Feds Give Boost to Impact Investing

Labor Secretary Thomas Perez (middle) in Europe

Investments that promise positive social ends alongside financial returns recently got a big boost from the federal government, which some say had until recently maintained roadblocks that kept some key institutional investors out of the impact investing market.

In October, Labor Secretary Thomas Perez announced new Department of Labor a change to 2008 guidance that kept private industry pension plans, which are subject to the Employment Retirement Income Security Act of 1974 (ERISA), away from impact investing.

“The 2008 guidance gave cooties to impact investing,” Perez said during the press conference announcing the change. “Whatever the stated goal of the 2008 change, a range of stakeholders have told us that, in practice, it has had a chilling effect on economically targeted investing. We’ve heard repeatedly that ERISA fiduciaries are gun shy about these investments — not because of their financial merits, but because they’re afraid of running afoul of our 2008 guidance.”

That move was followed in February with the IRS announcing that private foundations could use their endowments to dabble in— and profit from— impact investments without fear of losing their tax-exempt status. An article from Knowledge@Wharton, The Wharton School of the University of Pennsylvania’s online business analysis journal, underscored the sea change:

“These two [actions] together mark the beginning of a rethinking of fiduciary duty more broadly,” says Jacob Gray, senior director of the Wharton Social Impact Initiative. “[This is] not just for ERISA pension funds and foundations, but also endowments of private universities, and of smaller foundations that look to the larger ones for guidance.”

According to a 2014 survey, by the Aspen Institute and Georgetown University’s Global Social Enterprise Initiative, the vast majority of impact investments meet or even exceed both their social as well as financial goals. But The Chronicle of Philanthropy, covering the survey’s release, reported on some of the lingering roadblocks in the way of an impact investing gold rush:

“While most of the attendees at the event touted the impact investing as way to get “double returns” — both societal and financial benefits — many said it will be a challenge to bring the approach into the mainstream. A lot of social investments are designed to help solve very specific problems, like creating an adequate supply of rental housing, said Debra Schwartz, who leads such an effort for the John D. and Catherine T. MacArthur Foundation. The small housing start-ups the foundation supports are unlikely to grow into huge companies that will attract huge amounts of capital. “They’re not going to have an [initial public offering] as an exit, where the venture capitalists are just going to jump in,” she said.”

The U.S. remains behind other G8 nations in encouraging impact investing, Law360 reports:

“Member countries, such as France, have their own initiatives as well, where legislation now requires that all corporate employee pension plans offer at least one “solidarity fund,” which invests 5-10 percent in eligible ESG enterprises, and typically invest the rest according to SRI principles. And the U.K. government itself now provides a 30 percent tax relief for social investments. Canada has gone one step further and launched the Social Venture Connexion (SVX), the first investment platform of its kind in North America. SVX was built to connect impact ventures, funds and investors and provide a platform for fundraising for impact ventures. SVX is registered with the Ontario Securities Commission, and has raised several million Canadian dollars to date.”