5 Things Your Foundation Should Know About the Future of Impact Investing

Monday, June 30, 2014 - 1:44 pm
Laura Tomasko

At the White House last week, foundation executives, including the Council’s President and CEO Vikki Spruill, met with senior Administration officials for a roundtable on the future of impact investing. A complement to charitable giving and foundation grantmaking, impact investing offers a powerful opportunity to provide cash, loans, or equity capital to an organization, fund, or company that intends to generate measurable social or environmental impacts, alongside financial returns.

Many in Washington have seen the potential positive impact of turning traditional investing into an opportunity for catalytic change and community benefit. After the event at the White House, Senator Mark Warner and Representatives Todd Young (R-IN-9) and John Delaney (D-MD-6) hosted a briefing on Capitol Hill on impact investing.

These events got developed to highlight the release of a highly-anticipated playbook on impact investing policy, new commitments by policymakers and private sector leaders, and a discussion of a new piece of legislation.

Here are the top five things foundations and philanthropic leaders need to know:

1) There’s a new playbook on impact investing policy: A group called the U.S. National Advisory Board (NAB) to the Global Social Impact Investment Taskforce, formed at the 2013 G8 meeting, released this highly anticipated report, “Private Capital, Public Good: How Smart Federal Policy Can Galvanize Impact Investing – and Why It’s Urgent.” Compiled by twenty seven impact investing thought leaders, including several Council members, this report highlights how policymakers can grow the impact investing industry and add to an important global policy conversation.

2) A few of the policy recommendations directly affect foundations. The NAB hopes the Internal Revenue Service (IRS) will remove regulatory barriers that keep private foundations from making impact investments, whether the investments are program-related (PRIs, which are primarily focused on charitable purpose) or mission-related (MRIs, which align with a foundation’s mission and intend to generate a financial return). In particular, the NAB is concerned that some foundations hesitate to make investments that fall in between what seems acceptable for MRIs and what seems acceptable for PRIs.

Praising the updated IRS PRI examples and encouraging greater clarity about the definition of charitable purpose, the NAB would also like the IRS (1) to clarify how foundations can assess the financial returns they generate from PRIs, (2) to determine when it is acceptable to exit (or “cash out” of) a PRI, particularly if it is profitable, and (3) to update the jeopardizing investment standards that can restrict how a foundation makes MRIs. For more information, see pages 24-25 of the report.

3) A few policy recommendations indirectly affect foundations. In the report, the NAB supports the New Markets Tax Credit, the Pay for Success Incentive Fund, the Community Development Finance Institution Fund, and the Community Reinvestment Act. Without going into detail about each of these policies, foundations should know that these policies, in addition to others listed in the report, create vehicles for foundation investments and encourage other private capital to invest for social or environmental returns, alongside financial ones. This helpful policy recommendation infographic walks you through the various recommendations.

4) Public officials and private sector leaders made significant commitments, exceeding $1.5 billion. Beyond releasing this comprehensive policy report, Wednesday’s White House roundtable featured an impressive number of commitments from senior public officials and private sector leaders. Most notably for foundations, the Treasury Department plans to provide foundations with clarifying guidance about making investments in businesses that advance the foundation’s charitable purpose without conflicting with the prohibition on jeopardizing investments. The over twenty private sector commitments to new impact investing included announcements from Council members the McKnight Foundation, Rockefeller Brothers Fund, The John D. and Catherine T. MacArthur Foundation, Ford Foundation, and The Case Foundation. You can read a summary of the commitments here.

5) Social impact bonds (SIBs) are generating continued discussion at the White House and on the Hill. The day featured several conversations about social impact bonds, a new impact investing opportunity. Often referred to by the Administration as Pay for Success, SIBs are government contracts with private investors who pay the upfront costs for services to help a population, such as a program that helps reduce homelessness or recidivism. If, and only if, the program achieves its desired outcomes, government repays the private investors, who have the potential to earn interest if the program exceeds the agreed upon outcomes.

At the White House, the Social Innovation Fund (SIF) announced a $11.2 million grant competition to support Pay for Success and a new partnership with the Laura and John Arnold Foundation to launch a “Pay for Success Event Series” to provide SIB training and technical assistance to local policy makers and nonprofit executives. At the Hill briefing, Representatives Young and Delaney spoke to Hill staffers and attendees about their new bill, the Social Impact Bond Act, and expressed interest in the SIB focus on metrics, outcomes, fiscal responsibility, and leveraging private capital.

All in all, Wednesday’s report release, announcements, and activity at the White House and on the Hill demonstrated the continued growth of the impact investing field, in which foundations play an important role. The Council has been supporting foundations in this work through our impact investing initiative which includes resources and information for anyone interested in learning more. We look forward to keeping you abreast of the latest trends and its policy implications.

Laura Tomasko leads the impact investing initiative at the Council on Foundations. Connect with her by e-mail and on Twitter @lauratomasko.

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