As we discussed in a previous blog post, the promise of impact investing has been widely touted. A report from JP Morgan cites the potential for invested capital of $400 billion–$1 trillion over the next 10 years and a report from the Monitor Institute predicts a market size of $500 billion. Recently the White House signaled that they also see impact investing as a powerful force and a critical part of the domestic policy agenda.
On June 22nd, the White House and the Aspen Institute convened investors, philanthropists, entrepreneurs, executives and policymakers for a meeting entitled, “Building An Impact Economy in America”. The “impact economy” has been defined by the Aspen Institute as the “twin forces of supply and demand, impact investing and social entrepreneurship, that are driving systemic change in the US and around the world”.
Some of the most influential players in the field were invited to attend and work with Administration officials to understand how to remove barriers, streamline regulations and target existing government resources to support the building of an impact economy. Among those experts was our own Professor Cathy Clark. After she returned from Washington, D.C., I had a chance to sit down with Cathy and ask some questions about this monumental meeting.
Q: Convening this meeting seems like a strong signal from the White House about the importance of impact investing. What was your impression?
It was certainly an impressive set of participants from industry, academia, and from the government. The introductory session alone included Sonal Shah (Director of the Office of Social Innovation and Civic Participation); Bill Daley (White House Chief of Staff); Melody Barnes (Director of the Domestic Policy Council); and, Gene Sperling (Director of the National Economic Council). Bill Daley pointed out the need – more than ever given the economic situation – to do more with less and highlighted the potential of the impact economy to do just that. This attention from the White House will certainly help continue to build the momentum we are seeing in the field.
Q: The opening panel included representatives from across the impact investing industry — the investor community (John Buley, JP Morgan; John Goldstein, Imprint Capital Advisors), entrepreneurs and supporting organizations (Adam Lowry, Method; Cheryl Dorsey, Echoing Green), and government (Elizabeth Littlefield, OPIC). Was there agreement amongst their varied perspectives about the state of impact investing?
It was a very interesting panel and definitely a lot of agreement on where things stand in impact investing and what we need to do to move the field forward. A few of my takeaways from the panel were:
- Don’t focus solely on market size. There has been a lot of talk about the size of the market for impact investing. But that’s not really what matters. What’s important is that we get the “nuts and bolts” right, capitalize on the wave of activity that is occurring, and keep innovating.
- Criticality of metrics. John Buley of J.P. Morgan talked about the huge progress that is being made on the metrics side. In his opinion, there will be common standards sooner than we think. I couldn’t agree with him more. From all of my work with B Lab and GIIRS, I’ve seen the progress that we’ve made on standardization of metrics across audiences.
- Go mainstream. Of course we have to build the field with pioneers, but we must also bring on the mainstream sector to embrace a new way of doing business if we are to live up to the potential of the market.
- Talk openly, but don’t over-promise. This is an important balance for the field to reach – in other words, don’t let the hype supersede where we are, but also don’t forget to publicize our successes.
- Why start from scratch? Build on what we have while increasing clarity. Several panelists mentioned existing government programs that have seen success. There was agreement that these tools could be built upon, adapted and expanded. They also noted that what is truly important for markets to move are clearly defined guidelines and transparency.
Q: You mentioned that there are existing government programs that have seen success. Can you give some examples?
Karen Mills, Administrator of the U.S. Small Business Administration, talked about the potential of small business in America – she stated that half of Americans who work, work for small business and that small business creates 68% of new jobs. To expand access to capital for these entrepreneurs, SBA launched the Startup America initiative with a commitment to impact investing of $1 billion over 5 years.
We also heard from Elizabeth Littlefield, President and CEO of OPIC. She discussed their recent call for proposals focused on creating portfolios of social and/or environmental impact investments in emerging markets. The initiative aims to commit $250 million in OPIC financing and attracted proposals from 88 fund managers!
Q: You also mentioned the importance and progress being made on metrics and standards. Tell us more about why that is so important?
Well, there are still skeptics out there that ask “what is so special about impact investing?” And, “doesn’t every investment have a positive impact because it creates jobs?” And my answer is: absolutely not. But we are a little stuck because the definitions and standards regarding what is an impact investment (and what is not) are not yet clear.
However, the work that is being done by IRIS and GIIRS is helping us measure investments based on their performance in several areas (e.g., social, environmental, and governance), not just their intentions. Once we can establish measurement standards, we will have the opportunity to define clearly what the minimum level of social and environmental performance is that will qualify something as an impact investment.
Q: Once the opening plenary sessions concluded, there were a set of breakout sessions. You were asked to speak on “Breaking Down Administrative and Regulatory Barriers.” Tell us more about your remarks.
Before I headed to Washington, D.C., I actually did some “crowd-sourcing” – sending out an inquiry to about 75 colleagues, including entrepreneurs, academics, investors, policy makers, foundations officers, consultants, and several membership associations. I wanted my remarks at the White House to reflect what is being thought in the field about what we can do at the federal level to make impact investing easier and better. What was interesting was that there was a tremendous amount of consensus from the various audiences which I was able to boil down in to 5 sets of recommendations.
Q: What were the highlights of those recommendations?
- Allow foundations and investors using nonprofit forms to invest more effectively. The IRS’ PRI and MRI guidelines are pretty flexible, but the case examples they give are outdated and the perception of risk on the part of many foundations is very high. Currently only about 1% of foundation capital is invested through PRIs, clearer examples could encourage more. And longer-term, what about extending the PRI idea to others – allow any individual or investor that makes below market investments in a nonprofit to reap tax benefits. Others suggested that SBA loans be given to nonprofits as well.
- Unleash private investment capital. Outside of institutional investors, we need to do more to encourage investment from angel investors and non-accredited investors. We should extend tax credits to angel investors if they are investing in “certified” impact organizations, as the UK does. And we should allow investors who are putting lower amounts of capital at risk (say $5K instead of $50K), to invest without some of the SEC restrictions. That would allow for news forms of funding, like crowd-funding a la Kiva (except using investment dollars, rather then donations).
- Refine and copy existing market making mechanisms. Expand and improve the Community Reinvestment Act (CRA) and New Markets Tax Credits because they work. Standard guidelines have moved billions in Community Development Finance. And eventually, some believe we might want to emulate the CRA but for broader impact areas and pass an Impact Investing Act.
- Create ways for states, and eventually federal government, to participate in recognizing new corporate form standards. If a clear set of definitions for an Impact-Certified or Benefit Corporations emerge at the state level (and there doesn’t have to be just one), both states and the fed government can explore ways to support them, though procurement preferences for those companies, and other means.
- Develop the infrastructure. All of this requires infrastructure development. We have to invest in standards and metrics development; support intermediaries providing technical support to impact companies; enable capital flows to early stage impact investors (which is the most fragile part of the ecosystem); and, provide funding and incentives for research. CASE and other institutions are conducting this research but we need more resources put towards it – we currently have a handful of reports that people talk about but we need to know more.
Cathy’s remarks were consistent with many of the findings from other breakout sessions. Some of the consistent themes included: building transparent legal frameworks/definitions; unlocking capital markets (including calls for CRA expansion, PRI clarification and expansion, safe harbors for unaccredited investors and/or pension funds to engage in impact investing); infrastructure development and education (for investors and investees); and, continued focus on improving and supporting metrics development.
[note: The full video of the breakout “wrap-up” session can be viewed on YouTube. In addition, the Aspen Institute will be publishing a report summarizing the meeting findings later this summer.]
What is clear is that the elevation of the impact economy to the level of the White House shows that the momentum and potential of this field is potentially powerful and transformative. CASE looks forward to playing a leading role in this field, bringing academic rigor to the study of impact investing, training the next generation of impact investors and impact entrepreneurs, and continuing to work with key players in the field to create the ecosystem of policies and programs to support the emerging impact economy.