Solutions Finance – a Framework to Mobilize Entire Financial Assets for Systems Transformation
By Erica Barbosa Vargas and Julie Segal, J.W. McConnell Family Foundation
Established in 1937, the McConnell Foundation’s mission is to support Canadians in building a more inclusive, innovative, sustainable and resilient society. We use the lens of systems transformation — changing policies and institutional culture in order to address the root causes of societal challenges – to guide our philanthropic strategy. The Foundation has an endowment of about $650M managed in perpetuity with current yearly charitable disbursements that range between 4% and 5%. We recognized over a decade ago that if we were to contribute meaningfully to pervasive social and environmental challenges, we would need to harness the full range of our unique assets, capabilities, and positioning, and we need to work collaboratively within and across sectors. This led us to start our impact investing in 2007, which today has grown to represent about 18% of our total assets, and to commit in 2016 to managing 100% of assets through responsible investing.
Along this journey, we understood better how successful systems innovation to deal with global challenges requires adequate resourcing and calls for different forms of capital allocation across the multiple stages of design, implementation and scale. As a private foundation, we were uniquely positioned to mobilize capital along the entire spectrum of sustainable finance – from grants to concessionary investments to investments seeking market rates of return – as well as a range of other assets – intellectual, reputational, relational – to this end. This led us to shift and adopt a new practice — an integrated approach to deploying financial capital and adapting financial models to catalyze, sustain and scale systems transformation, which we called Solutions Finance.
With this new framework came an opportunity to reposition how we thought of our own institutional capacities as they related to the positive change we wanted to support in society. At one level, it is still about attracting and deploying more private capital to the community sector and helping social enterprises to increase their positive social and environmental impact as well as about increasing our own portfolio with the expectation of a blended social and financial return. Our impact investment portfolio today, totaling $130 million in commitments, consists of a diverse set of investments: guarantees, blended finance instruments, concessionary debt, infrastructure, outcomes-based contracts, private equity, venture capital, public equity and fixed income. The impact being generated is also diverse: improving the lives of vulnerable people and communities; building new economies and markets that are inclusive; building green urban infrastructure; and more.
Another important dimension is about influencing capital markets’ evolution to include stronger standards of sustainability and demonstrating greater concern for societal impacts through shareholder engagement and other responsible investing approaches. This is a more recent and emerging area of our work, but one in which we actively ask ourselves how we can leverage our positions as institutional investors, along with other endowments, pensions funds, etc., to advance our missions with as much intention as with our charitable work and our impact investments.
Something we recognize more now than we did when we began this work is the relative role different types of capital – and capital providers – play in the process of changing systems to create sustainable, inclusive and resilient economies. Impact investors and philanthropy are very important, but so are traditional and more mainstream capital providers. We learned that the participation of mainstream investors is almost always a requirement to take promising market-based interventions to scale – whether in housing, health, climate or any other issue area. To advance their involvement in a meaningful way requires investing in financial innovation and fostering new forms of collaboration between governments, commercial and institutional investors, philanthropy, and communities; and leveraging resources for larger systemic impact, while ensuring community ownership and rebalance of power of different stakeholders along the way. Collaborations between different types of institutions can be powerful. One example of a successful collaboration for us is Garantie Solidaire, a partnership between foundations and a financial institution, where Foundations guarantee lending provided by the financial institution to social economy organizations. By strategically combining our institutional assets – foundations’ balance sheets and financial institution’s operational capacity – and building on our relative strengths we built a efficient and effective program for an entire sector. Over the course of 3 years, we have guaranteed a total of $2.8 million which in turn has enabled $33 million in financing across 12 projects.
Another collaborative effort we were involved in was the Future Economy Lab, a global research and design lab, focused on innovating how we create financial mechanisms and strategies that catalyze the growth of inclusive and resilient economies. It’s first iteration took place in Montreal and focused on the Climate Economy, engaging over 50 organizations – from pensions funds to entrepreneurs – in a research and design process which resulted in an initial $50 million climate-focused blended finance fund, paired with an ecosystem program to support the development and growth of climate innovations and entrepreneurs, while promoting equity, diversity and inclusion across the climate economy.
As we face an unprecedented global moment, in which the climate action urgency is undeniable, global awareness of systemic social injustice is at an all-time high, and we are in need to restart entire economies; philanthropy has a unique opportunity to reimagine not only how it corrects the failures of past socio-economic systems but influences the fabric of emerging ones. Few actors in our economy are as uniquely positioned as many Foundations, with capital that spans the entire spectrum of sustainable finance, with an ability to take risks with its philanthropic and investment capital and mobilize a range of non-financial assets to develop the market and drive larger systems transformation. We hope to continue to learn from others, as we have done until now, to do more of this and better, and continue to adapt our philanthropic practice to the needs of our time.
McConnell Impact Investing Annual Portfolio 2019 Report: https://mcconnellfoundation.ca/report/mcconnell-foundation-impact-investing-annual-report-2019/ (2020 Report to be released in June 2021).
The Montreal Future Economy Lab Report can be accessed at the link: https://mcconnellfoundation.ca/wp-content/uploads/2020/12/Future-Economy-Lab-Montreal-_-Final-Report-Dec-9-2020.pdf
Arian Okhovat, Communications F20 | firstname.lastname@example.org