Impact Investing: Building on Strong Foundations in the U.S.

In short, active impact investing markets are built on substantial policy foundations.
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Impact investing in the U.S. has a rich history and established communities of practice -- spanning community finance, socially responsible investment, micro-finance, housing finance, environmental finance, small business finance in underserved "emerging domestic markets," sustainable development and, more recently, social finance, which explicitly ties investment returns to social outcomes using tools like "pay for success."

In most of these markets, and through various stages of development, government has played a critical role. In short, active impact investing markets are built on substantial policy foundations.

However the different strands of government effort engaged in the common activity we call impact investing have often operated independently. Instead, they could and should be knitted together into a cohesive platform that helps identify what works and what more can be done, building on the seminal efforts of groups such as "Investing in What Works", an initiative of the Low Income Investment Fund, Federal Reserve Bank of San Francisco and Citi Foundation.

This is one key to scaling impact investing in the U.S. -- connecting historically disparate activities in order to take better advantage of distinct policy opportunities when they arise. By weaving diverse approaches into a coordinated narrative, we will also build active and mutually supporting practitioner networks, and better mechanisms for cross-sector engagement with public officials. This is the goal of the Accelerating Impact Investment Initiative (AI3), which just launched a draft white paper on the enabling policy environment for impact investing in the U.S., and a map of the many different ways in which policy activates and shapes the market.

What did we learn from our first public meeting of the AI3, held at the Aspen Institute in Washington, D.C., on February 25?

1. Policy is a lens for community building.

Many of the commercial and philanthropic investors, community finance and other intermediaries, policy leaders and entrepreneurs gathered at Aspen noted that not all actors in what we think of as a unified field have come to see themselves as engaging in the same activity. A necessary part of the policy discussion is therefore a more coherent account of the various actors involved in impact investing, a way to add up the sum of the parts and their collective impact, and a deeper understanding of different operational approaches and constituencies.

2. There are clear links between mapping public policy and field expansion.

The U.S. impact investing market is relatively mature in key sub-sectors, and often involves collaborations among public, private, and nonprofit actors at scale. Yet the field itself is often typecast as "niche" or "immature," in part because newer activities have come to stand in for the field as a whole. We need a better way to talk about the full range of policies and investment activities that target specific social outcomes -- and our policy map is meant to be one step in this direction. A more inclusive discussion about impact investing and public policy can avoid the problems of typecasting, and perhaps make it easier to talk about the ways public policy most effectively leverages private investment towards different ends -- across different asset classes, different types of investees, and different sectoral targets.

We also hope the policy map facilitates engagement with new actors not currently active in the discussion. The various "shared value" platforms of corporations, responsible investment policies of institutional asset owners, community engagement strategies of anchor investors and efforts to promote public-private collaborations by elected officials at local, regional and national levels, all have a place in this discussion.

3. The discussion around policy and impact investing is often about "unlocking capital."

Policymaking is often seen as a tool for "unlocking capital," which is "sitting on the sidelines" or perhaps "parked." The idea is that policies that promote market development can open up new channels for investment with a social purpose. This is becoming an increasingly sophisticated discussion in the impact investing community. Among the points raised on the 25:

  • We have much more to do to describe how, in practice, policies and capital provision interact at the level of investment. Research and data-generation can help make this discussion more focused on policy efficacy, and investor performance
  • The role of sustainable intermediation remains crucial, particularly as more and different types of capital focus on impact. Generating investable deals and programs, at the level appropriate for different kinds of investors, with the right settings to generate intended social impacts, is a central challenge for the field. What are the paths for developing, evaluating, and paying for the various forms of intermediation necessary for an effective investment ecosystem?
  • Current conceptions of fiduciary duty, and agency issues between asset owners, their consultants and managers, are a constant source of attention and occasionally frustration for the impact investment community. As we build impact investing in practice, we have to consider its implications for the theories that govern how many private investors currently manage their money.

4. The foundations are in place.

Ellen Seidman, a Senior Fellow at the Urban Institute, crisply summarized the day by emphasizing that, thanks particularly to a robust community finance sector, there is already significant market infrastructure in place for impact investing.

Seidman argued:

There's nothing new about layering capital. What is new is figuring out how to do it at scale, broadening the investment base, continuing to build capacity on the demand side, and broadening the definition and measurement of return...There are some additional things that could make a big difference, like better data, modernizing the definition of fiduciary duties and the Community Reinvestment Act, but much is in place.

That being the case, the government's near-term opportunities for scaling impact investing may not be a wholly new set of policies, but a careful review and revision of existing practices. By easing the "rigid rule" in ERISA and freeing institutions to invest in a manner more aligned with their beneficiaries, for example, or by breaking down program and appropriations siloes, allowing for subsidy layering, or stabilizing key supports like the New Markets Tax Credit, the federal government could go a long way to unleashing the latent demand for impact investing, Seidman explained.

The AI3 has its work cut out for it -- but also a wealth of experiences and diversity of innovative approaches to investing private capital for public purpose on which to draw.

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