New Regulations Boost Social Impact Investing
Two federal agencies have removed barriers that have discouraged foundations and pension funds from seeking out impact investments.
Predictions that social impact investing will become the new venture capital got a big boost from a pair of federal regulatory changes this year. One affects foundation investment decisions, and the other affects decisions by pension funds governed by the Employee Retirement Income Security Act (ERISA). Both changes make it easier to target impact investments—those that generate social or environmental impacts alongside financial returns.
Private investor enthusiasm about impact investing has picked up steam in recent years, a trend documented in the 2015 survey conducted by J.P. Morgan and the Global Impact Investing Network (GIIN). All told, survey respondents currently manage $60 billion in impact investments worldwide. They reported committing $10.6 billion in new capital in 2014, up 7 percent from the previous year. And they anticipated upping the ante by 16 percent this year.
Major financial institutions have taken notice. BlackRock, the world’s largest asset management firm, launched BlackRock Impact early this year to focus on impact investing. Prudential has committed an additional $1 billion to socially responsible businesses by 2020. And Bain Capital hired former Massachusetts Governor Deval Patrick last spring to found a new social impact investment business.
Impressive as this momentum appears, impact investments still represent less than one-half of 1 percent of the all the assets managed globally. As a movement some predict will replicate the success of venture capital, impact investing has a long way to go. And government can help by creating a more favorable regulatory environment.
That’s where the recent regulatory changes come into play. They remove barriers that have discouraged foundations and pension funds from seeking out impact investments. Today their stakes represent just 6 percent and 2 percent respectively of all impact investments, according to the J.P. Morgan-GIIN survey. Those figures are poised to increase.
