Market Infrastructure policy can reshape the conditions that guide how private capital works, promote impact investing at a larger scale, and drive more capital toward enterprises with a positive social and environmental impact. In 2011, Pacific Community Ventures released Impact Investing: A Framework for Policy Design and Analysis, mapping the policy environment.
With government involvement in the impact investing industry, the framework is used to understand the tools that support impact investing policies that are sector and/or outcome-specific. To enhance the resiliency of market infrastructure, the framework provides a holistic impact investing policy environment, which should appropriately support supply development, directing capital, and demand development.
We need market Infrastructure policies to create sustainable conditions for impact investing as we build back from the COVID pandemic and look to create a new economy based on quality jobs, healthy communities, and equitable and sustainable growth. PCV’s expansive discussion paper – Meeting The Moment – examines how impact investing policy can be used to help private capital address inequality and support COVID-19 recovery efforts in the U.S.
Reprioritizing the market infrastructure for impact investing can enhance and reposition a domestic development bank, incentivize donor-advised funds, and adopt insurance companies’ reporting requirements. Here are a few examples:
Facilitate Impact Investments and Adopt Reporting Requirements for Insurance Companies (Supply Development and Directing Capital)
This will provide additional private capital for impact unlocked, including investments in affordable housing, clean energy, small businesses, healthcare, and others.
At a national level, requiring that insurers annually report to the National Association of Insurance Commissioners (NAIC) about their impact investment or ESG activities could incentivize local affordable housing and economic development organizations, community advocates, and the California Department of Insurance to invest more of their capital in underserved communities and/or for environmental benefit.
Incentivize Impact Investing through Favorable Tax Treatment of Donor Advised Fund Impact Investments (Supply Development)
This will direct capital to impact, including investments in struggling small businesses, rural and urban entrepreneurs, affordable housing development or preservation, and nonprofits providing critical social services.
The number of Donor Advised Fund (DAF) accounts in the U.S. has grown by over 55 percent to more than 728,000 between 2017 and 2018 alone. As of 2018, contributions to DAFs totaled $37.12 billion. The federal government can leverage DAFs by unlocking sizable DAF charitable assets for impact, including requiring a 5 percent new asset value minimum annual distribution for future donor contributions to the DAF to be eligible for a tax deduction.
To incentivize DAFs, donors could receive an additional tax benefit equal to 50 percent of the capital’s value deployed to an impact investment with an investment term of at least five years.
Launch A Domestic Development Finance Bank (Directing Capital)
This will drive capital and resources to underserved communities and underfunded development projects, such as infrastructure and affordable housing. This bank can also directly deploy capital to enterprises nationwide, weathering COVID-19 and its aftereffects.
Positioned to advance the incoming administration’s priorities, the Domestic Development Bank can scale large projects, such as climate change mitigation, infrastructure improvements, and areas within community investment. Creating a new financial entity with an explicit mandate to work with stakeholders, fund projects, and enterprises primarily overlooked by traditional banks would build public sector capacity and knowledge on the field of impact investing.