A. Bouri, CEO, GIIN: Setting the Table - How Government Policy Can Help Mobilize...
Global, August, 20 2019 -
Acting as a facilitator, regulator, investor, participant, or some combination of these, governments can define the landscape in which private capital operates.
Amid the political turmoil and volatility around the world, it’s easy to be pessimistic about the ability of any government to move us closer to a more just and equitable society.
Take the mixed news out of the European parliamentary elections earlier this year. Widely overlooked in the results was the emergence of a a continent-wide voting bloc eager to drive action on the climate crisis, after voters prioritized climate action in several European countries. Or the demonstrations and student strikes planned for Sept. 20, calling for climate action as world leaders gather in New York for the annual U.N. General Assembly.
People are seeking solutions to widening income inequality and catastrophic climate change and governments retain powerful influence to drive progress on social and environmental issues.
Governments can amplify that progress by creating a policy environment that mobilize more private capital for impact investment. Acting as a facilitator, regulator, investor, participant, or some combination of these, governments can define the landscape in which private capital operates.
The size of the global impact investing market is now estimated to be more than $500B USD. Imagine what could be done with engaged governments committed to unlocking the trillions of dollars of potential.
The GIIN’s Roadmap for the Future of Impact Investing outlines in detail where I believe government action will be especially valuable to the future growth of the market.
1. Redefine fiduciary duty to include impact. The financial value of their retirement savings is not the only thing people saving for retirement care about. They also care about the world they are retiring into. A future with sustainable use of resources, improved access to jobs and education for the workforce, and reduced poverty rates is a better investment for them, both personally and financially. That’s called “client demand” and in our 2019 Annual Impact Investor Survey, 85% of respondents said such demand was an important motivation for making impact investments.
It’s not a new idea. Back in 2001, years before the term “impact investing” was first coined, the French government introduced what became known as the “90-10 rule” for pensions: companies must offer their employees access to savings funds that invest five to ten percent of their capital in “solidarity-based enterprises.” The law has since unlocked more than €8.6B in capital to grow France’s sustainable and impact investing ecosystem while providing solid long-term savings options for employees.
Unfortunately, too many asset managers around the world still see their fiduciary duty — their obligation to act in the “best interests” of their investors — as limited to maximizing financial return in the short-term, without regard for social or environmental impact. Measuring and managing impact on people and the planet should be an important consideration in looking out for a client’s interests.
Governments can ensure that fiduciary duty acts as a driver rather than a barrier to impact investing by clarifying the definition of fiduciary responsibility so that short-term thinking does not take undue precedence over long-term sustainability.
2. Use tax incentives to encourage investment in impact. Elected leaders like those in the EU Parliament use big, visionary goals to inspire their voters and set priorities. But public budgets are simply not large enough to tackle every single domestic and international development goal on their own. They certainly fall short of the estimated $30T required to achieve the UN Sustainable Development Goals.
This is where they can help motivate the private sector to bring in additional capital. Tax incentives offer a way for public agencies to channel private sector resources for a development agenda directly into sectors where it would make the biggest difference.
To be most effective, tax incentives need to target specific sectors or places. The 2017 Tax Cuts and Jobs Act in the United States created Opportunity Zones, which provide tax benefits for investors who move their capital gains into low-income or economically distressed communities. Opportunity Zones have attracted significant interest and, if combined with strong policy focusing capital on high-impact projects, it could be a powerful example of how government can mobilize more capital for good.
In addition to tax incentives, governments can deploy other incentives to drive investment behavior, including using their own capital to mitigate risk and mobilize more mainstream capital to address social and environmental issues.
3. Mandate disclosure of data on impact. When the UK government mandated reporting on gender pay equity metrics, it emboldened shareholders to push for additional disclosures. This process led to Citibank’s reveal earlier this year that women at the firm were paid 29 percent less than men — something the firm then committed to rectifying.
Imagine how transformative these regulations could be if applied to more forms of impact reporting. When it comes to the impact of business activities, sunlight can be a great disinfectant — and governments need to not only open the curtains, but send a message that they’ll stay that way.
South Africa and Brazil, for example, now mandate that companies operating there collect and report ESG data. This helps build impact into the business culture, setting the stage for future reporting on target outcomes.
It’s worth noting that there are companies stepping up their impact disclosures without government prodding. The IFC recently announced that 60 investors have agreed to voluntarily align with a set of operating principles for impact management. This is good news, but the market cannot rely solely on corporate good Samaritans to normalize impact reporting.
I want a world in which impact is sought, measured, and ultimately achieved. That future will benefit from governments as a more engaged partner. They have a unique power to accelerate systemic change by giving innovation a hospitable place to seed and scale. If impact investing is going to be the new normal, government can help define the norms that get us there.