Confusing Federal Rules and Little Guidance Inhibit Power of Impact Investing, Group Says

All the right ingredients are in place to create a big market for impact investments, says Jean Case, chief executive officer of the Case Foundation.

Younger investors looking to do social good while seeing their money grow are ready to plunge in, and a fresh slate of entrepreneurs hoping to improve the world as well as start new businesses needs seed funding.

However, a lack of clarity in federal regulations is holding back impact investing, says Ms. Case.

Last summer the U.S. National Advisory Board on Impact Investing, on which Ms. Case sits, released a series of suggested changes to federal policy to help expand the market.

“Many foundations are looking for more comfort, guidance, and, really, approval from Treasury in order to jump in the way they want to,” she says.

Andrew Farnum, senior program investment officer at the Bill & Melinda Gates Foundation, agrees the rules are often confusing. For instance, he says, a foundation might be hesitant to pull out of an investment, even after achieving its social goal, if it would “take a bath” financially because of a low stock price.

“It’s unclear when you’re required to divest,” he says. “There’s not great guidance.”

Difficult Requirements

Debra Schwartz, director of program-related investments at the MacArthur foundation and another member of the national advisory board, believes that the policy landscape generally inhibits smaller foundations from making impact investments. Larger foundations, like Gates and MacArthur, have the legal staff to make sure they are following the rules.

“It can be challenging to thread the needle of regulatory requirements,” she says.

The National Advisory Board recommended that the federal government:

• Allow pension plans to consider social benefits when making investments. Current regulations state that plans may “never subordinate the economic interests of the plan to unrelated objectives.”
• Clarify standards for foundations to allow traditional market analysis when they consider opportunities.
• Clarify rules for when a foundation must end a program-related investment. Make it clear that it is allowable to delay an exit until it is financially prudent to do so.
• Designate a third party, such as a think tank, to regularly review regulatory, tax, and capital programs to identify barriers and suggest statutory or regulatory changes that would increase the market.
• Allow foundations greater latitude in their nonprogrammatic investments so they could invest in assets “that have a special relationship or special value … to the charitable purposes of the institution.”
• Permanently reauthorize the U.S. Overseas Private Investment Corporation and allow it to make investments that have a social value, rather than requiring it to support projects with meaningful connections to U.S. citizens or businesses.
• Endorse a framework being developed by the G8 Social Impact Investment Taskforce to create measurement standards.