How Impact Investing Could Move from the Margins to Mainstream

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Fran Seegull from U.S. Impact Investing Alliance and Jonathan Wong from UNESCAP discuss how an enabling policy environment would help to grow impact investing.

The amount of money that goes towards impact investing globally is far short of what is needed to meet the United Nations’ Sustainable Development Goals. Charitable institutions, donors, foundations and NGOs have long been the chief champions of impact investing, and the best bet is for the private sector to address the funding gap, experts say.

Transparency and accountability in impact investing will make the space attractive to more investors, according to Fran Seegull, executive director of the U.S. Impact Investing Alliance, a New York City-based organization that aims to promote awareness of impact investing in the U.S. The Alliance also helps in the deployment of impact investments, and in creating an ecosystem for those investors.

According to Seegull, the Alliance has “a long-term vision to place measurable social and environmental impact at the center of investment decision-making, alongside risk and financial return.” In other words, it hopes to find ways to demonstrate the social and environmental gains from such investments and risk-adjusted financial returns.

Governments could also play a major role by steering policy innovation to grow the impact investing movement, according to Jonathan Wong, chief of technology and innovation at UNESCAP, or the United Nations Economic and Social Commission for Asia and the Pacific. His mandate covers 53 countries in Asia Pacific, from as far west as Turkey, up to Russia and down to the Pacific Islands.

“When we look across the whole ecosystem, there is obviously a lot of work done in the private sector — foundations are working at this, as are donors, multinational banks, etc.,” he said. “But government was always the missing piece. Let’s face it – governments can do very bad things. Equally, they could do very good things. I have been curious to find out more how I could support governments on the impact investment journey.”

Seegull and Wong shared insights about impact investing with Knowledge@Wharton for its podcast series “From Back Street to Wall Street,” produced in partnership with Impact Investment Exchange (IIX), a Singapore-based organization that serves as a bridge between investors and development goals in Asia. (Listen to this episode using the player at the top of this page. You can find links to the other episodes in the series here.)

Seegull traced the roots of the U.S. Impact Investing Alliance to an organization called the U.S. National Advisory Board, founded in 2013 as part of a G7 social impact investment task force. As part of that group, it delivered a policy paper to federal policymakers in its member-countries called “Private Capital for Public Good,” around which it has framed its programs. Seegull joined the Alliance in 2016.

The Alliance focuses its work on three areas: advocacy, catalyzing investor actions to expand their impact and building an impact investing movement. It is incubated by the Ford Foundation and draws its support from a broad coalition of funders, including philanthropies, corporate foundations and high-net-worth families.

“I have been curious to find out more how I could support governments on the impact investment journey.” –Jonathan Wong

An Enabling Policy Environment

The advocacy work of the Alliance has resulted in a few recent policy wins. One was part of the 2017 Tax Cuts and Jobs Act, which introduced a community development program called Opportunity Zones. The program provides tax incentives for private investors to channel their unrealized long-term capital gains into low-income communities nationwide. “It was a once-in-a-generation moment,” said Seegull. “It’s the first new community investment incentive in the last 15 years.”

Yet another is the Social Impact Partnerships to Pay for Results Act that Congress passed in a bipartisan effort in February 2018. It is the first federal “outcomes fund” to support state and local Pay for Success projects across the full range of government social services. Under the provisions of the bill, investors are paid for the actual outcomes achieved.

As part of its work in Opportunity Zones, the Alliance has been working with community development financial institutions (CDFIs), which include banks, loan funds, credit unions and others, alongside community development venture capitalists. The aim is to understand how Opportunity Zones could be a new source of tax-advantage capital and to explore how they could work alongside other programs and incentives that exist at the federal, state and local levels, Seegull said.

Several community investment incentives already exist. Seegull cited the Community Reinvestment Act that encourages banks to provide equitable access to credit in underserved communities. Another is the CDFI Fund, which is run by the Treasury Department and offers bond guarantees to community development finance institutions.

Those policy incentives “have given rise to a robust community development finance institution landscape,” Seegull said, adding that a thousand CDFIs operate in the U.S. “There are many opportunities to cluster programs and benefits in a way that will enhance the outcomes for these communities in need.”

Seegull noted that the Pay for Results legislation has spawned a growing market for Pay for Success and social impact bonds in the U.S. She pointed, for example, to Salt Lake County in Utah, which used a Pay for Success bond to increase access to pre-K education. The state of Connecticut is also looking to use that mechanism to finance substance abuse intervention among parents of young children, she said. “What is so fascinating about this tool – and what we hope the federal fund will foster – is using private sector-style innovation, and then allowing government to identify what works and then take it to scale.”

The growth of the Pay For Success bond market has made way also for secondary financial products such as funds of social impact bonds, Seegull said. These funds aggregate various pay-for-performance instruments so that investors can get a broad exposure across investment types and geographies, she added.

Unfinished Agenda

Seegull set initiatives such as the Opportunity Zones against the backdrop of the United Nations’ Sustainable Development Goals, or SDGs, which aim to meet 17 goals by 2030 in areas including poverty, hunger, education, clean energy and gender equality. In order to meet the SDGs, the annual investment requirement globally is between $3 trillion and $8 trillion, but what is actually available falls far short of that need, she said. Professional grant making in the U.S. brings about $60 billion a year, and foreign aid accounts for another $30 billion a year, she noted.

“I hope to see a time where those downstream costs and challenges to tax payers are voided by interventions that could potentially be priced in, making them highly attractive [to investors] on a risk-adjusted basis.” –Fran Seegull

In trying to raise more money to meet the SDGs as they relate to low-income communities, tax credits and similar policies “can be incredible conduits or catalysts,” said Seegull. “Some of us believe that the scale that a private sector investor or a private enterprise can achieve can conceivably be greater and more sustaining than the results of a grant,” she noted, adding that she is not making a case against grant making.

To be sure, gaps exist in the impact investing policy terrain. One feature of the Pay for Success bonds that needs perfecting is the measurement of outcomes of projects in order to determine how investors are paid. Social impact funds and investment banks fulfill the function of third-party evaluation, but for the most part, each investment fund is custom-designed, Seegull noted. Efforts are underway in Connecticut and elsewhere to use “rate cards” that specify the returns investors could expect for specific outcomes, and there is talk of introducing legislation for rate cards, she said.

Both the government and the private sector could work towards bringing greater transparency on the impacts achieved, Seegull said. “I hope to see a time where those downstream costs and challenges to tax payers are voided by these interventions that could potentially be priced in, making them highly attractive [to investors] on a risk-adjusted basis.” In some Asian countries, the government takes on the risks in such pay-for-success contracts, thereby making them more attractive to private investors, she added.

According to Seegull, current practices in measuring the impacts achieved by social investing have to be refined. Her organization is working on creating “a consensus around baseline impact reporting” for Opportunity Zone benefits in partnership with a few other organizations and data reporting and evaluation experts.

Advances on that front would encourage impact investors and philanthropies to attract more funds to the space, Seegull said. “There are places where we use regulation and tax incentives to drive behavior, but there are times when we also appeal to the private market to raise the bar on impact reporting and raise the bar on deep impact.” The Alliance’s work here is to make the Opportunity Zones “more impact-transparent and accountable,” she added.

“We know that all investments have impact – what we eat, what we drive, how we vote, everything has an impact. But the impact is opaque.” –Fran Seegull

Seegull mentioned other efforts underway to bring greater awareness and behavioral change in impact investing. Currently, impact disclosure by publicly held companies is voluntary, she noted. The majority of Fortune 500 companies release sustainability reports, but that is not sufficient, she argued. “Mandated disclosure [of impacts achieved] on the 10-K (annual reports) could be transformative,” she said, but she gave that a low probability of getting legislative mandates.

At the same time, Seegull spotted the emergence of “a private movement around long-termism and moving bonds beyond the slavish focus on quarterly returns of Wall Street and corporate managers.” She noted that some companies have begun issuing sustainability reports twice a year instead of quarterly. “There is a private long-termism approach that also manifests in the private markets, encouraging long-term, patient capital.” The Alliance sees the opportunity to unlock for impact investing some $7 trillion worth of assets in the public markets over the next five years, she added.

“We know that all investments have impact – what we eat, what we drive, how we vote, everything has an impact,” said Seegull. “But the impact is opaque.” Going forward, she expected “a generational wealth transfer” to women and millennials, and the rise of technology tools in impact investing. “There is a drumbeat around impact transparency, and it will rise over time. Our long-term vision for impact investing is impact transparency and impact accountability, which is why one of the things we say at the Alliance is, ‘The future of investing is in past investing.’”

Enlisting Governments

Like Seegull, Wong stressed the need for greater rigor in accurately measuring the impacts or outcomes of impact investing. “That would be critical in moving towards an evidence-based policy scenario,” he said.

Much of government policymaking is less evidence-based than one might imagine, Wong said. “Governments like to be inspired in many ways,” he added. “They like to hear the inspiration stories of what another government is doing not so far away in their region. We try to bring these policymakers together – socialize language, inspire them, and kind of move forward from there.”

“Ideally, you want all investments to be impact investments, or all enterprises to be impact enterprises.” –Jonathan Wong

Wong said the UNESCAP goes about its work in impact investing in three strands. One is advocacy work with governments. “You have to socialize the language and concepts of impact investing within the fabric of government so that they see impact investing and impact enterprises as critical parts of their portfolio as they think about fiscal policy or monetary policy.”

The biggest innovation that could happen for sustainable developments “is for economies to work better for society and the environment,” noted Wong. He made a case for governments to play “a critical role” in integrating impact-investing goals in all projects. “Ideally, you want all investments to be impact investments, or all enterprises to be impact enterprises,” he said. “The key is how you move impact investing from the margins to the mainstream, and engaging private sector in it.”

“Governments need to … incentivize not just impact investors, but [also] mainstream capital to report on social and environmental impact and on financial return,” he said. For instance, governments could promote “embedding impact investing principles in major areas of the economy such as government procurement, trade agreements and stock exchanges,” he added. “That is where government can play that role in moving this to a massive scale.”

At the same time, Wong noted that as governments get involved in impact investing, they could end up doing more harm than good. “There is this danger when legislation or regulation comes in, they could just kill the whole space,” he said. “That is a serious risk, given the sometimes unnecessary bureaucracy that they put in place.” The U.N. advocates for governments to take “a more adaptive approach to regulation, maybe letting the innovation happen, while doing what government should be doing, which is safeguarding society.”

Asian Advance

Now based in Bangkok, Wong has worked previously in London and Africa. According to him, some of the “most interesting policies” around impact enterprises and impact investment are coming from Asia. He cited an inclusive business accreditation scheme in the Philippines as “an absolute world first.” In Korea, the social economy contributes as much to the GDP of the country as Silicon Valley does to the U.S. economy.

Wong noted that for example, all the 53 governments in the Asia Pacific region have developed an “Asia Pacific road map for the achievement of the SDGs.” He is currently working with the Pakistan government to help it develop its social enterprise sector by looking at gaps and ways for government policies to address them.

“Impact investing as a concept has the opportunity to transcend politics, religion and other factors that tend to cause conflict in today’s world.” –Jonathan Wong

While the private sector drives most of the innovation in the impact investing space, there are pockets where government is taking the lead, said Wong. For example, in Thailand, the draft Social Enterprise Act and the Impact Investment Act are in development and are driven by government, he added.

Platform Approach

On another front, the UNESCAP recently launched platforms for investors in sustainable development to interact and learn best practices from one another. One is with the Islamic Development Bank, and another is with the Asia Foundation. “The premise of all of these [platforms] is that innovation happens when you connect the right people with each other,” said Wong. “We connect innovators, entrepreneurs and investors from around the world to make these connections and do something interesting together.”

Wong observed that “impact investing as a concept has the opportunity to transcend politics, religion and other factors that tend to cause conflict in today’s world.” Here, he is encouraged by the work with the Islamic Development Bank, especially because impact investing happens to be “a Western phenomenon, if you like,” he said.

Wong sees a big role for technological innovation in advancing the cause of impact investing. “Technology can be a real equalizer and spark inclusivity,” he said. For example, artificial intelligence tools could be used to diagnose problems and in demonstrating cost-effective models to deliver essential services to impoverished people, he added.

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