Royal Bank of Canada has decided to establish its own impact fund, in what appears to be the first major move by a Canadian financial institution in this space.
Impact or social finance is essentially finance with a social or environmental goal. In some instances investors in this space are willing to accept a slightly lower financial return in exchange for social or environmental benefits (though, some financial instruments in this space can actually outperform other alternatives).
Impact finance includes a range of relatively new concepts and instruments, such as social impact bonds, which are bonds that are issued to private investors by way of the capital markets and are used to fund projects with a social aim, which could be reducing diabetes or integrating newly-released prisoners back into society. The bonds pay a return to the investors that is tied to the success of the project, and that return comes from the money that the project saved the government.
Canada is just beginning to dabble in social finance, a concept that the U.K.'s government and capital markets players, including a number of well-known investment bankers and Apax Partners founder Sir Ronald Cohen, have been working on for more than a decade. The idea has picked up speed as governments have recognized the benefits of having capital markets fund what has typically been government, non-profit, or charitable work, at a time when government finances are strapped and charitable donations are declining.
High-profile proponents of the concept in Canada include former Prime Minister Paul Martin and Stanley Hartt, the chairman of Macquarie Capital Markets Canada.
RBC notes that impact finance – which it defines as a range of financial vehicles and services that use private capital to finance solutions to social and environmental challenges while at the same time generating financial return – "is expected to help drive the next wave of innovation and productivity growth in the global economy."
The bank will be establishing a new $10-million capital fund, called the RBC Impact Fund, to help finance projects by organizations and entrepreneurs who are tackling social and environmental challenges. Its priorities will include promoting environmental sustainability and water resource management, and providing employment opportunities for youth and newcomers to Canada. What makes this impact investing is that RBC is expected to earn a profit by financing these initiatives – these are not donations.
RBC will also be making a $10-million investment of its own assets into socially responsible investment funds.
"We've been waiting for the right moment to launch a program of this nature, and the moment is now," stated RBC CEO Gord Nixon. "We are confident that our initial investment of $10-million in the RBC Impact Fund will not only spark entrepreneurship and innovation in Canada, but also catalyze similar investments from the business community."
Ilse Treurnicht, CEO of MaRS and chair of the Canadian Task Force on Social Finance, says RBC's initiative is a watershed moment for the concept in Canada.