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From issue: Impact Investing: Profit Meets Purpose (Fall 2011)

AQ Feature

When the Private Sector Isn't Enough

Katie Grace and David Woods

Governments play a vital role in ensuring that impact investment achieves genuine social and environmental goals.

In March 2011, the U.S. Overseas Private Investment Corporation (OPIC) announced a call for investment proposals for impact investing. OPIC, the U.S. development finance agency, had set aside $250 million of its $14 billion portfolio for investment in funds that aimed to combine positive social and environmental impacts in the emerging markets that OPIC operates in with a market-rate financial return. This call for proposals was quickly followed in April by the Small Business Administration’s (SBA) announcement of the Small Business Investment Company Impact Investment Program, part of the White House’s Startup America initiative. The SBA’s program is a $1 billion, five- year commitment to invest in funds with at least 50 percent of their investments in U.S.-based small businesses in underserved markets and communities.

These U.S. initiatives, which explicitly adopt the language of “impact investing,” take their place among a wide range of global efforts—including supporting private investment in social entrepreneurs in the U.K., bringing pension fund capital to bear on disadvantaged communities in South Africa, developing a social stock exchange in Singapore, and unlocking private capital to support sustainable infrastructure investment in Brazil in anticipation of the World Cup in 2014 and the Olympics in 2016.

These efforts illustrate both the vital role public policy plays in developing impact investing markets, and the momentum behind using policy innovations to catalyze private markets to solve deeply rooted social and environmental issues.

Impact investing—defined here as investment that seeks explicit social or environmental benefits in addition to a financial return—has become an increasingly popular topic for a variety of private investors, foundations, nonprofits, and businesses who see need and opportunity in the face of complex problems such as poverty alleviation or carbon mitigation. The goal of this movement is to bring new capital and new ideas to address such problems.

Why Government Policy and Impact Investing?

There is clear benefit to governments in more broadly supporting a policy environment conducive to impact investment. The social and environmental benefits that result from impact investing are often aligned with the government’s own policy agenda, and there is an advantage in incorporating private-sector investment capital to assist in the pursuit of that agenda. Though the field developed during the boom times in the earlier 2000s, if anything, the financial crisis has increased interest in impact investing. For many, budget debates and external or self-imposed austerity agendas highlight the need to leverage alternative sources of capital.

The language of impact investing—and related concepts such as responsible, social, sustainable, and mission investing—has focused on private market activity, but the practice has always relied on public policy to shape and support these markets. In a recent paper we co-authored with our partners at InSight at Pacific Community Ventures, we addressed the role public policy can play in developing these markets, highlighting 16 case studies from around the world to help practitioners think about public policies that could be achievable and effective in mobilizing private capital. 1

Relevant policymaking that supports impact investing includes a wide variety of hard and soft policy tools that support market development. Examples range from public-private partnerships in large-scale projects; tax credits for affordable housing or investment in underserved areas; feed-in tariffs to support renewable energy production; procurement policies that favor responsible contracting or minority-owned firms; regulations that encourage banks or other investors to lend to underserved communities, or that require environmentally sensitive building construction; loan guarantees that support investments in energy-efficient buildings; and technical assistance to develop small businesses with social impact.

Policymakers can help build a supportive environment for impact investing by helping to define what it is and isn’t, contributing to the development and credibility of metrics that measure social and environmental performance. These metrics can create or provide information that helps measure impact and financial performance, and identify opportunities for different kinds of investment capital. It can bring credibility to the field through public support and educate potential investors by convening multiple stakeholders. Government can also more directly encourage investment through policies that incentivize investors to enter the field, or by increasing the number and quality of investment opportunities available.

A Framework for Impact Investing Policy

In our work with InSight we developed a framework for thinking about public policy and impact investment that sought to place these various policy interventions in the context of how and where they intervene in market transactions. The above illustration, drawn from the report, breaks down policy types by where they intervene in the investment process and how directly the government is participating in the impact investment market through those policies...

ENDNOTES:

1. See <http://hausercenter.org/iri/wp-content/uploads/2010/12/Impact-Investing-Policy_FULL-REPORT_FINAL.pdf> (Last accessed November, 2011)

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