Policy Levers for Impact Investing
By Lauren Morrell
Though we may overlook its importance, conditions in the public sector can often have a considerable effect on the success of private impact investments. In light of this, the White House has been adjusting policies to promote impact investing and has shifted focus from “what government can do, [to] what government can allow markets to do better,” explained Annie Donovan, the former Senior Advisor to Obama’s Office of Social Innovation and Civic Participation during a presentation at the 25th annual SRI Conference.
JP Morgan assessed that 42% of the $46 billion in impact investments are coming from development finance institutions, which Elizabeth Littlefield, President and CEO of the Overseas Private Investment Corporation (OPIC), described as “public sector entities whose job it is to catalyze private sector investment, while making a profit [for the U.S. Treasury] on their own.” Littlefield notes that the most exciting thing in the industry lately is the explosion of investments being made, increasing from $8 million in 2008 to $1 billion in 2010.
In the domestic market, Donovan cited four policy levers that are spurring impact investment: regulation, such as the JOBS Act (Jumpstart our Business Startups) of 2012 that enables equity crowdfunding for small businesses; direct investment through the CDFI Fund Agency (Community Development Financial Institutions); loan guarantees from the Small Business Administration, and a growing potential for tax credits to move capital into the industry.
Each of these policies has challenges in their development, and the SEC is moving slowly and vigilantly in their regulation of the crowdfunding scene. With crowdfunding, there are risks inherent to vulnerable borrowers engaging with non-accredited investors, and uninformed investors making poor decisions. However, the “opportunity to democratize capital,” as Donovan praised it, is worth the effort.
Social Impact Bonds, also known as “Pay for Success” bonds, are a new and innovative instrument taking off in blue and red states across the country. In this arrangement, investment banks back the financing of a social intervention. If the intervention is successful at meeting specified targets, the government pays the investment back. If the project is not successful, the bank absorbs the cost. Opposite of the “Fannie Mae” concept, failures are privatized and successes are socialized—an appealing concept for both the government and taxpayers.
There are deep challenges in the impact investing space, such as the misguided belief that there is a tradeoff between impact and return, and the lack of clarity on expectations for a successful investment. Littlefield is also concerned about hype: “Like it was for the microfinance industry, our advocates could become our worst enemies,” she explained.
However, naming three broad objectives for policy development, Littlefield shed light on the future of the public sector’s influence in impact investing: legal reform, such as removing regulatory barriers and fiduciary responsibility; efficiency, such as giving government agencies the flexibility and authority that helps them maximize their impact; and investment incentives.
The future appears bright for impact investing—all the more so because of policy changes that encourage and empower more of it.
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Posted: April 8, 2015