As the impact investing market in the U.S. continues to grow in size and inventiveness, 27 financial experts have gotten together to form the U.S. National Advisory Board (NAB), a group dedicated to hammering out specific ways the U.S. federal government can encourage that market’s continued development — or at least avoid getting in its way.
After roughly a year of discussions to that end, the group, which includes professionals from NYSE Euronext, the Pension Benefit Guaranty Corp., Bloomberg, Duke University and the impact investing divisions of Goldman Sachs Group and Morgan Stanley, on June 25 released a 64-page report, “Private Capital, Public Good: How Smart Federal Policy Can Galvanize Impact Investing — and Why It’s Urgent,” outlining dozens of recommended actions it says the federal government should take to galvanize the still tiny impact investing sector.
“We tried to be practical and at the same time ambitious in our policy recommendations,” says Tracy Palandjian, CEO of Boston-based nonprofit Social Finance U.S. and a co-chair of the NAB. “These are long-term systems-change recommendations.”
An impact investment is one that targets, alongside a specific financial benefit for the investor, some sort of additional social or environmental benefit. Impact investors may issue microloans in the developing world or support enterprises that seek to address social problems while turning a profit. Other impact investing approaches are more complex, like the social impact bond, first launched in the U.S. in 2012. Social impact bonds invite private investors to pay the up-front funding of government-supported social programs and then pay those investors back when those programs prove successful and accrue savings to their supporting governments. A J.P. Morgan/Global Impact Investing Network (GIIN) survey of 125 major impact investing players released in May showed a total of $46 billion in impact investments under management, a number likely, according to the J.P. Morgan/GIIN report, to increase 19 percent by the end of 2014. Still, as the report points out, this represents a scant 0.02 percent of the $210 trillion invested via the global financial markets.
To encourage that percentage to grow, many of the report’s recommendations call for a redrawing of lines and definitions to offer incentives for social-minded investment. For example, the authors suggest that the Department of Labor offer new guidance on the Employee Retirement Income Security Act (ERISA) definition of fiduciary duty for pension plans, clarifying that an investment approach integrating economic, environmental and social factors is consistent with the law.
The report suggests writing rewards for impact investing into the tax code, perhaps by lowering corporate tax rates for qualified impact businesses — that is, enterprises deemed to have positive social impact — and cutting capital gains rates for investors who help fund them. Another incentive would be a charitable tax deduction specifically for impact investments.
Andrea Phillips, a vice president of the Urban Investment Group at Goldman Sachs in New York and member of the NAB, notes that in her conversations with potential impact investors, a form of tax incentive has come up as a possible sway for those who remain on the fence.
“I think it would be particularly interesting to high-net-worth individuals,” says Phillips. “If what we’re talking about is, ‘What are some of the ways the government could help facilitate this emerging marketplace?,’ I think that’s one.”
The NAB report also has a large section arguing for a need to allow for more flexibility in foundations’ legal structure. Such nonprofit organizations have been on the front lines of testing various new impact investment approaches, and in the process some have blurred the lines between foundation and investor, or investor and small business. The U.S. Small Business Association’s 7(a) loan program, for example, offers loan guarantees and other capital to small businesses, but it isn’t allowed to extend its largesse to nonprofits, the report notes, adding that federal agencies such as the SBA and the Department of Housing and Urban Development should update their financing programs to encourage impact-investing-related businesses.
Other recommendations in the report focus on collaboration across agencies and public-private divides. Perhaps the most major of these recommendations involves the freeing up of the vast amounts of data captured by government agencies, so that impact investors can better judge the effectiveness of social investments and learn which companies tend to wind up on the blacklists of various government watchdog groups, such as the Environmental Protection Agency.
Curtis Ravenel, global head of sustainability initiatives at Bloomberg in New York, says his firm’s hunger for these data represents its biggest stake in the report’s efforts. He says that in an attempt to substantially build upon Bloomberg’s environmental research offering, for example, his team tried to pull data from the EPA on information such as companies’ water usage, water violations, chemical usage, chemical violations and more. But the project ultimately drowned in data.
“There’s all this data, but it was designed to inform a general public about the risks in their neighborhoods,” he says. “The data itself is not meant to be aggregated at the issuer level.”
He adds that partnerships with relevant government agencies are a first step in pushing through that impenetrability. “One thing we’re calling on them to do is to not only make the data available to the public but to work with various groups like ourselves — anyone who’s working on this issue — to help them improve the data sets so they can be used by different constituents,” says Ravenel.
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