President Obama recently put in a request for $5 billion to fight a terrorist threat most people had never heard of a few months ago. Before that, he pushed for $1.2 billion to deal with a border crisis that few people knew was coming. And before that, he signed a $16 billion bill to fix scandals at the VA that few people knew existed.
Day after day, new issues, crises and scandals emerge that strain federal, state and local budgets. And on top of those are the ever-growing costs of entitlement programs like Medicaid and Medicare. Medicaid alone now accounts for 24 percent of state spending,which is double its share in 1990.
Meanwhile, chronic social problems like homelessness, crime, unemployment, lack of opportunity continue unabated, and government at all levels can’t seem to find the resources to address them, much less solve them.
What’s especially troubling about this picture is the fact that there are literally trillions of dollars left sitting on the table -- along with an untold amount of creativity, energy, results-oriented approaches and financial discipline necessary to tackle these problems.
This capital and talent is being mobilized by a growing movement called impact investing, which seeks to marshal private capital to support the public good. Impact investments, simply put, offer a return on investments that target specific social needs.
This year, impact investors have invested billions of dollars into innovations that promote national priorities, from early childhood education to financial services for the poor and struggling middle class, to innovations in clean technology. Although still in its early stages, the impact investing market is large and growing: at least $46 billion worth of impact investments are already under management, according to J.P. Morgan and the Global Impact Investing Network -- an increase of close to 20 percent in a year.
Unfortunately, a handful of government policies unintentionally stand in the way.
Pension funds, for example, sit on trillions of dollars in assets. Unfortunately, 2008 guidance from ERISA (the regulation governing pension funds) inhibits using these funds to make impact investments by essentially creating a higher burden on them compared with other investments. By simply clarifying rules to show that impact investing can be part of a prudent portfolio, the government could unleash billions of dollars towards impact.
Of course, this would not be the first time a shift in regulations has accelerated new markets. Much of the success of the venture capital industry would not have been possible without the clarification to ERISA in the late 1970s that made it “prudent” for pension fund managers to invest in venture funds as an asset class. The industry went from virtually zero to more than $5 billion in just two years.
Earlier this year, a coalition that includes some of our country’s largest foundations and biggest financial institutions reviewed federal policy to see what the government could do to unlock impact investing. We found a trove of relatively easy and cost-efficient changes, catalogued in the report Private Capital, Public Good, available at www.nabimpactinvesting.org.
Ironically, very few people are opposed to these changes. Instead, the obstacle is well-intentioned but outdated thinking. Many policies simply overlook the potential leverage that could come from the private sector and from market-based financial instruments.
Take charitable foundations, which at least in theory are the ultimate mission-driven financial institutions. The top 100 foundations are sitting on more than $650 billion in assets to improve society.Instead of harnessing all of their assets for social impact, foundations are guided by the IRS to maximize return on their endowment, and then give five percent away in grants every year.
Pioneering foundations such as the WK Kellogg Foundation and The McKnight Foundation have begun to buck this trend. Kellogg, for example, seeks to improve the well-being of children. It has used its endowment to fund high-growth, mission-driven companies such as Revolution Foods, providing healthier school lunch for 200,000 kids, or Acelero Learning, driving better outcomes for low-income kids in Head Start.
Treasury and the IRS should clarify that it is okay for foundations to allocate some endowment funds for purposes that advance their own mission. Unlocking even a small percentage of the billions under management could be a game-changer.
And while there are a host of things the government can do to unlock private capital, it can also review its own programs to make sure that mission-driven entrepreneurs aren’t unintentionally excluded. In the last few decades, we’ve seen many non-profits, which traditionally relied on grant funding, develop robust revenue streams to help them grow and scale their impact. For instance, last year, Goodwill Industries generated over $5 billion in revenue, enabling the non-profit to offer professional training to 9.8 million people, and help 261,875 people find new jobs.
Currently, however, even the most financially stable non-profit is unable to apply for a loan from the Small Business Administration. The government could change this at no net new cost, and in so doing help these organizations scale their impact to millions more people.
In the next few weeks, as election debates and attack ads invade our televisions and radios, we’ll hear many promises from our elected officials. Chances are we’ll hear far less about how we’re going to find funding to make good on these promises.
We’ll leave partisan debates to those who find them productive. In a time of budget scarcity, we can all agree that we should remove obstacles from private actors who would use their capital and talent to address urgent social issues.
Goldman is the senior director of Knowledge and Advocacy at Omidyar Network; Goldstein is the managing director of Imprint Capital and a member of the U.S. National Advisory Board on Impact Investing.