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Why Policy Change is the Only Way to Open Impact Investing Floodgates


By Beth Sirull and Brenna McCallick

What’s standing in the way of impact investing exploding in the United States?  We are seeing lots of intention.  Everywhere we turn, we hear more and more from investors who are excited about impact investing.  Bain Capital and Blackrock have created dedicated impact practices.  High net-worth individuals and family offices are starting to gather on a dedicated platform, ImPact, to share deals, ideas and experiences.  Foundations are sharing best practices and forging ahead on Mission Investors Exchange.  Even pension funds are making some Economically Targeted Investments (ETIs) to earn appropriate financial returns and create economic opportunities in low-income areas.

And yet, the amount of dollars invested in real projects and actual businesses is still a minuscule percentage of all invested capital. What’s holding us back?

While changes in public policy won’t automatically open up floodgates of impact capital, creating a policy ecosystem that allows — and encourages — impact investing, is a necessary, but insufficient, condition.  Changes in policy are arguably step one.  Let’s look at an example:

  • ERISA. In 2008, the Department of Labor (DOL) issued an interpretive bulletin on the Employee Retirement Income Security Act, or ERISA, which sets the standards of fiduciary duty for pension funds. The bulletin established what is known as the “rigid rule,”­ a mandate that pension fund managers invest solely with a view to maximize returns for their beneficiaries, and prohibiting the consideration of other factors, such as environmental, social or governance (ESG) issues, in investment decisions. The rule has since been seen to have a “chilling effect” on ETIs made by pension funds, many of which view such investments as too risky or in violation of fiduciary duty.

Retracting the rigid rule would open the door for pension funds to invest for social and environmental impact alongside ― and not at the expense of ― competitive returns for their beneficiaries. This would constitute big win for impact investing, and not only because pension funds represent over $22 trillion in total assets in the U.S. alone.  While ERISA technically only applies to private pension funds, it effectively sets the standards of investment for other large fiduciaries, and any changes to the policy have the potential to create a ripple effect beyond those it directly governs.

These changes are necessary, although we are not likely to see a change in investing the day after they’re made.  But once these changes are realized, we can move to step two: reaching out to pension fund managers and their advisors, as well as the lawyers, accountants and investment managers that advise the thousands of foundations in the U.S., to educate them on the availability of impact investments.  This outreach will need to showcase examples of solid investments that have worked, and we will need to demonstrate that impact investments can be made effectively and efficiently.  But  the culture shift we need will not be achieved without the catalyzing power of policy change.

With the importance of these policy changes — and others — in mind, Pacific Community Ventures was excited to launch the Accelerating Impact Investing Initiative (AI3) project in 2013, in partnership with the Initiative for Responsible Investment and Enterprise Community Partners, and with the support of the Ford Foundation and the Surdna Foundation. Our goal is to explore concrete, specific opportunities and strategies for enacting critical policy changes that will strengthen the impact investing ecosystem in the U.S.

Throughout 2014, we convened and consulted with stakeholders from across impact investing and community development realms, and collaborated with the U.S. National Advisory Board and the Social Impact Investing Taskforce.  From these collaborations, we developed tools for making sense of the various ways the federal government can and has enabled impact investing in the U.S. ― tools to help advance meaningful policy change going forward.

The AI3 recently released a “mid-term” report, a framework for understanding and assessing policy ideas. Entitled Financing Social Innovation: Analyzing Domestic Impact Investing Policy in the United States, the report offers a brief look at historic and existing public-sector activity in support of impact investing, and provides tools for practitioners looking to navigate the complex universe of U.S. policy levers that harness private investment for public benefit.

The AI3’s work is far from done; we will continue to identify specific policies — particularly changes in guidance and regulation, rather than in legislation, understanding that Congressional gridlock can hamper such efforts — that both allow and incentivize impact investing.

We encourage you to join the conversation.  Send your comments and questions to ai3@pcvmail.org.

Image credit: Pixabay

Beth Sirull is the President of Pacific Community Ventures, a social enterprise dedicated to creating jobs and economic opportunities in low-income communities. She is a co-recipient of the James Irvine Foundation California leadership award, and has been named to Forbes’ “30 Top Social Entrepreneurs” and the San Francisco Business Times’ “Most Influential Women in Bay Area Business.” Beth holds a Masters of Business Administration from Boston University and a Masters in Public Policy from the University of California, Berkeley.

Brenna McCallick serves as Research Associate for PCV InSight, supporting PCV’s domestic and international impact investing policy initiatives. In her work with the Accelerating Impact Investing Initiative (AI3), Brenna conducts research on U.S. public policy as it relates to impact investing and produces content for AI3 publications.

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