Social investments for the marginalized take off in North America

Illustration by Pete Ryan

Health is more than health care, according to Healthify, an early-stage social enterprise based in Baltimore that bridges Medicaid patients with critical social services.

The tech company wants to end the causes of negative health that arise outside of clinics. Its software platform gives health care payers, hospitals and providers a tool to search for social services, identify patients’ needs and eligibility for benefits, and coordinate care. Low-income patients get access to housing, nutrition and job search assistance to improve their health and economic stability.

By investing $500,000 (U.S.) equity in Healthify in 2016 – and helping facilitate a total capital raise of $2.5 million – Acumen is now seeking to scale the social enterprise.

“We think they will play an important role helping low-income patients manage the root causes of their health problems,” says Catherine Casey Nanda, director of Acumen America. It offers a great opportunity to change the way the U.S. health care system addresses social factors that influence someone’s health, she says.

This was the first investment within Acumen’s new U.S. portfolio. It’s an example of the bold new experiments underway in the burgeoning field of social investing for poverty alleviation in North America.

Globally, 800 million people are still living on less than $1.25 a day. But there are elements of both the developing and developed worlds in all countries.

After investing $101 million across 92 social enterprises in Africa, South Asia and Latin America since 2001, New York-based impact investor Acumen is now expanding at home.

The American dream is increasingly threatened by income inequality and low prospects of social mobility for the marginalized.

One in five children and 43 million people live in poverty in the U.S. And 40 million people are food-insecure.

“The problem is enormous,” says Nanda. “We see a huge opportunity to use some of the things that America is great at – the power of American entrepreneurship and innovation – to tackle poverty at home.”

But the talented entrepreneurs dedicated to solving social challenges often lack the risk capital and management expertise needed to scale, according to Nanda.

Acumen’s new U.S. portfolio invests capital and business support into social enterprises in three sectors: health care, workforce development and financial inclusion.  Philanthropic funds from the Robert Wood Johnson Foundation, Barclays and the Hitachi Foundation were invested by Acumen America in five social enterprises in 2016, the program’s inaugural year. Those investments included a company offering affordable insurance and loans for low-income American Latinos and another that is expanding access to employment for trade- and vocational-school students.

A growing number of impact investors are aiming to generate positive social or environmental impact alongside financial returns. But in Acumen’s case, patient, high-risk-tolerance capital is invested for the long term, up to 10 years, and exit returns are recycled into new social investments.

North of the border, Canada is seeing rapid growth in impact investing. There was $9.2 billion (Canadian) of assets managed as impact investments in 2015, an increase of 123 per cent over 2013, according to the Responsible Investment Association, a Canadian social investment trade association.

Globally, a 2015 survey of 46 large-scale asset managers reported $60 billion (U.S.) in impact investments in their portfolios, according to the nonprofit Global Impact Investing Network.

Many new social investments are being structured as partnerships between public agencies, private investors and nonprofit service deliverers.

Partnerships represent a growing push towards placing peoples’ needs – and project outcomes – at the centre of social programs, explains Adam Jagelewski, director of the MaRS Centre for Impact Investing, a hub supporting social finance development in Canada.

“It’s ineffective for…the Ministry of Health, because they have the largest budget, to think that it’s only their responsibility to work on programs related to a homeless population,” explains Jagelewski. Research shows there are mental health, housing and justice issues, and they are all interconnected, he says.

Healthify is itself part of a larger, cross-sector effort.

Healthify built the software platform and works with payers, insurance providers and health workers to implement the service.

And this is taking place after a shift in government policy.

Rather than being paid on a fee-for-service basis, payers and providers are now paid a single amount to keep a patient healthy, which encourages them to pay attention to patients’ social needs outside of the health care system, according to Acumen’s Nanda.

Another cross-sector social investment, an affordable housing fund for low-income indigenous peoples living on reserves in Canada, is being championed by the J.W. McConnell Family Foundation, a private Montreal-based grantor and impact investor.

Sixty per cent of on-reserve homes need repairs, and over the next 10 years there is a projected housing deficit of 80,000 units, according to Erica Barbosa Vargas, the McConnell Foundation’s director of solutions finance. But since land on reserves is owned by the Crown and cannot be used as security for a loan, conventional banks have been reluctant to lend, she explains.

To tackle the problem in the Huron community of Wendake near Quebec City, the Aboriginal Savings Corporation of Canada (ABSCAN) offers residents loans to build, buy and sell their houses. Out of the 400 participants in ABSCAN’s program over 10 years, the annual loss rate has never exceeded 2 per cent.

The McConnell Foundation has since partnered with the federal Ministry of Indigenous and Northern Affairs Canada to finance and expand ABSCAN’s Wendake model to four communities across Quebec. And a commercial lender has come on board.

But the model can only scale nationwide by increasing the pool of capital from other impact and mainstream investors.

Roughly $12 to $13 billion is needed to address housing on reserves across Canada, according to Vargas. That scale exceeds government and philanthropic capacity, and requires financial vehicles that combine different capital sources, she says.

The growth in impact investing is being accompanied by a push towards more rigour in social impact measurement.

Under particular scrutiny are social impact bonds (SIB), a new structure for financing social programs that requires outcome-based metrics.

In a SIB, investors finance interventions upfront, which are then delivered by social service providers. Investors are repaid by government and earn returns only if there is improved performance.

SIBs typically focus on prevention for the vulnerable. Governments can potentially realize cost savings through prevention, and transfer risk to investors.

Since the first SIB was introduced in 2010, over 50 of these bonds have become operational and two dozen more are under design, with the U.K. and U.S. experimenting most.

Canada’s first SIB was introduced in the Province of Saskatchewan in 2014 to provide at-risk single mothers with affordable housing.

But the few completed SIBs have yielded mixed results and performance assessment has been suspect, according to John Loxley, a professor of economics at University of Manitoba who is researching SIBs.

A problem arises from the fact that investors, alongside the government, get to sign off on outcome metrics, giving them the power to stack the deck in their favour.

“It looks like [in the Saskatchewan case] they are meeting their targets, but they’ve done it by choosing women who would’ve met the target anyways,” says Loxley. “It’s cherry-picking, it’s not genuine.”

But SIBs have a five to 10-year maturity and the jury is still out on their performance.

And Jagelewski from the MaRS Centre for Impact Investing says that the government has a strong and equal say, as do the provider and the investors, in setting performance targets.

The MaRS centre recently helped structure a new three-year, $4-million SIB – in partnership with the Public Health Agency of Canada, the Heart and Stroke Foundation, and 11 private investors – aimed at helping seniors with pre-hypertension in Toronto and Vancouver control their blood pressure.

“The biggest value proposition of the model is that governments pay if and only if the intervention is successful,” he says. “The [government] is defining what success looks like and they are going to pay only if that success measure is hit.”

For its part, Acumen has pioneered a customer-first approach to impact measurement called “lean data.”

Over six weeks in 2015-2016, Acumen’s Lean Data Sprint saw its companies gather data from their customers through a survey sent via SMS and follow-up phone interviews. Eighteen social enterprises provided 500 of their customers’ phone numbers and permission to contact them.

Customer responses revealed many insights, from the impact of a solar heating system in Uganda to that of an agricultural loan to smallholder Kenyan farmers.

Next year Acumen America will implement several lean data projects with its U.S. investees.

“We think it’s critical not only to understanding our impacts but also to help companies get customer insights that will help them drive better products and services,” says Nanda.

Acumen is leading the charge in impact measurement and in social investments to tackle the systemic causes of American poverty. And with plans to grow its U.S. portfolio to 25 social enterprises in five years, there is still hope for a more inclusive society.

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