Changing Policy to Increase Impact Investments
By Michael McLaughlin (MBA’15)
Can opportunities for impact investments – dollars that yield both financial and social returns for investors – be increased if policy adjustments are made? What are some of the unintended consequences of current national regulations and whom do they affect if changed? These, and other questions were raised in a GSEI meeting co-convened with the US National Advisory Board (NAB) to the G8’s Global Social Impact Investment Task Force: a group of business, non-profit, and government leaders in impact investing from around the US.
Supported by a grant from the Case Foundation, a NAB member, the meeting brought together impact investing stakeholders from business, government, and foundation investors, to intermediaries, to nonprofits, funds, and other investment recipients, in order to offer input on potential policy change recommendations.
After an introduction to the meeting by GSEI’s Executive Director Ladan Manteghi and Social Finance Co-Founder and CEO Tracy Palandjian, US Department of the Treasury Deputy Assistant Secretary Don Graves expressed President Obama’s strong support for social impact investing. Graves highlighted an Obama Administration-created Pay for Success incentive fund worth $300 million for social innovation initiatives that achieve savings by improving outcomes, not simply serving more people.
During a panel discussion moderated by Sean Greene of Revolution, Andrea Phillips of Goldman Sachs suggested that the best way forward was to build on community development successes by incentivizing private investors using tax benefits and reducing risk of such investments through the Treasury. Ben Hecht of Living Cities explained that one of the main goals of impact investing policy for social enterprises should be to stabilize revenue streams over longer time horizons. Often, much of the problem is that enterprises lose their grant funding just as they are gaining speed and as a result, many highly successful organizations never reach their potential for serving the community. Overall, the panel agreed that every effort should be made to standardize impact investing so that it can be scaled.
Georgetown Professor Melissa Bradley highlighted the need to include the demand side of the social enterprise equation during the participant discussion about what communities truly need. A representative from the District of Columbia Mayor’s office pointed out that local governments need support to grow complex investments like social impact bonds. Structurally, technical skills and human capital lack at the local level to assess which enterprises are the most successful. If the priority is to move policy away from paying for the number of people served, to outcomes like decreased poverty, as the NAB discussion suggested, this will be an important structural barrier to overcome. The grant method of funding per project is also a barrier to this policy change because funds should be targeted toward supporting successful social enterprises, not just singular projects.
Breakout discussion also covered five key areas for potential policy change highlighted in a draft NAB report:
- Expanding catalytic capital to mitigate risk and thus expand impact funds available
- Expanding the reach of programs by increasing agency flexibility to deploy “patient capital”
- Removing barriers by simplifying policy to make it easier to include impact investments in investment portfolios
- Improving metrics to focus on outcomes and to make it easier to measure impact
- Creating a culture of knowledge-sharing of best practices in impact transactions.
NAB members and participants agreed that normalizing social returns as a legitimate goal for all investors was very important to growing the space. There was also support for positioning impact investing as an investment philosophy, not just an asset class, so that all the relevant players from foundations to commercial investors have a role in the new impact investment landscape.
The final report from the NAB meeting will be published in late June 2014.