Growth of market in social good investments hampered by regulations despite huge demand
By Astrid Zweynert
SAN FRANCISCO, Sept 4 (Thomson Reuters Foundation) - Governments need to create policies that help to accelerate the growth of investing for profit and social good, the head of a task force set up by the world's richest nations to boost impact investing said.
Sir Ronald Cohen, chair of the G8 Social Impact Investment Task Force, said the group's first report, due out on Sept. 15, will make eight high-level recommendations aimed at boosting the market in impact investing, which generates measurable social or environmental benefits alongside financial returns.
"We're in a world where there is huge latent demand on the part of entrepreneurs, there is huge latent demand on the part of investors, you see a lot of socially responsible investment already," he told Thomson Reuters Foundation in an interview. "What we haven't had are the financial instruments and the legislation to enable this to take off."
Impact investing is not new but has gathered momentum as cash-strapped governments around the world struggling to deal with poverty, broken health care systems, crime and ineffective education increasingly look for money from the private sector.
Investment bank J.P. Morgan and the Global Impact Investing Network estimate there are $46 billion in impact investments under management. While experts say this figure is growing, it is only a fraction of the $210 trillion invested in financial markets around the world.
Unlocking even a small percentage of those trillions for impact investments would dramatically expand resources available to address global problems as philanthropic funds and aid money are not sufficient to deal with threats such as climate change, water scarcity, food shortages and lack of access to health care, education and affordable housing.
Cohen said impact investing could take off in a similar way to venture capital, which rocketed when governments eased investment restrictions.
"What we have tried to do (with the report) is to draw out some of the measures needed to turn impact investment into something that is like venture capital or private equity," he said, referring to the potential of such investments to drive change.
WHAT'S HOLDING BACK THE MARKET?
Governments should look into helping their own departments find new ways of using money, as in the "pay for success" model pioneered in Britain where a public service is delivered by a non-profit or social enterprise and investors get paid if agreed outcomes are met, Cohen said.
Government restrictions on where foundations and pension funds, among the largest investors in the world, can put their money are also hindering the growth of the impact investing market, he added.
"If governments begin to look at the issue of fiduciary duty that would make it easier too," Cohen said. "The question that needs looking into is can the trustees of a foundation invest in things that may not maximise financial return but would achieve social returns consistently.
"Trustees are prepared to go in that direction but they're very concerned that they're going beyond the remit that legislation gives them."
The G8 task force was set up a year ago and brings together government officials and senior figures from the worlds of finance, business and philanthropy.
A report in June 2014 by the U.S. National Advisory Board on Impact Investing (NAB) recommended government actions to help remove barriers to impact investing, increase the effectiveness of government programmes and provide incentives to encourage the sector to grow.
Another measure to boost the market would be to allow the U.S. Overseas Private Investment Corporation to allow the international development finance agency to provide equity, not just loans, said Matt Bannick, a managing partner at Omidyar Network and NAB co-chair.
"Government plays a critical role and perhaps some of the things that government can do to facilitate the development of the market have been under-appreciated," Bannick told Thomson Reuters Foundation.
"Government's role is multi-faceted and critical, and it extends from more forward-looking regulation through to creating greater efficiency in existing programmes to government itself playing a role in stimulating the development of markets," said Bannick.
Cohen and Bannick spoke to Thomson Reuters Foundation this week during the SOCAP social capital markets conference, an annual gathering that brings together social entrepreneurs, non-profits and investors to help accelerate the flow of capital to social good.
Cohen and Bannick spoke to Thomson Reuters Foundation at SOCAP 14, a conference that brings together social innovators, entrepreneurs and investors to help boost the flow of capital to social good. Find out more about SOCAP here.
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