The impact investing industry is in a unique position in that its main objectives align with those of any (sensible) government. It wants to increase access to vital goods and services, such as healthcare and education, making them more affordable and available to all. This synergy extends to the desire to combat climate change and protect the planet.
Impact investing does not seek to profit at the cost of government, as can sometimes happen in the capital markets (think: the subprime mortgage and banking crisis), but rather both are pulling in the same direction.
In this regard, sensible regulation — from both the left and the right, and around the world — can help impact investing efforts and create opportunities for impact entrepreneurship. This is one of the reasons that so many impact investors like to track Sustainable Development Goals, as they represent an ambitious agenda set out by a centralized authority, the United Nations, with government backing and funding.
The 2030 deadline for achieving the SDGs still needs to be met, but government funding and encouragement through regulatory reform generate momentum and enterprise. While impact investors and governments want the same things, investor timeframes don’t always align with government timeframes, especially related to economic impacts.
We look for these synergies in our investments and also ensure they make sense without government subsidies.
Here to help
The year has been a difficult one for investors and businesses alike, with rates rising, ongoing inflation concerns, questions over whether or not we are in a recessionary environment, a meltdown in crypto that precipitated a banking crisis, a volatile stock market and an increasingly challenged lending environment.
Funding for small to medium businesses and start-ups has slowed, and exits are down. This challenging environment makes the jobs of our companies harder, even as the needs they are seeking to address are growing ever greater.
Government policy can act as a headwind or a tailwind to impact investments, and this is even more noticeable at times when the capital markets themselves are challenging.
The Fed’s policy of rising rates is creating problems for businesses, as higher rates cause a less favorable lending environment. The situation was compounded earlier this year by the interest rate-driven banking crisis among regional banks, including Silicon Valley Community Bank, which were active lenders to startups and venture businesses.
Higher rates make home ownership even less affordable, lead to rent increases, and make down payments even harder to save for. We continue to invest and see opportunities in and around enabling people to obtain access to housing.
Government policy plays a part in many other ways. Over the last two years, we have witnessed a surprisingly high level of activity out of Washington. D.C., given the often-gridlocked nature of the federal government. The federal COVID response, the 2022 Infrastructure Bill, the Inflation Reduction Act, the lifting of the federal debt ceiling until 2025, and other actions have made the Biden Administration one of the most productive White House administrations in recent times.
Headwinds and tailwinds
We have seen both the negative and positive impacts of that regulation in our portfolio this year.
On the negative side, we are experiencing some headwinds in some of our healthcare investments, specifically concerning remote health, which we see as a very positive opportunity to deliver accessible, affordable healthcare for a wide range of treatments.
One of our portfolio companies, Workit Health, provides a platform to help people recover from addictive behaviors, including by prescribing medication. During the COVID pandemic, the Drug Enforcement Administration significantly loosened restrictions regarding controlled medication prescription via telemedicine.
Generally speaking, this change in prescription requirements meant patients no longer needed to physically see a physician before getting access to remote prescription services. It could all be accessed online through the remote portal. This was a huge accelerator of the business models of companies such as Ann Arbor, Michigan-based Workit Health, enabling them to grow much more quickly than was previously expected.
This past February, the DEA announced new telemedicine rules, requiring patients to see a doctor before receiving a prescription or within 30 days of doing so.
For low-income people living in rural areas, those in crisis, or otherwise without easy access to in-person medical services, the rollback in restrictions is a significant blow. It impacted the growth trajectory of Workit Health, which now has to work with physicians in person in order to help patients.
The impact on our investment is hardly fatal. We had invested in these companies before COVID, and the need and outcomes they offer are still valid. It is just going to take longer to get there.
Inflation Reduction Act
On the flip side, government subsidies regarding domestic solar in the Inflation Reduction Act have benefited some of our clean energy companies. The IRA’s provision for a 30% tax credit for domestic solar installation over the next ten years is benefiting companies such as PosiGen, a developer of affordable power solutions based out of New Orleans.
As communities were looking to build back stronger in the aftermath of Hurricane Katrina’s devastation, Posigen’s founders saw that, while there were many incentives for solar, typically only the wealthy were in a position to take advantage. PosiGen wanted to make sure that all homes could switch to solar and save money on their energy bills. They do this by offering an affordable and accessible 25-year solar leasing program.
As with Workit, we invested in PosiGen before the favorable legislation, because we believed in the economics of the business. Indeed, a solar investment tax credit was already in existence, but the incentives were winding down. The IRA served as a reboot of the program, and this initiative will likely accelerate PosiGen’s growth trajectory.
Combating climate change
Carbon measurement and offsets is another area where government regulation, both domestically and globally, can be a positive accelerator. We believe a group of technology and nature-based solution companies will emerge to help companies quantify their carbon footprint and meet their carbon reduction goals.
We recently invested in Cloverly, an Atlanta, Georgia-based company that offers a marketplace for high-quality carbon offsets. Carbon reporting mandates will likely encourage companies to look for near-term reductions in their carbon footprints through offsets.
Carbon offsets, and especially the voluntary carbon offset market (VCM), are a point of controversy for the environmental movement, given the potential for false accounting and for companies to rely on offsets rather than reducing emissions directly rather than relying on credits, But we believe they are still an essential part of the clean energy transition mix. Companies in hard-to-abate sectors will require offsets to achieve their 2050 carbon reduction goals, and there is huge value (and potential for profit) in assisting in developing a transparent, effective, and efficient offset market. Cloverly helps achieve this by providing a platform for the buying and selling of high-quality credits.
As you can see, we want what governments around the world want (or should want) and what society and the planet need: the quickest, most efficient and meaningful solutions to health, education, and decarbonization and other challenges.
Impact investors can be effective partners to the government, and government policy can be a helpful tailwind for impact opportunities. But that is not always the case, so we urge impact investors to confirm the innovation in their investments will survive despite being out of alignment with the government and to step up more than ever to invest in the most impactful solutions that can be scaled, with or without government intervention.
Roger Liew is a partner at Impact Engine and a member of the Investment Committee.