hiring practices, and enterprises that employ at-risk youth), and charitable endeavours (ie. food banks, employment programs, and shelters).

Arguably, this is a reason that displacement cannot happen, as well as a reason that it will not happen.  It is simply not practical.

3. Finances. There are powerful financial incentives in place for Canadians to donate to charitable organizations and causes.  For many Canadians, it makes financial sense to donate a small portion of their income to charity.

The tax incentives to donate are substantial.   (In particular, there are significant incentives for the donation of securities.  So if you haven’t heard about this yet, ask your financial advisor).  If you don’t believe this, then please learn more from the good folks at TD Canada Trust, the Canada Revenue Agency, Deloitte, or KPMG. For example, the actual after tax cost of a $1,000 donation of securities for an individual in the highest tax bracket (marginal tax rate of 46 per cent) is $536.   Although it does not deliver the potential for a financial return, a donation does not represent a total loss for an individual or institution.

Arguably, it is still not financially profitable, but the first two features (connections and practicality) coupled with these financial incentives will continue to ensure that funds are directed towards charitable causes. 

4. Lack of evidence. The reason that displacement is a theory is because it is just that; a theory.  There is no statistical proof that displacement takes place.

In countries that have witnessed a significant development in their social enterprise and innovation sector, there has not been a commensurate decline in charitable gifts.  In nations with a well-developed and rapidly growing social enterprise sector such as the United Kingdom, there has not been a displacement of funds.  In fact, more Britons make financial donations to charity than Canadians.  According to a recent study, 95 per cent of all UK residents made a financial donation to a charity in the past year.  In Canada, 84 per cent of citizens make some form of financial donation to a charitable or non-profit organization on an annual basis.  [Note that many do not apply for a tax receipt, as they may contribute to a raffle or by some other mechanism that doesn't allow for charitable exemption.]

5. The real target. Perhaps the most important and relevant reason that the theory of displacement doesn’t fly is that the target pool of financing is not charitable donation dollars.  We are targeting a much different and much larger pool of money.  So it’s not really a choice at all.

Certainly, charitable donations represent a very large and important source of funds.  In 2008, according to Statistics Canada, 5.8 million Canadians donated $8.2 billion to over 80,000 charities in the country.  In 2007, the average donation contribution made by individual donors was $437.

The real target is a tiny fraction of total financial assets in Canada and around the world.  Total managed assets in Canada equalled approximately $3 trillion in 2008.  This is part of a much larger (and almost unfathomable) pool of capital that makes up world financial assets.  In 2007, “…the total value of global financial assets reached a peak of $194 trillion, equal to 343 percent of GDP.”

Herein lies the power and potential for impact investing.  Over the past generation, we have witnessed a fundamental shift in the potential and size of financial assets.  Although there has been some slight reversal, world financial assets have quadrupled in size relative to GDP since 1980.

And if we require capital (ie. money) to grow, sustain, or improve our response to social and environmental problems, then we should pursue the largest and most readily available source of that capital. Fortunately, there are many enterprises and individual actors that do (or could) meet the pre-conditions for obtaining that capital: some form of or potential for financial return (even moderate), and a demonstrable ability to achieve certain social and environmental outcomes.  [Following a trajectory in line with the increasing interest of citizens that funds be directed to places that better align with their values.]

So, if even one per cent of Canadian assets were channelled in this direction, this would be equivalent to four times ($30 billion) the amount of money donated to charities in the same year.  This shift would not be unprecedented, as core SRI assets in Canada already totalled $54.2 billion in 2008, according to the Canadian Socially Responsible Investment Review 2008.  All screened SRI investments represent almost 20 per cent of the total managed assets.  The number of investors in this space continues to grow.  Between 2006 and 2008, the total value of assets invested according to SRI guidelines increased by 21 per cent.  Impact investing would be expected to follow this trajectory as a subset of the broader SRI space.

Arguably, this is part necessity and part opportunity.

Government revenues will be increasingly constrained over the foreseeable future as modest economic growth drives modest government revenues, and fiscal pressures from rising health costs, economic security programs, and public pension programs stretch the public purse.  The ability to invest in important programs such as the construction of affordable housing will become even more limited.

And the necessity, or need for capital to provide resources to address increasingly complex and monumental social and environmental problems grows.  A similar thesis was featured in Ralph Nader’s most recent book, Only the Super Rich Can Save Us!  Although a fictional account, it recognizes that we need significant amounts of capital to catalyze the necessary change we require for both survival and success.

There is a significant opportunity to grow the number of individuals who are engaged directly and indirectly in solving social and environmental problems with their available financial resources.  At present, a declining number of Canadians report financial donations to the federal government.  Only 24.1 per cent of all tax filers made donations to charity in 2008, representing a slight decline from 1999, when 25.5 per cent of all tax filers made charitable financial donations.

As we know, these individuals are only donating, on average, slightly over $400 per year.  We need to work to increase the percentage of Canadians who give, as well as the amount of their donations.  The charitable sector requires additional grant and donation dollars to build and sustain operations.  But we must also think of the potential of the savings and investments of current donors.  And imagine the even greater potential of the investments of individuals (retail investors) as well as corporations (and other institutional investors) who do not currently contribute to charity.

The potential is tremendous.  But it will take a lot of work to realize that potential.  Think of what you can do to help move this forward.