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June 30, 2014
Partnerships Between Government and Private Sector Needed to Bring Impact Investing to Scale
    by Robert Kropp

Citing the Community Reinvestment Act as an example of effective federal support, a report from the US National Advisory Board calls for additional government action to help maximize the impact of community development initiatives.


I don't pretend to fully understand the distinction between impact investing and sustainable investing or socially responsible investing (SRI). I do know that impact investment studies persistently define sustainable investing and SRI in an anachronistic manner. A new report from the US National Advisory Board (NAB), entitled Private Capital, Public Good, continues the trend; in a graphic called A Brief History of Impact Investing, socially responsible investors are defined as those “who attempt to avoid investments deemed harmful to society.”

It's not surprising that sustainable investors might be a bit indignant about being saddled with an antiquated definition of what they do; a perusal of the most recent Trends Report from US SIF: The Forum for Sustainable and Responsible Investment clearly indicates that proactive strategies such as consideration of environmental, social, and corporate governance (ESG) factors, and robust shareowner action, have long been commonplace.

That said, however arbitrary the distinctions between investment strategies may be, impact and sustainable investors seek the same ends: to ensure that their investments not only make money but also contribute to measurable social and environmental progress. Especially welcome is the report's focus on the role of government in facilitating investment that seeks to realize these ends.

One successful public-private partnership that the report describes as an important example of impact investing is the
Community Development Finance Institution (CDFI) Fund, a US Treasury Program that since its inception in 1977 has awarded over $1.7 billion to community development organizations and financial institutions, and awarded allocations of New Markets Tax Credits which will attract private-sector investments totaling $33 billion.

The CDFI Fund is especially important because the funding it provides focuses on housing and small business development in low- and middle-income communities often underserved by commercial financial institutions. Also, as the report points out, the CDFI Fund “marshals $20 of private capital for every $1 of federal funds invested,” which supports the idea that similar programs could work as well without involving vast government expenditures.

The report proposes three strategies that if enacted could lead to the kind of success realized by the CDFI Fund. Observing that “As recently as the 1970s, stock investments were widely viewed as imprudent for trust fiduciaries,” NAB proposes the removal of antiquated regulatory barriers that stand in the way of scaling up investment. A particularly compelling narrative involves the evolving concept of fiduciary duty. An Employee Retirement Income Security Act (ERISA) has been interpreted by many mainstream fiduciaries as preventing them from investing with any end other than the strictly financial.

“We believe it would be beneficial for the Department of Labor to make it clear that consideration of targeted economic, environmental, and social factors is consistent with ERISA’s fiduciary obligations to plan participants,” the report states.

The report also recommends that the federal government revise investment restrictions that currently prevent the Overseas Private Investment Corporation from participating in more impact investment initiatives. It calls for more programs like the CDFI Fund that “can attract private investment to support important social and environmental goals.”

“US SIF supports the report’s message that public policy should be utilized to encourage private sector investments for positive social impact,” stated Lisa Woll, the organization's CEO. “We believe the policies the NAB report outlines will help introduce new practitioners to the expanding sustainable, responsible and impact investing field.”

And Amy Domini, founder of
Domini Social Investments, commented, “Thank you for providing this thoughtful report on the state of Impact Investing and particularly for the focus on what the legislative and executive branches can accomplish.”

“I have one further legislative opportunity,” Domini continued. “Disclosure.”

“My ask, therefore, is that every legislation carry a disclosure give back,” she wrote. “A farm bill would mandate a carbon disclosure footprint from every corporation that received funding. A tax bill that contained opportunities for corporations would also mandate that corporations publish each year, in their 10K, what dollar amount they had received from the U.S. Government in the form of subsidies or tax breaks from the 35% stated rate.”

 

 
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