How do we respond to the social and economic impacts of COVID19? (Part 1)

We are living through an extraordinarily challenging moment in time. It almost feels like we are trying to find our way through a foggy forest without a compass, map, or trail markers. Circumstances around us are shifting hourly and daily at a local and global level; new measures are being announced by governments, individuals and organizations continue to try to adapt and adjust to the changes and challenges they face, and additional resources and supports are being deployed in order to aid individuals and the economy through this incredibly challenging time. We are faced with a concurrent health, economic, and social crisis with immediate and long-lasting effects.

It is vital that we focus on the immediate health crisis as individuals and institutions. But we must also seek to understand and prepare for the short-term and medium-term social and economic impacts of the crisis. Although there are no precise parallels, the economic and social shock of COVID19 may have similar complications and consequences to those felt during the rapid decline of the Great Recession in 2008 and the slow de-industrialization of a number of regions in Canada, North America, and parts of Europe in the eighties and nineties.

In the impact investing and social enterprise world, many organizations have completed their immediate steps to re-organize their operations to a completely different work environment. Many colleagues have begun to assess potential impacts and develop their own responses to COVID-19 both for their own organizations (including their investees or clients) and the ecosystem.

We want to inform our response and the response of the ecosystem by:

  • Identifying relevant trends that can help understand the magnitude of the challenge we are facing;
  • Identifying the principles that should guide our response and the gaps in the response to the current crisis;
  • Exploring the role of impact investing and social enterprise in the response; and
  • Reviewing how other organizations and jurisdictions are responding to the crisis.

We hope these insights will help inform the ongoing response of governments, communities, financial institutions, and ecosystem partners in impact investing and social enterprise. Together, we can find ways to support each other and increase the impact of our efforts, both for the immediate emergency and medium-term recovery and regeneration. We are facilitating regional discussions in Canada over the coming weeks to identify and discuss potential solutions and actions.

What are the macro-economic and sector trends?

We have begun to identify a number of key trends:

  • Unemployment is increasing at an unprecedented rate in Canada, with 1.6 million Canadians applying for Employment Insurance as of March 30. Although unknown, it is projected this figure will grow to 3 million. This follows a similarly challenging experience around the world. It is possible that the US will experience an even deeper hit in employment, with the potential for 32 per cent of Americans out of work according to the Federal Reserve Bank of St. Louis.
  • Nonprofits and charities will experience a significant impact due to COVID-19, with an expected loss of between $9.5–15.7 billion and layoffs between 118,000–194,000 people. Charities and nonprofits account for 8.1 per cent of GDP and employ 2.4 million Canadians of which 70 per cent are women. Social enterprises are facing similar challenges, either with temporary or permanent closure or attempting to re-tool or adapt to respond to the crisis. Enterprises like Fresh City Farms are retooling their business to scale and to hire those laid off from the restaurant and food service industry.
  • According to a preliminary analysis by McKinsey, the overall impact on economic growth of COVID could be significant, with the potential for an 8–13 per cent reduction in GDP in the US and more substantial impacts in Europe. These macro-economic impacts may be felt for a prolonged period, extending well into 2021 before a recovery takes hold. There are some who have identified the potential for a steeper economic decline akin to a Depression. It is uncertain what will happen as we have never shut down entire segments of the modern global economy for a protracted period.
  • It is expected that women, rural Canadians, and indigenous communities will face the most severe social and economic impacts of the crisis.
  • The crisis is having a negative impact on the current operations of critical intermediary organizations that provide capacity building and capital to social enterprises, nonprofits and charities, and plans for starting or scaling place-based impact funds. Organizations like Innovation Works in London, Ontario and Centre for Social Innovation in Toronto, Ontario are facing significant financial losses without any tenants in their co-working facilities. It is also clearly impacting the organizations we support, from layoffs to business closures.
Source: COVID19 Briefing Materials. McKinsey and Company. March 25, 2020.

There are also clear trends in the initial response:

Source: Global News. March 28, 2020.

How do we collectively need to respond?

It is evident that there are at least two phases to the response for COVID-19, including:

  • short-term response to the emergency over the next 1–3 months to provide relief and resilience to organizations and enterprises that are facing a significant crisis of loss of customers and cash flow, and to provide support to those that are seeking to adapt, retool or scale-up to respond to the crisis.
  • medium-term response to recover and ensure regeneration over the following 3 to 12 months and beyond. There will be a potentially unprecedented need to support small and medium-sized businesses, a greater need for affordable housing projects, and other specific needs for the nonprofit sector.

The following principles should guide our response:

  • The health and safety of our families, colleagues, and communities, and those responding to this crisis on the frontline is paramount. We cannot respond if we are not safe and healthy.
  • Speed is important. We should attempt to respond as rapidly as possible to the social and economic impacts of the crisis to ensure we have short and medium-term responses in place.
  • Governments must lead the relief response with substantial investments and policy responses to the social and economic impacts of the crisis.
  • But we cannot sit on the sidelines. We have a shared responsibility to be a small part of the community and national response to the crisis.
  • A cross-sectoral effort including government (federal and provincial), private and community sector will allow us to best respond to the crisis. The combination of resources mobilized across sectors will ensure greatest resilience.
  • Social enterprises, charities and nonprofit organizations have a critical role to play in the short and medium-term response to the crisis. Intermediaries, funders and investors in Ontario and across the country can help ensure these organizations have the right capital, particularly for recovery and regeneration. A response must be reasonably within scope of the resources and capacity of organizations.
  • Regional efforts are best positioned to direct resources to communities and organizations and enterprises, at a provincial and sub-provincial level.
  • There is a need for financial supports (grants in particular should be the focus in the short-term, but also loans and possibly equity capital) and non-financial resources (financial advice, coaching, etc.) for organizations to navigate the crisis. Blended capital strategies including grant and investment capital, alongside human capital (eg. good advice) will be critical to delivering effective relief and recovery.
  • A coordinated response from those providing resources will ensure maximum impact, reduce duplication, and get resources to those who need it most.
  • We cannot retreat from our global commitments and partnerships, particularly in a world that will need to double down on resilience and regeneration in the years and decade ahead.

Where are the gaps in the current response by governments, as well as the private and community sector?

There are clear gaps in the current response strategies by the public, private and community sector:

  • Wage subsidies will protect many jobs, but it may be insufficient to prevent nonprofits and for-profit businesses from retrenching or closing their operations. Charities and nonprofits are expecting a major loss of income that will never be replaced.
  • Standard lending solutions may be insufficient or not a fit for enterprises that will have no capability to repay, either in the short-term or long-term.
  • The social and economic impacts in rural Canada may be the most severe, and there is an inadequate supply of resources available to support enterprises and organizations based in rural Canada.
  • Women entrepreneurs will be disproportionately impacted by the short and medium term impacts of the crisis. Moreover, as an overwhelming majority of those employed in the sector, women will be more heavily impacted by losses in the nonprofit, charitable and social enterprise sector.
  • There is an uncoordinated response by funders, investors and intermediaries at a regional and national level to dedicate resources to respond to the crisis. Although it is understandable given the speed of change, it is vital that we get organized to deliver short-term relief and to effectively manage recovery and regeneration.
  • There is limited short-term capacity and capital for organizations and enterprises to re-tool or adapt their business to respond to the crisis.
  • Arms length organizations providing financing to entrepreneurs like BDC and EDC are doing incredible work, but they may be stretched beyond their limit to meet the demands of so many.
  • Support and capital intermediaries that can effectively assist enterprises and organizations who can provide relief and support recovery lack sufficient resources to meet the demand and need to support organizations who are seeking to adapt or manage through the crisis.
  • Investors may retrench on any new commitments to invest (particularly locally), which may mean less capital for the resilience and regeneration phase of our response, further hampering growth. Prospective or new impact investors may be more challenging to secure in the weeks and months ahead as portfolios take major hits.
  • Many major financial institutions have not announced or implemented strategies to ensure flexibility or to dedicate new resources for relief or recovery efforts, beyond mortgage relief and service adaptation.
Lost Acre Variety, West Montrose, Ontario

What is the role of impact investing and social enterprise in the response to COVID19?

Let’s be clear that impact investing and social enterprise is not the answer to COVID19. You cannot contain a virus or its aftermath with an investment or business strategy, even one with impact as its North Star.

But impact investing and social enterprise, and the movement of enterprises, investors, and leaders have a critical role to play in how we respond, particularly in the medium-term recovery and regeneration efforts that seek to address the social and economic effects of the crisis. They must be a part of a broader strategy that includes a continued commitment to good public policy and community action.

Impact investing and social enterprise have a critical role to play:

  • The mandate is to mobilize capital and enterprise (nonprofit and for-profit) to tackle our most pressing problems, from inequality to climate change. The most intractable problem we may face in this generation is the emergency relief, recovery and regeneration of COVID19. Many social enterprises are already stepping up by adapting their businesses, from local distilleries producing sanitizer to local, ethical food delivery businesses employing laid off workers to sustainable fashion companies producing gowns and masks for frontline health care workers. And social enterprise organizations like Kids Code Jeunesse who can deliver education online for kids and parents will become even more important in the weeks and months ahead.
  • Impact investing and social enterprise strategies support local economic and social development including job creation and retention — a critical approach following the immediate aftermath of the crisis. Impact investing in particular often fills the gap of unmet capital and capacity needs in particular regions or population groups that face economic and social challenges and barriers.
  • Impact investing often seeks to provide critical capital to small and medium-sized businesses, nonprofit organizations (including affordable housing providers and community real estate) and high impact projects. There will likely be a significant capital gap when we enter the recovery and regeneration phase. New or existing place-based funds across Canada will be particularly critical in providing this capital in a variety of regions.
  • Social enterprise intermediaries can provide technical assistance and advice to organizations and enterprises through workshops, bootcamps, accelerator programs, and one-on-one coaching as they seek to manage the short-term economic shock or adapt to meet short-term community needs, or to adjust to ensure they can be successful during the recovery and regeneration phase. Organizations like Esplanade in Quebec are already adjusting their venture programs to deliver triage supports, and the Women of Ontario Social Enterprise Network (WOSEN) is taking similar steps.
  • Moreover, the impact investing and social enterprise sector infrastructure that has been built over decades, from impact funds to accelerators to networks, can be re-deployed to respond to the crisis. The most appropriate analogy is the conversion of hotels to hospitals during war-time. Similarly, impact funds may be capitalized and redeployed to move grants, loans and equity investments out to businesses and organizations that need it most.
Hand sanitizer recently produced by Kinsip, a local brewery in Prince Edward County that works with the local Community Futures organization

If history is a guide, impact investing and social enterprise will be an important feature of our response to the crisis:

Source: Rosenthal, Clifford. Democratizing Finance. June 2018.

What are organizations and jurisdictions doing to respond?

We should recognize the great work of organizations like Imagine Canada and the Save Small Business campaign to advocate for critical relief measures to support businesses, nonprofits and charities in Canada.

But there are already a number of examples of the use of impact investing (or blended finance) strategies to respond to the crisis:

  • The New York Community Trust has established the $75-million NYC COVID-19 Response and Impact Fund, which is offering loans from $250,000 to $3 million that can be used by social enterprises for a variety of purposes, including covering delays in government payments for services delivered, postponed fundraising events, and increased expenses to deliver services which will be reimbursed in the future.
  • The Restaurant Workers Community Foundation in New York City has established Restaurant Workers COVID19 Crisis Relief Fund to finance organizations supporting on the ground efforts for restaurant workers, to provide zero interest loans, and to establish a relief fund for individuals impacted by the crisis.
  • The African Development Bank issued a record breaking $3 billion social bond to fight the economic impacts of the COVID crisis. The bond will seek to provide ADB with the capital it needs to meet its mandate to provide, “…financing for access to health and to all other essential goods, services and infrastructure.”
  • Impact investors like Open Road are seeking to deploy short-term bridge loan financing to social enterprises and nonprofits, and they are working with organizations like the Global Impact Investing Network (GIIN) to mobilize more investors to take this approach.
  • The Midland Area Community Foundation in Michigan is donating $1 million to respond to COVID-19. The funds will be available for nonprofits, individuals and small businesses impacted by the crisis, and they have established two funds to provide this relief: COVID-19 Response Fund and the COVID-19 Impact Investing Fund. A range of other US foundations have established response funds. Philanthropy Northwest provides an excellent summary of these models.

So what do we do?

What we do next is the biggest question on everyone’s mind.

Although we do not have all of the answers, we have identified a few next steps:

  • Share resources that are available to social enterprises, nonprofits and charities that will provide relief at this time.
  • Convene sector stakeholders to discuss and coordinate the ecosystem response. We are hosting conversations in British Colombia and Ontario over the next few weeks, and we hope more conversations will take place across the country.
  • Identify actions that can be taken by the impact investing community, financial institutions, and governments. We will explore some potential ideas for actions in our next post.

Until then, we wish you, your friends and your families good health in the days and weeks ahead. And please stay home as much as possible to help #flattenthecurve.

SVX is financial services firm & impact investing platform connecting ventures, funds, and investors to catalyze investment capital for impact. #ImpInv #SocEnt