Impact Investing Is a Policy Issue
by Michael Hamill Remaley, SVP, Public Policy & Communications
This piece was originally published as the feature article of the October 2016 issue of the New York PhilanthroPost Policy Edition.
In my role supporting Philanthropy New York members’ learning and connecting to policy leaders – through our issue-based working group convenings (education, health, gender justice, etc.), through programming on the legalities of advocacy, through engaging in our process for taking official stands on issues of concern to the sector – I try to attend as many policy-focused programs as possible, but I need to be strategic with my time commitments. So some might ask, “Why do we see you at every program on impact investing?”
I strongly believe that impact investing has the potential to vastly increase the ability of philanthropic organizations to achieve their social missions. But one of the policy questions we often hear when the topic comes up is whether or not impact investments that have an imperative to contribute to social mission, and may not earn returns as high as other traditional investment strategies, violate the “prudent investor rule” contained in IRS Guidelines for foundations and endowments.
This is one of the many issues that I am sure will be addressed at the program “Getting Your Board on Board with Impact Investing” at PNY on Tuesday, November 1, the fourth in our Impact Investing Series. Previous programs in the series explored getting started with impact investing, investment/divestment strategies and social impact bonds/pay-for-success models. I have attended every one of those programs as well as many programs hosted by other organizations in our community on related impact investing topics and, truth be told, I just can’t get enough.
I don’t think I am leaking a spoiler for the November 1 program by saying that there are some very clear responses to the concerns on the “prudent investor rule.” Some reticent board members may say that a prudent investor cannot consider noninvestment factors when considering a strategy for inclusion in the organization’s investment portfolio because the 2006 “Uniform Prudent Management of Institutional Funds Act” requires an institution to act “in good faith and with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” But as our colleagues at Morgan Stanley wrote in a very helpful and succinct four-page brief on this topic, “The IRS further clarified that foundations can make an investment that furthers its charitable purpose in lieu of an investment that may offer a higher target rate of return. By offering this specific guidance, the IRS removed ambiguity surrounding permissible investing.”
And yet, this question continues to be raised by many boards just beginning to think about different ways of investing their resources. As I’ve learned more and more about impact investing, it seems that intermediaries – who deeply understand both financial investing strategies and the specific program areas of concern to a given foundation – are playing increasingly important roles for foundations. Whether it is an arts funder looking for impact investments in creative placemaking or an environmental funder exploring investment options in clean energy projects, the role of the intermediary is becoming increasingly central to decision-making on how to direct foundation resources. This itself raises interesting policy issues for the sector.
Might impact investing significantly alter the tools used by foundations to achieve social mission? How do the changes on the horizon affect the federal and state laws and regulations that govern our sector? These are questions that I definitely want to stay on top of. I am making impact investing an important learning priority over the coming years and will continue to soak up every piece of information I can.
If you are similarly fascinated by the complexities and promise of impact investing, I hope to see you at “Getting Your Board on Board with Impact Investing” on November 1.