The field of impact investing is expanding, but key barriers could still be removed and incentives put in place by the U.S. government to boost growth and promote best practices, according to a new report released on Wednesday.
Foundations and investors are bearish on impact investing and have announced $1.5 billion in investments over the next few years. The White House has also made several commitments to expanding or launching new government investments in impact investing.
The report “Private Capital Public Good: How smart federal policy can galvanize impact investing — and why it’s urgent” produced by the U.S. National Advisory Board on Impact Investing lays out a series of steps the government could take to help promote impact investing and potentially make available additional, innovative development financing.
“Impact investing is at a critical juncture, an absolutely critical juncture and government has an important role to play,” Matt Bannick, managing partner at the Omidyar Network and co-chair of the National Advisory Board, said at the launch event.
Composed 27 impact investing thought leaders, including investors, fund managers, foundations, and government officials, the NAB was funded about a year ago following the creation of the G-8 — now G-7 — task force on social impact investing to and strengthen the role of the United States in promoting and improving the impact investing field.
The report, the culmination of a consultative process with more than 200 stakeholders, “calls forth a host of recommendations that really — if adopted — could drive the sector forward,” Bannick said.
It advocates for three strategies: removing regulatory barriers that are preventing additional private investment, improve the effectiveness of existing government programs related to impact investing, and provide incentives for new private investment. The document also highlights the importance of high-level government support for impact investing and the ecosystem needed for its growth and the importance of standardizing metrics, as well as improving access to data.
While the wide-ranging report tackled a variety of government policy changes that could help — including, for instance, modifying the Employee Retirement Income Security Act and tax laws to include broader definitions of allowed investments, which could open up new sources of impact investors. It also made several recommendations about policies that could improve impact investing in developing or emerging markets.
Key recommendations
While several of the recommendations will help both domestic and international impact investing, there are five key suggestions for improving the flow of funds to development finance.
1. Enable the Overseas Private Investment Corp. to help U.S. business expand and invest in the developing world through debt financing, guarantees and political risk insurance. The report urges Congress to give the agency permanent or at least multiyear reauthorizations, rather than the current annual authorizations to improve the agency’s ability to maintain long-term partnerships. It also recommends allowing OPIC to maintain some of its earnings to increase staffing to fully deploy available capital, authorizing the agency to make early-stage equity investments, and remove the restriction that OPIC only support projects with connections to U.S. citizens or businesses.
2. Ease constraints on the U.S. Agency for International Development’s Development Credit Authority, which uses partial loan guarantees to help make underserved businesses in developing countries commercially viable and creditworthy borrowers. DCA borrowers have a 98 percent repayment rate but there are limitations on the organizations ability to work with other financial guarantors “which would greatly expand its scale, reach and impact.” DCA is limited by its level of risk exposure $300 million per country and total value of loan guarantees it can give - $1.5 billion, according to the report, which suggests a modest budget increase to expand operations.
3. More loan guarantees, especially first-loss guarantees are needed to encourage more global investments by bringing in investors who are currently too concerned about risk and the lack of reliable information to invest. OPIC and DCA could be well positioned to provide those guarantees given their other risk mitigation products, according to the report.
4. The U.S. government should look into Development Impact Bonds, a financing model where investors provide a project or intervention with capital and donors pay them if it achieves its targets. The report recommends that U.S. donor agencies lead a proposed G-7 initiative and help get member countries to commit to piloting DIBs, possibly through pooling capital in a $100 million DIB Outcomes Fund where developing countries could compete for funds. A key challenge that the report tries to address is that development finance tools are dispersed across a number of different agencies, which all operate differently, making it difficult for organizations or investors to know what is available and how to gain access. To tackle that issue, the NAB picked up on a recommendation previously made by the U.S Global Development Council in April, and suggests creating a “one-stop shop storefront” or development finance bank that would combine relevant programs from U.S. government agencies. The bank could draw funding from OPIC and be financed through retaining part of OPIC’s profits.
5. Experimenting with impact-oriented procurement and allow contractor evaluations for social impact, in the same way that some procurement policies support environmentally sustainable or minority- and women-owned businesses.
New announcements
It’s clear that the White House and the Obama administration supports impact investing — the first NAB meeting was hosted by the White House and a roundtable was held on Wednesday to discuss the report and a number of impact investing commitments by the U.S. government.
“The bottom line is that impact investing is real. It’s valid as an approach to create economic value and drive environmental and social impact,” said Jonathan Greenblatt, special assistant to the president and director of the office of social innovation and civic participation.
We’re in the early days, though, and there is still a lot of field-building to do, but he was excited by the discussion and looking forward to using the report as a guide.
“It’s like a playbook,” Greenblatt said.
At the event on Wednesday, the U.S. government made several announcements related to development finance:
• This fiscal year, DCA will launch a $60 million loan guarantee facility to spur lending to businesses that sell environmentally-friendly household technologies — such as solar lanterns or clean cookstoves — to people living at the base of the pyramid.
• USAID will set up new global development alliance with Echoing Green to support a group of global fellows who are pioneering innovative solutions to development challenges, some of whom may seek funding from impact investors.
• The same agency — in partnership with the Bill & Melinda Gates Foundation, the Lemelson Foundation, and the National Collegiate Inventors and Innovators Alliance — will expand Xcelerator, a training program that helps innovators introduce and scale their innovations in developing countries with the goal of making at least 100 entrepreneurs “investment-ready.”
• The U.S.-Africa Development Foundation will also launch an Impact Africa Initiative, giving additional financing to about 50 enterprises including village-based cooperatives and entrepreneurs.
Major private sector actors also made key commitments, with Prudential Financial committing to build a $1 billion impact investing portfolio by 2020 and several foundations pledging to invest in socially-motivated companies.
And this is an issue that can attract not just White House but also bipartisan support, noted Congressman John Delaney. Impact investing — and especially social impact bonds — offer a pay for performance model that is appealing to those who champion fiscal responsibility and those who work to ensure social programs are in place, he said.
“If you care about taxpayer money, which I do, and you want to make sure it’s deployed in the best way possible, you should really be embracing this framework,” Delaney explained. “You are paying for success, which means you’re not paying for failure.”
After intense discussions, culling lists of recommendations and more than four drafts, the report charts the path members of the NAB would like to see the government go to expand and improve the field of impact investing. It was designed to be bold and to present a variety of recommendations that are achievable in either the short or longer-term, pointed out Paula Goldman, senior director of knowledge and advocacy at the Omidyar Network, who has helped manage the NAB through this process. Now members of the board will work to mobilize around the recommendations and get those in positions of influence to take up the cause, she said. Intense discussions on the long-term goals of the board, what it will look like and what kind of presence it might have in Washington D.C. are ongoing, Goldman said.
“We have the proof points, companies are showing it works, going to scale,” she stressed. “With the right policy, I think this is about to take off.”
This story is part of a series on impact investing. For more, check out our Storify page on “Impact Investing 2.0: The evolving social finance landscape” and tweet @DevexImpact using #impinv.
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