US NAB

Another Policy Win for Impact Investing

Posted on by Case Foundation

This week marks another important moment in the growing global impact investing movement, and an important reminder of the critical role that government policy can play in catalyzing social progress.

In response to a 2013 call from G8 leaders for nations to designate Task Forces that would work together to identify policy recommendations to accelerate the growth of impact investing, the U.S. National Advisory Board (NAB) on Impact Investing was formed. This incredible group of cross-sector changemakers, including our own CEO Jean Case, presented its recommendations in the summer of 2014 at the White House in the form of a report—Private Capital, Public Good. The report zeroed in on a number of key policy changes that held the potential to significantly increase the amount of capital available for socially responsible business. And over the past two years, in strong partnership between the private sector, philanthropy, civic leaders and government, those recommendations are being adopted through policy change.

From Mission-Related Investment (MRI) regulations issued in September, 2015, to new Employee Retirement Income Security Act (ERISA) regulations issued in October, 2015, to last week’s issuance of new Program-Related Investment (PRI) regulations, the U.S. government has listened to stakeholders and taken action to remove uncertainty about impact investing among capital providers (foundations, charitable organization and private investors alike) wishing to invest for both financial and social returns.

The Latest Policy Win: PRI Regulations

This week, the Treasury Department and IRS finalized highly anticipated PRI regulations. This new guidance removes some of the uncertainty about impact investing among foundations by confirming new examples of the types of investments that qualify as PRIs. These examples were recommended in 2012 to modernize the list created more than 40 years ago, and identify foundations using PRIs to further their mission through:

  • Different financing methods, including equity, debt or loan guarantees—as is frequently the case in Pay for Success models.
  • Greater flexibility in determining a prudent, mission-aligned exit from an investment in a for-profit company that has become profitable.
  • Investments in both for-profit and nonprofit organizations and even to individuals through, for example, microloans in developing economies.
  • Strategies that aren’t limited by geography or charitable purpose—PRIs can go to support the arts, the environment, health, urban development and more, both within the U.S. and internationally.

This new guidance is very welcome news. Historically, limited PRI examples left many foundations that wanted to take advantage of PRIs to support their charitable efforts on the sidelines. They questioned what was “allowable,” given their unique tax status and the changing landscape of investment seeking social enterprises and revenue generating nonprofits. At a time when our communities are in great need and traditional resources are being stretched thin—we need the power of all sectors working together, and PRIs provide foundations with a powerful tool to make that happen.

We Know These Kinds of Policy Changes Can Matter

We’re encouraged by the recent steps taken by the federal government, knowing that their actions can, and have, greatly influenced market activity. If we think back to 1979, the U.S. government issued highly impactful guidance on the prudent management of pension funds—stating that investments in venture capital funds could be consistent with ERISA guidelines. Directly following this guidance, venture investment in the U.S. jumped from just over $450 million in 1979 to a peak of $5 billion by 1987, effectively catapulting venture investments into the mainstream.

Taken together, the MRI, PRI and ERISA policy changes remove obstacles (or excuses) that have stood between good intentions to seek out impact investments and action. Even a relatively small percentage increase in pension fund impact investments would add up to billions in new capital—funds governed by ERISA manage roughly half of the $18 trillion in US pension assets. And on the PRI front, a Center for Effective Philanthropy report points to the great potential to scale impact investing—of the 64 foundation CEOs surveyed, only 41 percent said their foundations are making impact investments. Of those who are, they are deploying a median of only two percent of their endowments and 0.5 percent of their grants to PRIs.

At the Case Foundation, we believe we’re on the verge of seeing impact investing gain traction like never before. The impact investing road has been further paved by this latest policy change—let’s make that road paved more with robust actions than good intentions!

For more on the new PRI regulations, visit the White House blog post: Steps to Catalyze Private Foundation Impact Investing.

Photo credit: Roman Boed

Social Impact Bonds: Investing in Public–Private Partnerships at the National Level

Posted on by Case Foundation

The Social Impact Partnership Act

With tighter local and federal budgets, how can government more effectively innovate to achieve the public outcomes that Americans desire? One growing trend, both nationally and internationally, is social impact bonds (SIBs). Recently, Congressmen John Delaney and Todd Young, in partnership with America Forward, hosted a briefing on Capitol Hill releasing updates to the Social Impact Partnership (SIP) Act that expands support for SIBs at the federal level. Congressmen Young and Delaney, along with a bipartisan group of co-sponsors, introduced the SIP Act in the House on March 4, 2015 (similar legislation was introduced in the Senate on April 27, 2015, with sponsorship from Senator Orin Hatch). The SIP Act is intended to create federal-level support to help city and state governments leverage SIBs as a way to tackle local community problems with greater efficiency and accountability.

During the briefing, Brian Beachkofski, senior director at Third Sector Capital Partners; Jeff Shumway, vice president of advisory services at Social Finance, Inc.; and Jeremy Keele, executive director of the Policy Innovation Lab at the University of Utah, highlighted a number of SIBs-based projects currently being constructed in cities such as Salt Lake City, Boston, Chicago and Washington, DC.

How SIBs Function

SIBs, despite the name, are not actually bonds. Originally introduced in the United Kingdom, they are a new method of funding social services in a way that promotes outcomes over the number of services provided. One of the primary benefits of SIBs is the increase in efficiencies through private-sector capital and insights that allow government to identify what works before deploying tax dollars on an intervention (full definition). Other benefits to SIBs are the potential to fill certain social gaps, promotion of bipartisan cooperation within government and the opportunity to put tax dollars to work more effectively. (Watch Congressman Delaney’s TEDx Pennsylvania Avenue talk on SIBs.)

SIBs flow chart 7-28-15
Image developed by Third Sector Capital Partners – Pay for Success Mechanics

 

Recent Results

The first U.S. SIB contract recently came to a close, providing the market with some valuable lessons. As a government-contracting model, this SIB proved that through creative partnerships the government could experiment without passing the risks on to taxpayers. While the program did not achieve the desired social outcomes—reducing recidivism rates at Rikers Island prison in New York—the city now has a better understanding of this intervention and can make adjustments in the future.

Continuing the 2014 Momentum

Last year, SIBs gained wider attention following two major milestones—the U.S. National Advisory Board (U.S. NAB) publicly launched in June 2014, and in November 2014 it released a report of recommendations for federal policy on impact investing, Private Capital Public Good. Today, SIBs remain an underleveraged tool; however, the Foundation is excited to witness the progress that has grown from the work of the U.S. NAB. Policymakers around the world are seeing the value of bringing the talent, time, philanthropic will and assets from all sectors together to tackle major social problems.

As a member of the U.S. NAB to the G7 Task Force on Impact Investing, Jean Case has been an advocate for the powerful potential and virtues of this “all oars in the water” approach to solving society’s most intractable obstacles. By engaging private investors through both their immense capital assets and talent, we at the Case Foundation believe that governments and service providers will have the support to realize big, measurable gains on the issues communities care about most.

We look forward to more progress and to a future with more innovative government funding for measurable outcomes and impact.

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