ImpactAlpha. Feb. 24 – “A labor market where workers have more opportunities and have more power and have more leverage is a good thing,” Brian Deese, the outgoing director of President Biden’s National Economic Council,, told The New York Times in an exit interview.
“It’s a good thing for working people. And it’s a good thing for the economy.”
We couldn’t have asked for a better set up to ImpactAlpha’s Call No. 49, which explored The Year of the ‘S,’ for social, in impact policy. Worker and community power are in the air – and on the agenda.
Building on the historic legislative wins of the past two years, from the American Rescue Plan to the Inflation Reduction Act, the action this year is turning to policy, specifically new rules that advance worker ownership, improve human capital disclosure and accounting, and hold banks accountable for fair lending and access to capital by underserved communities.
“What unites all of these is power to the “S,” power to the people, power to employees, power to communities, even to customers,” said Fran Seegull of the Impact Investing Alliance, who co-hosted the Call.
First up: a major update to the Community Reinvestment Act in March or April. The 1970s-era law was aimed at remedying the systemic redlining and racial discrimination by banks of communities of color. But some five decades later, it has done little to close the racial wealth divide. The update, by a trio or bank regulators, would build more community accountability and transparency into the law.
A lesser known rule out of the Consumer Financial Protection Bureau will be key to holding banks accountable. An update to the Dodd-Frank act (section 1071, for you policy wonks) would require banks to collect for the first time gender and race data on small business borrowers.
Women and minority-owned businesses report being denied loans more often than their white, male counterparts and receiving smaller loan amounts when they do obtain loans. Better data on small business borrowers will help to better assess the effectiveness of the CRA and enforce fair lending laws.
“If you care about small business, if you care about minority entrepreneurship, women-owned businesses, this is critical to understanding really who’s getting the loans and who’s not,” said Jesse Van Tol of the National Community Reinvestment Coalition.
NCRC has argued that the rules should also apply to credit unions, online fintech companies, community development financial institutions and other non-depository institutions.
Countering ESG attacks
Like much of Biden’s social and environmental agenda, the CRA and, especially, section 1071 changes will face pushback from politicians who have already weaponized ESG and diversity. Van Tol urged investors to express their support (see NCRC’s website for more on 1071, the CRA and how to voice your support).
Educating lawmakers and countering the disinformation campaign around environmental, social and governance, or ESG, is the mission of a new Sustainable Investing Caucus on Capitol Hill. “We wanted to bring together members of Congress and staff and bring them together with experts to better understand the sustainable investing space and inform policymaking,” explained Kyle Bligen, legislative aide to Rep. Juan Vargas, who co-chairs the caucus with Rep. Sean Casten.
The caucus, for example, is looking to fend off an expected Republican effort to rescind a new Department of Labor rule that enables pension plan managers to consider ESG in their investment offering decisions.
As ESG is increasingly politicized, “We have to make sure that staff are armed with the information and the data to understand the track record of sustainable investment, why investors care about it, why market advocates continue to come and lobby the Hill on behalf of it,” said Vargas. “It’s about business. It’s about investor protections and market transparency.”
Broad-based employee ownership is a way to equalize wealth before it is created. Such ‘predistributive’ approaches have bipartisan appeal. The topic is becoming more urgent as the U.S. faces a “silver tsunami” of retiring baby Boomer business owners.
“The problem is, there’s no investment capital at scale in the employee ownership field that can help enable the financing of these businesses, from the owners to their employees,” said Jack Moriarity of Ownership America, a nonprofit public policy organization that advocates for policies that increase employee ownership. “And that’s where there’s just a remarkable impact investment opportunity.”
New investment funds and models are helping to facilitate worker ownership conversions. But policy is what will scale the movement.
“Our theory of change is we can use public policy tools and credit enhancement, in particular, to mobilize new private capital sources into the market,” says Moriarity. “That’s really an opportunity for scale.”
Moriarity argues for a regulatory change to allow the Small Business Administration to guarantee loans to employee-ownership buyout funds in the same way it guarantees loans to designated Small Business Investment Companies, or SBICs. Ownership America’s design for Employee Equity Investment Companies would stand up a credit facility specifically purposed for employee ownership focused funds.
Accounting is destiny
Like the dearth of small business borrower data in banking, little can be gleaned about corporations’ workforce and policies based on what they are required to report. Outdated accounting standards account for employees as an expense, rather than what they have increasingly become: a company’s greatest asset.
That could soon change. A new rule being readied by the Securities and Exchange Commissions that would require greater employee-related disclosure could finally come this spring. The Human Capital Management Coalition has urged regulators to require simple disclosure about the makeup of a company’s workforce, including contract and part-time workers, turnover rates, and diversity data, for example.
“Disclosure sometimes gets derided as sort of slightly boring, but disclosure is the source of all data and accountability, and really starts to drive the theory of change,” observed ImpactAlpha’s David Bank. “In the human capital context, there really is almost an ‘accounting is destiny’ aspect to it.”
The shift could finally force companies to account for their workers as assets, not liabilities, spurring them to invest in their success instead of cutting them as costs.
Added Seegull: “Ultimately what it means is, we want to be able to see the asset. We want to be able to count the people. We want to be able to understand how companies are treating employees because we believe that that correlates to financial outperformance.”