2015 Lane Reports

DOL Changes Its Tune About Impact Investing

The Lane Report, November 2015
Thursday, November 5, 2015
by Anne Field

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Impact investing just took another big step towards becoming mainstream, with the help of the Department of Labor (DOL). And all the hard work investors have been doing to build reliable ways to measure results seems to be a contributing factor.

Specifically, the DOL recently posted guidance about what it calls economically targeted investments (ETIs) made by retirement plans covered by the Employee Retirement Income Security Act (ERISA). The DOL defines ETIs as, “investments selected for the benefits they create in addition to their financial return.”; so, impact investments would be included. The DOL’s guidance makes it easier for retirement plans to use such investments.

Marc J. Lane

That move comes not long after the IRS announced it’s kosher for foundations to make mission-driven investments as part of their core portfolio.

“These are signals from federal regulators they’re encouraging investments that drive positive social change,” says Marc J. Lane, an attorney in Chicago and a leader in the social impact arena.”There’s been an 180-degree shift in regulatory attitude.”

Basically, the DOL’s guidance gives its blessing to retirement plans that want to use impact investments, as long as financial performance isn’t compromised. That’s quite a change from a 2008 ruling (IB 2208-01) which seemed to discourage fiduciaries from taking such steps on the grounds that the  investments might hurt financial returns. According to an online DOL statement: “The Department has now concluded that in the  seven years since its publication, IB 2008-01 has unduly discouraged fiduciaries from considering ETIs and environmental, social and governance (ESG) factors under appropriate circumstances.”

Why the about-face? For starters, one important difference between now and then lies in significant improvements in metrics for analyzing impact investments. Also, there seems to be an emerging recognition of research showing that  ESG factors may help  investment performance. “These factors are more than just tiebreakers, but rather are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choice,” continues the DOL statement.

It all makes perfect sense to Lane. “Companies that are accountable to stakeholders other than shareholders are more likely to have loyalty from customers, less employee turnover, greater brand equity and, ultimately, over time, greater financial results, including share value,” he says. “These choices are fully consistent with the fiduciary duty to be a prudent investor.”

The guidance, according to Lane, is also evidence of a sea change in attitude among investors, especially Millennials. That cohort of 20-and 30-somethings is reputed to place a big emphasis on investments aimed at  driving positive social change.

“To some extent, regulators are catching up with the growing sentiment in the investment community,” says Lane.

 

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems.

A SIB isn't a traditional bond where investors are guaranteed a fixed return but a contract among a government agency that agrees to pay for improved social outcomes, a private financing intermediary and private investors. SIBs shift the risk of experimenting with promising but untested intervention strategies from government to private capital markets, with public funds expended only after targeted social benefits have been achieved.

Peterborough's problem was daunting: Sixty percent of prisoners serving short-term sentences historically had gone on to re-offend within a year after their release. But policymakers were confident that a solution was within their reach. They attracted private investment to pay experienced social service agencies to provide intensive, multidisciplinary support to short-term prisoners, preparing them to re-enter society and succeed outside the penal system.

The government decided which goals would be supported, but exactly how those goals would be achieved was left to the private sector. It was the investors, through a bond-issuing organization, who ultimately endorsed the allocation of investment proceeds — how much would be invested in job training, drug rehabilitation and other interventions.

If the Peterborough plan eventually shrinks recidivism rates by 7.5 percent or more, the government will repay the investors' capital and share the taxpayers' savings with them, delivering up to a 13 percent return. If the target isn't hit, the investment will have failed and the government will owe the investors nothing.

Illinois' SIB effort was spearheaded by the state's Task Force on Social Innovation, Entrepreneurship and Enterprise — the governor's think tank on social issues, which I am privileged to chair — with support from Harvard University's John F. Kennedy School of Government, the Rockefeller Foundation and the Aurora-based Dunham Fund. A request for information issued by the Office of Management and Budget on May 13 yielded responses from service providers eager not only to reduce recidivism here but also to create jobs, revitalize communities, improve public health outcomes, curb youth violence, cut high school dropout rates and alleviate poverty.

Now the governor has issued a request for proposals intended to spur better outcomes for Illinois' most at-risk youth — by increasing placement stability and reducing re-arrests for youth in the state's Department of Children and Family Services, and by improving educational achievement and living-wage employment opportunities justice-involved youth most likely to re-offend upon returning to their communities.

Kudos to Mr. Quinn for bringing SIBs to Illinois. May they soon start delivering on their promise.

- See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf
The world's first social impact bond, or SIB, was introduced in 2010 to fund innovative social programs that realistically might reduce recidivism by ex-offenders in Peterborough, England, and, with it, the public costs of housing and feeding repeat offenders. Prudently building on the strengths of that initiative, Illinois Gov. Pat Quinn is rolling out SIBs to help solve some of the state's most vexing social problems. - See more at: http://www.chicagobusiness.com/article/20131007/OPINION/131009850/a-new-kind-of-futures-contract-for-illinois#sthash.ThgxeiFt.dpuf

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Republished with permission from Anne Field's October 30, 2015 editorial which appeared on Forbes.com. ©2015 Forbes.com LLC™ All Rights Reserved.

 

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