Nine policy wonks on how to catalyze private capital for public good



ImpactAlpha’s What’s Next series, produced in partnership with the Global Impact Investing Network, provides a platform for practitioners and experts to reflect on the future of impact investing.


ImpactAlpha, Aug. 26 – Impact investing is among the last of a vanishing species: a bipartisan issue. In the U.S., some of the few legislative achievements of the last several years have moved the ball forward on capital for low-income communities, enhanced global development-financing authority and new structures for entrepreneurs raising early-stage investments.

Specifically: Opportunity Zone tax incentives for investments in low income communities; the BUILD Act modernizing the U.S. Overseas Private Investment Corp.; and the JOBS Act back in 2012, which eventually jumpstarted equity crowdfunding. All received support from both parties. As ImpactAlpha has long argued, building businesses that boost livelihoods, build communities and restore the environment is a parade any politician should jump in front of.

Can impact investments build popular support for inclusive, sustainable and, yes, global prosperity? (podcast)

What’s next? Agents of Impact are brimming with ideas for policies to catalyze impact investing, judging from the strong response to ImpactAlpha’s call for suggestions as part of our What’s Next series with the Global Impact Investing Network. Fran Seegull of the U.S. Impact Investing Alliance says adapting accountability practices from community can “promote better outcomes for investors and communities alike.” OPIC’s Lara Driscoe looks forward to new tools and a doubled mandate (to $60 billion) for the new U.S. International Development Finance Corp. Investibule’s Arno Hesse and Amy Cortese (an ImpactAlpha contributor) point to crowdfunding improvements in a JOBS Act 2.0. The full list:

Adopt evidence and engagement from impact investors

Fran Seegull, U.S. Impact Investing Alliance

In the United States, decades of experience have shown how smart federal policies can unlock private capital for public good. Even in bitterly partisan times, leaders continue to come together around a catalytic agenda that enables and promotes impact investing. Policymakers should learn from the experiences of impact investors and field builders around the world by embracing key principles and practices of impact investing.

  • Stakeholder engagement. Government officials should try to consider all relevant stakeholders when developing policy. For instance, community development finance institutions, or CDFIs, are required to be accountable to the low-income communities they serve. Opportunity Zones could benefit from similar protections. While capital is starting to flow into these deeply distressed communities, the policy lacks mandates that would prioritize the voices of existing residents and other community stakeholders. The history of community investing has shown that accountability promotes better outcomes – for investors and communities alike.
  • Strong data and evidence. Strong data enables better decision-making. Opportunity Zones originally had strong reporting standards to ensure there was a way to evaluate success, but these were removed on procedural grounds. Recent efforts like the Social Impact Partnerships to Pay for Results Act (SIPPRA) pair government with private investors in projects that are measured for their long-term impact. Policymakers should continue to explore these kinds of efforts to promote consistent, transparent impact data across the market.
  • Government as an impact investor. Through the passage of the BUILD Act and the soon-to-be created U.S. International Development Corporation, the U.S. government will have greater capacity to invest directly in projects and companies that can lift up communities in developing countries. These investments open the door for other kinds of capital, including impact investments, and could potentially serve as a model for how governments can invest in social, economic and environmental impact.

Setting the Table: How government policy can help mobilize private capital for public good

Back policy ownership with political capital

Rosemary Addis, Impact Strategist

Governments are such significant actors that progress will be slower and less impactful without them. Strategic, targeted policy and action can catalyse activity, reduce risks for new entrants, build track records and enhance investor confidence. 

Amit Bouri’s piece highlights governments’ unique role as market steward, removing regulatory barriers, creating incentives and setting standards. The EU sustainable finance package is set to demonstrate how powerful this can be. Governments have other roles too. It is time to see more governments take a seat at the table, break from incremental policy measures and drive a step change. 

  • Signaling effect. As market actors, governments can send powerful signals. Backing policy ownership with political capital by appointing a champion, ideally a senior Minister, backed by a dedicated office of impact investment that provides a go to point for engagement with stakeholders across sectors and portfolios would send a clear signal they are open for business.
  • Market builder. As market builders, governments can change the game with strategic catalytic investment to seed flagship infrastructure to spearhead new funds to invest in local jobs, de-risk investment in infrastructure and demonstrate models of financing in areas of high demand and growth such as aged care and disability. The UK and EU led on adapting experience from other markets to establish wholesale funds to facilitate and enable intermediation necessary to drive the impact investing to scale. Their experience has encouraged commitments in Japan and South Korea and Canada.

Crowdfunding is democratizing who gets funded

Amy Cortese and Arno Hesse, Investibule 

One of the last major bills passed by Congress to enjoy overwhelming bipartisan support was the Jumpstart Our Business Startups (JOBS) Act of 2012, which modernized the nation’s outdated securities laws and ushered in investment crowdfunding. The Act was intended to open up new pools of capital for the nation’s job creators by allowing ordinary Americans to invest in small, local businesses. 

[Editor’s note: Amy Cortese is an ImpactAlpha contributor]

And it is quietly achieving those policy aims. In the three years since its key provision, Regulation Crowdfunding, went into effect, individual investors have committed more than $250 million to 1,800+ ventures seeking capital (only those that meet their funding target receive the funds).

  • Mitigating bias. Crowdfunding is not synonymous with impact investing. But a more democratized financial system can mitigate the bias that exists in conventional finance and channel capital to a diverse range of entrepreneurs. Our platform, investibule.co, aggregates community-funded offerings from 30+ funding sites spanning JOBS Act and intrastate crowdfunding, direct public offerings, and Kiva loans. As such, we have a unique view into this emerging field—and it is encouraging.
  • Returns on inclusion. More and more women and people of color are making use of community funding. And they are outperforming. Women-owned firms met their funding goals 78% of the time and people of color 75% of the time, compared to 66% for the group as a whole, according to an analysis of the first 2,000 offerings featured on investibule. That’s a stark contrast to the dismal track record of VC funding. B Corps, cooperatives, ‘Main Street’ businesses, affordable housing developers and nonprofits are also finding a warm response.
  • Aligned interests. By shifting decision-making power to those closest to a company—customers, neighbors and supporters—community funding aligns interests. Done right, it can help keep money local and build wealth in communities that have been locked out of economic opportunities.
  • Impact for all. Another key provision, Regulation A, has been used by innovators such as C-Note, American Homeowner Preservation and Iroquois Valley to open up their investment offerings to retail investors. 
  • JOBS Act 2.0. The JOBS Act is not without flaws. Industry groups and lawmakers have proposed improvements to the law, including allowing investors to be pooled into special purpose vehicles, raising the caps on how much can be invested and raised, and creating tax exemptions for small investors. 

Use public grants as ‘research and development’ capital

Allegra Wrocklage, Conservation Finance Network

One simple way that public policy has supported impact investing and has the potential to do even more is by doing what government does best – providing money for research and development. The USDA Natural Resource Conservation Service’s Conservation Innovation Grant program has for several years had a focus on funding pilot projects in conservation finance. Grant programs like this can fund the market development process (developing cash flow, creating protocols, defining units of measurement) that needs to happen before returns can be realized, a crucial step on the road to attracting impact investing but one that impact investors don’t necessarily have the resources to support.

  • Investable and repeatable pilots. Just a sampling of the pilots the Conservation Innovation Grant program has funded include: the development of a grasslands carbon protocol, which could unlock a new market for carbon investing; the creation of a water fund in the Delaware River watershed, which investors can pay into to help municipalities meet their Clean Water Act obligations; and the formation of an environmental price assurance facility to create certainty for investors on the future value of environmental credits. 
  • Seeding conservation. While all of these concepts hold promise for impact investing, without grant funding from the USDA to develop and test the models into investable and repeatable pilots then they would likely remain nothing more than good ideas! 

All tools on deck for enhanced U.S. development finance

Lara Driscoe, Overseas Private Investment Corporation

The Better Utilization of Investments Leading to Development Act (BUILD) Act, signed into law on October 5, 2018, is the product of a U.S. Government policy that successfully catalyzed impact investment. The law creates the new U.S. International Development Finance Corporation, or DFC, which brings together the capabilities of the Overseas Private Investment Corporation, or OPIC, and USAID’s Development Credit Authority, and introduces new and innovative financial tools to further spur private investment in the developing world. Bipartisan support for the BUILD Act arose from a recognition that OPIC and DCA’s model of mobilizing private investment must be enhanced because the needs in the developing world are too great for government resources to meet alone. 

  • By the numbers. Last year alone, OPIC catalyzed over $3.8 billion in private investment alongside its investments. With a doubled portfolio limit ($60 billion from $29 million) and the addition of more modern investment tools, like the ability to invest equity and provide support through grants and technical assistance, DFC will be equipped to catalyze substantially more private investment to advance development and grow economies.
  • All tools on deck. OPIC has deployed loans, guarantees, investment funds, and political-risk insurance to facilitate private-sector investment in developing countries for more than 70 years.
  • Impact quotient. The new law also sought to advance impact investing through mechanisms such as the creation of a chief development officer and the prioritization of low- and lower-middle-income countries. OPIC and DCA are engaged with impact investors and development stakeholders from inside and outside the U.S. government (including the GIIN) to develop a new state-of-the-art development impact measurement tool. Named the Impact Quotient, (“IQ”), the new tool aims to incorporate best practices from across the impact investing and development community to catalyze impact investment in countries with critical development needs. 

Encourage impact investing at foundations by taxing non-impact earnings

Bill Young, Social Capital Partners

A relatively easy yet transformational way for policymakers to encourage impact investing? Make foundations invest in social finance. The government should announce today that, starting in 10 years, the earnings of all foundation assets in traditional investments – and not directed towards impact – will be subject to taxation. The purpose of foundations is to do good. In the US, they hold approximately 900 billion dollars of assets or 4.8% of GDP. Yet only 5% of those assets are required to be directed to a foundation’s purpose. The rest can be invested tax-free in conventional stocks, bonds and other assets that have no social or environmental purpose whatsoever.

This is terrible public policy. As a society we give huge tax incentives to individuals to start a foundation and also forego taxes on their investment earnings forever. What does society receive in return? A mere commitment to donate a very small fraction of those assets to worthwhile causes. How smart is that?

  • Define what qualifies. A simple way to correct this situation is to tax earnings that aren’t making the world a better place which is, after all, why foundations exist. By setting a 10-year timeline before this tax change takes place, it allows an appropriate amount of time to define what qualifies as an impact investment, time for foundations to shift their asset mix without a fire sale, and it would catalyze the development of a robust network of intermediaries and impact investment opportunities to help foundations execute these changes.
  • Redirecting billions. By announcing it now, even though it won’t take effect for 10 years, this redeployment of investments to purpose would begin to happen immediately. Billions of dollars would be redirected to critical societal needs like affordable housing and clean energy. All this accomplished without the government spending a cent or risking any kind of capital loss.

Match public policy with education and ecosystem building

Luc Lapointe, TheBC.lab

As part of our Annual Summit and Regional events, Concordia launched the Coalition on Innovative Finance in order to help provide an unbiased space for strategic dialogues on impact investment and sustainable finance. We have been promoting the importance of public policies in emerging economies that would foster the deployment and strategic use of innovative finance solutions to address local needs and opportunities. While public policies are an important pillar for impact investment and sustainable finance solutions to scale up, we believe that it can only be successful if such policies are implemented with matching efforts in education and ecosystem building. We need to close the knowledge gap as well as increase engagement from financial service providers and ‘third sector’ actors. 

  • Market mismatch. Over the past years, the discourse between social entrepreneurs seeking funds and impact investors seeking opportunities can be summed up in a few words: i) lack of a pipeline of bankable projects, ii) limited in size, and iii) lack of expertise at the local level to structure projects beyond the chronic state of ‘pilotitis’.
  • New normal. The US is moving away from a ‘shareholder only’ model. The EU is using non-financial reporting as the new norm. As the world is moving towards a risk and return model that incorporates sustainability, the role of the social entrepreneur and impact investor is changing as well. No longer will they remain on the fringes of our economic model, but their values become the new standards.
  • System change. Until the sector becomes more inclusive and deals with the discourse on suitable rates of return that depletes resources, the murky theories of impact that spawn confusion about the quality of evidence to demonstrate impact, and sidelining of global and large regional companies – we shouldn’t not expect much in terms of public policies other than those that may not benefit the system!

Take another look at the Qualified Small Business Stock tax incentive

Joe Milan, Angel Span

Opportunity Zones get all the love but a little-known tax incentive pre-dating Opportunity Zones already rewards small business investors by allowing them to write off losses and eliminate taxes on gains. 

  • Risk mitigation for angels. If the investors were part of the first $1 million of money raised by the startup – the early money – and the company tries but fails to get traction and closes, those investors can deduct their losses against ordinary income. This deduction is ‘Above the Line’, which means the write-off lowers taxable income dollar for dollar. 
  • Upside incentive. If the startup has success that results in an eventual exit or profit for investors (in a merger, for example), then all profits up to $10 million are excluded from paying capital gains! The good news is, the investors don’t have to be part of the first $1 million for the exclusion to apply. Even later stage investments qualify, as long as it took more than five years from the time of investment to the exit or profits to be realized.
  • Geographically agnostic. Unlike Opportunity Zones, the QSBS have no specific geographic boundary (and therefore no intentional goals low-income communities). There is little knowledge of these incentives, and has been even less use to day. If you are an Impact investor, make sure you are investing in QSBS term sheets. Better yet, invest in a QSBS Fund so any losses are a good write-off, and you have a good chance to have tax-profits from investing in something you care about!

Bonus: Solve legal impediments to managing fiduciary and impact duties

Will Martindale, United Nations Principles for Responsible Investment

Investors have a fiduciary duty to integrate financially-material factors, including environmental, social and governance (ESG) factors, in their investment decisions. In addition, the Paris Agreement and UN Sustainable Development Goals have ramped up investor awareness about global sustainability challenges, with investors increasingly thinking about the way in which their investment activity contributes to impact, such as decarbonisation efforts.

While there are emerging pockets of excellence in technical understanding of impact, fundamental legal questions remain, including:

  • Are there legal impediments to investors adopting “impact targets”—for example—that an investor’s investment activity is consistent with no more than 1.5 degrees of warming?
  • Are investors legally required to integrate the sustainability impacts of their investment activity in their decision-making processes?
  • On what positive legal grounds could or should investors integrate the realisation of the SDGs in their investment decision-making?

The PRI, the UN’s Environment Programme Finance Initiative and the Generation Foundation launched A Legal Framework for Impact to understand how investors in major jurisdictions can manage their fiduciary and impact duties within existing legal frameworks. The project will also explore what happens if fiduciary and impact duties are in conflict. In some cases, the project is expected to recommend policy change.

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