Opportunity Zones: Moving Toward a Shared Impact Framework

The tax bill passed in 2017 includes a provision creating various benefits for investors that move capital gains into designated low-income census tracts, known as Opportunity Zones, through special investment vehicles known as Opportunity Funds.

This tax benefit has captured the attention of a wide range of stakeholders — from investors attracted by a new tax incentive to community development practitioners drawn by the promise of increased investment in low-income areas.

Many elements of this new investment tool are uncertain, including if and how Opportunity Funds will manage and report on the social and environmental impact of their investments. Yet even amid this uncertainty, investors are looking to take advantage of the benefit.

What is certain is that Opportunity Funds are another tool in the community development tool kit — primarily for state and local players — and they underscore the importance of place-based investment. The tax benefit will drive capital to the nation’s most distressed areas, but the activities that capital supports must be rooted in a local context.

Ensuring that these investments result in meaningful and inclusive economic development will require a coordinated effort by a diverse consortium of leaders. With that in mind, on July 19, the U.S. Impact Investing Alliance, the Beeck Center, and the New York Fed convened a roundtable of community development investors, researchers, and practitioners to discuss the future of Opportunity Zones.

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U.S. Impact Investing Alliance Statement on Department of Labor ESG Guidance

Field Assistance Bulletin 2018-01 Seeks to Clarify Fiduciary Consideration of ESG Factors

On April 23, the Department of Labor published a “Field Assistance Bulletin” providing guidance to fiduciaries of private-sector employee benefit plans. The note served as a clarification related to the DOL 2015 guidance on economically targeted investments and the DOL 2016 guidance on shareholder engagement. While remaining clear that fiduciaries must prioritize financial returns, the DOL confirmed that pension managers can and should feel comfortable using ESG factors as an input in evaluating potential risk and financial return.

Fran Seegull, Executive Director of the U.S. Impact Investing Alliance, released the following statement:

“The guidance from the Department of Labor reaffirms the direct, material impacts that environmental, social and governance factors can have on financial performance, as demonstrated in the significant and growing body of financial and academic research. It further confirms that pension plan fiduciaries may engage management – both directly and through proxies – in order to maximize the long-term economic value of their investments.

"While the advisory offers some notes of caution, we believe the economic case for evaluating the material impacts of ESG factors on both risk and financial return remains as clear as ever. It is not without reason that a growing number of retirement plans, alongside leading banks, insurance companies, foundations and individuals, are recognizing that responsible long-term investment strategies demand a full and complete accounting of impact factors.”

Clarification of Guidance on ESG Considerations (DOL IB 2015-01)

  • The Department of Labor remains clear that in many cases, “ESG issues present material business risk or opportunities.” As stated in the 2015 Interpretive Bulletin and restated in the Advisory language, “if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance (ESG) factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.”
    • This thesis has been corroborated by several studies proving the positive correlation between ESG practices and business outcomes. Oxford University and Arabesque Partners reviewed 200+ academic analyses and found that firms that rated highly on ESG factors enjoyed lower costs of capital (90% of firms), better operational performance (88%) and higher stock prices (80%).
    • With growing sophistication and reporting accuracy, investors are able to recognize, demonstrate and account for the materiality of ESG considerations on underlying financial performances. Though the Department of Labor has never mandated consideration of these factors, the Field Assistance Bulletin recognizes and reasserts that plan participants are increasingly demanding their plan sponsors consider ESG factors and make ESG-themed investment options available. Three-quarters of U.S. defined-contribution plan participants surveyed by Natixis Investment Managers said they would like to see more socially responsible options included in their retirement plans.
    • Managers are also increasingly aware of the fact that it may be imprudent to ignore these material risks and opportunities. Flows into U.S. funds that incorporate ESG factors were at an all-time high for the second year running in 2017. A report from Morningstar showed net flows of $6.5 billion last year, more than three times their level just two years earlier. Buoyed by strong returns, the AUM of these funds also grew to $95 billion.

Clarification of Guidance on Shareholder Engagement (DOL IB 2016-01)

  • Likewise, the guidance reasserts that managers should take an active role as shareholders if they believe it is necessary to enhance long-term investment performance. Once more, the Department of Labor is recognizing the materiality of environmental, social and governance risks to long-term financial performance.
    • In discharging their fiduciary obligations, investment managers are able to “engage with companies to learn [and share significant concerns] about corporate governance practices, or company actions to manage its environmental risks, human capital, facilities, stakeholder relations, and long-term access to critical resources.”
    • While the guidance warns against incurring outsized costs in pursuing this type of engagement, it recognizes that, through carefully considered strategies and with the assistance of consultants or proxy advisories, plan administrators are able to increase the economic value of the plans investments. The guidance will spur efforts already underway to quantify the economic benefits of active ownership.

New Language on Qualified Default Investment Alternatives

  • The guidance offers new language around Qualified Default Investment Alternatives (QDIAs) – referring to asset allocations including target funds which an employee might be automatically opted into. The guidance suggests that including an ESG fund as the default investment alternative would require a rigorous demonstration of its superior return expectations relative to other options. However, including an ESG fund as one of many options for a participant to select from, particularly where participants are expressing a desire to invest in accordance with their “personal values”, remains appropriate.
    • Clear and consistent regulation benefits the industry. Although the bulletin language could chill the nascent growth of ESG target-date funds (TDFs), financial services providers have always focused on the economic case for these exciting new products. The bulletin will help sharpen that focus and turn attention to the increasingly robust evidence base of ESG performance. The DOL should continue to work with the industry to ensure that retirement plan managers and participants have access to best-in-class financial instruments.

Looking Ahead

  • The DOL regularly issues clarification for Employee Benefits Security Administration (EBSA) investigators and plan administrators, and with an emergent field like ESG investing, this type of clarification should be expected.
    • The fundamental contention that ERISA fiduciaries must above all else safeguard the interests of plan participants is clear and uncontested. Fiduciaries must carefully evaluate every investment decision, and we don’t ask that ESG-themed investments get special treatment.
    • The data shows, and will increasingly show, that investors who have proactively mitigated ESG risks and capitalized on ESG opportunities will be at an economic advantage relative to peers .
  • For impact investors, this guidance should underscore the critical importance of field building at this critical juncture. Pension fiduciaries, plan participants and regulators are looking to the market to develop and advance the best practices which will guide further adoption of ESG investment strategies.
    • These efforts will require a commitment to robust and transparent data in addition to collaboration on research, education and policy.  As we further deepen understanding of the material impacts of ESG factors, together we will build the case that the future of investing is impact investing.

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About the U.S. Impact Investing Alliance

The U.S. Impact Investing Alliance is a field building organization committed to raising awareness of impact investing in the United States, fostering deployment of impact capital and working with stakeholders to help build the impact investing ecosystem.

Congress Passes the Social Impact Partnerships to Pay for Results Act (SIPPRA)

Included in the recently passed Bipartisan Budget Act of 2018 was the Social Impact Partnerships to Pay for Results Act (SIPPRA). This legislation is the result of more than five years’ worth of efforts by bipartisan lawmakers to create a standing pool of capital to support outcomes based financing. It builds on the work and learning of the Social Innovation Fund, state level pay for success projects, and the global movement to create social impact bonds. It was also highlighted as a priority in the National Advisory Board on Impact Investing’s report, Private Capital for Public Good.

At the U.S. Impact Investing Alliance, we have been following this bill closely as we know it is a topic of interest to many of our members. The hope is that by creating this new federal resource to support evidence based policies, states and localities will be encouraged to think about how this type of program can improve outcomes for their communities in need. By supporting programs traditionally funded across numerous federal departments and agencies, it looks to embed evidence based practices throughout the federal government.

The enacted legislation provides for a $92 million fund to be housed at the Department of Treasury. It highlights a wide range of outcomes eligible for the program, including improved child and maternal health, reduced homelessness, lowered rates of recidivism and increased youth employment, among others. The key criteria is that outcomes must “result in social benefit and Federal, State, or Local savings.” The Treasury is instructed to publish a request for proposals from states and localities within the next year.

Stay tuned for updates.