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U.S. federal, state and city governments are moving toward testing a British idea for social programs: pay only if they achieve desired results

It's basically a no-lose proposition for government.

It's really the perfect tool for these tight fiscal times where so many core services are also being cut.

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.

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.

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.

Local stock exchanges once were common but faded as face-to-face trading shifted to electronic platforms and the biggest U.S. stock-exchange operators acquired smaller rivals. Among the few remaining exchanges, the former Philadelphia Stock Exchange is now an options exchange owned by Nasdaq OMX Group Inc. A minicomeback might be around the corner. In April, Hawaii lawmakers agreed to begin examining the state's securities laws to possibly create a "locally focused, Hawaii-based stock exchange."

In Toronto, organizers of the Social Venture Exchange, or SVX, are expected to launch this summer a specialized exchange to link institutional investors with local companies having a social or environmental impact. The fledgling market is backed by Toronto Stock Exchange owner TMX Group Inc. Local exchanges are also in the works in Europe, Africa and Asia.

But other efforts at "loca-vesting," as the concept is known, have struggled. Investbx opened in 2007 in the U.K. city of Birmingham to serve small companies in the West Midlands region. Last month, the exchange was sold for a token £1 ($1.6352) after bringing just three companies to market and absorbing more than £3 million ($4.9 million) in public subsidies.

Local stock exchanges once were common but faded as face-to-face trading shifted to electronic platforms and the biggest U.S. stock-exchange operators acquired smaller rivals. Among the few remaining exchanges, the former Philadelphia Stock Exchange is now an options exchange owned by Nasdaq OMX Group Inc. A minicomeback might be around the corner. In April, Hawaii lawmakers agreed to begin examining the state's securities laws to possibly create a "locally focused, Hawaii-based stock exchange." David Fisher, an economic development and business consultant involved in the effort, says the electronic-only exchange would help Hawaiian investors keep their money closer to home, while connecting local entrepreneurs with capital. Honolulu's stock exchange shut down in 1976. In Toronto, organizers of the Social Venture Exchange, or SVX, are expected to launch this summer a specialized exchange to link institutional investors with local companies having a social or environmental impact. The fledgling market is backed by Toronto Stock Exchange owner TMX Group Inc. Local exchanges are also in the works in Europe, Africa and Asia.

Late last week, Governor Deval Patrick and the Commonwealth of Massachusetts quietly released a Request-for-Information (RFI) on an esoteric new public financing concept. The state cautiously issued its RFI without much fanfare. No trumpets or flags, just an understated press release announcing its interest in the issuance of a Social Impact Bond.

Let's be clear: SIBs are not a silver bullet. The very nature of a capped return probably means that SIBs will need to be kick-started by philanthropists and other "impact-first" investors with PRIs before they gain mainstream acceptance. Unlike conventional fiduciaries, philanthropists more easily can square SIBs with their investment priorities. Nonetheless, if this model is proven to work, such experimental philanthropy might be viewed as the venture capital of an era of social innovation.

As the field evolves, we should expect to see a flurry of new groups seeking to design such public-private partnerships. Today the field is sparse. Social Finance, a US group launched by Sir Ronald and Mr. Blood, presently appears to be the only significant player in the field. But, many more will come as impact investors, social entrepreneurs and new intermediaries spring up to scale SIBs and launch new innovations.

The human capital performance bond proposal differs from the more familiar social impact bond in three important ways: It is truly a bond.  The social impact bonds -- as used in the UK, explored by the Rockefeller Foundation and Nonprofit Finance Fund in the U.S., and profiled here on SocialFinance.ca -- are really equity investments where the investor’s capital is at risk. Consequently, rates of return can run as high as 14%. Not the case in Minnesota. Rather, investors are essentially guaranteed their money back and the rate of return is expected to be around 4%. The anticipated upside of this model is that a lower required rate of return means more organizations will be able to demonstrate economic value that beats that rate and thus allows them to compete for these new funds. The payment timeline is different. In the social impact bond model, organizations receive the cash upfront and must hit pre-determined benchmarks in order for investors to get their money back. With human capital performance bonds, the organizations (mostly nonprofits) carry most of the risk and are only paid if and when they achieve their goal. They would need to secure PRIs or patient capital to meet their interim cash flow needs. The incentives are different. Social impact bonds depend on investors engaging in a due diligence process to evaluate the likely effectiveness of particular social interventions. The model thus uses investors to create the market forces that purportedly will enhance the efficiency of resource flows. The human capital performance bond proposal, in contrast, does not give investors that role.  An intermediary (details yet to be worked out) would fill this gap.

A special report on the innovative business models social entrepreneurs are inventing

special

In the pages that follow, we shine a light on this new universe of social entrepreneurship. First, we meet Fred Keller, the founder of Cascade Engineering, a $250 million Michigan plastics manufacturer, who recently turned his business into a B Corporation, the highest standard for socially responsible businesses. Then we investigate five more business models—and meet the entrepreneurs who have adopted them.