U.S. Policy Shift Can Unleash the Power of Impact Investing

Letting pensions consider the social impact of investments will boost capital that works for retirees — and the greater good.


The venture capital and private equity industries represent nearly $4 trillion of assets under management and have produced some of the world’s most innovative and powerful companies.

It wasn’t always this way. In the 1970s, venture capital and private equity assets were mostly the domain of wealthy individuals and families, and the assets under management were institutionally insignificant. To grow substantially, the industry needed access to larger pools of capital. The regulatory environment didn’t help: When the Employee Retirement Income Security Act (ERISA)was signed into law in 1974, the U.S. Department of Labor prohibited corporate pension plans from making risky investments, including investments in privately held companies. Although the intention of this regulation was to protect participants’ interests, it was unintentionally hurting pension fund returns by restricting access to this asset class.

Five years later, the DoL amended ERISA’s so-called prudent-man rule, allowing pension plans to invest up to 10 percent of their assets in venture funds and private equity. The change unlocked capital and fueled exponential growth. Commitments to venture and private equity investments grew nearly 20-fold in a decade. Pension funds and other institutional investors became the driving force in a thriving market. The financial world as we knew it fundamentally changed. And the companies that emerged — Apple, eBay, Genentech, to name a few — have transformed entire sectors of the economy and have had a profound impact on the way we live and work.

We are on the cusp of another such revolution. A new generation of investors and entrepreneurs is challenging the idea that for-profit investments and social impact are at odds. They, and we, believe that investment can create positive societal impact at the same time as financial returns.

This is impact investing. It is taking root across the globe, from entrepreneurs in India to venture capitalists on Silicon Valley’s Sand Hill Road, and from the halls of Congress to the Global Task Force on Impact Investment, established by the Group of Eight in 2013. Investors understand that they can invest in the public good while also making financial returns. Impact investments come in different forms: social impact bonds, to alleviate such issues as recidivism, health disparities and the achievement gap; support for entrepreneurs promoting financial inclusion; and growth capital for renewable energy. All share the common goal of leveraging the power of markets to achieve social and environmental objectives that address many of the world’s intractable problems.

Last month the DoL, led by secretary Thomas Perez, helped propel the impact investment movement forward. Two decades ago, DOL issued guidance clarifying that ERISA plans could consider the social impact of their investments when deciding among comparable opportunities. Seven years ago, however,in the midst of the 2008 financial crisis, the administration of president George W. Bush narrowed that guidance, signaling to pension fiduciaries that such choices could be considered imprudent.

A diverse set of policymakers, investors, entrepreneurs, philanthropists and others have since worked to reverse the 2008 decision. Among them was the U.S. National Advisory Board for Impact Investing (NAB), a policy group developed last year under the auspices of the G-8’s Social Investment Task Force, which brought renewed energy in focusing on the issue. Changing the 2008 ERISA guidance was among NAB’s most significant recommendations for policy reform to support impact investing. Significantly, NAB also recommended that the Internal Revenue Service clarify guidelines for foundations making mission-related investments — which it did last month — and that Congress pass legislation to support federal participation in social impact bonds, by which investors commit to pay for improved social outcomes that help the public sector save money.

As Secretary Perez wrote in the Huffington Post on October 22, The DoL “remove[d] the shackles and return[ed] to the sound principles originally clarified in 1994.” This is smart policy and forthright leadership. Repealing the 2008 guidance allows pension funds to consider the full range of investment opportunities while keeping their fiduciary duty to hardworking pension beneficiaries front and center.

Let us be clear: The effect of revising guidance on ERISA may be more subtle than that of the 1979 prudent-man rule change. But it is no less important. Pension funds hold trillions in investment capital. Allowing ERISA investors to take social and environmental impact into account in making investment decisions will help boost their long-term returns and further society’s interest. And it will do so at no cost to pensioners, taxpayers or investors. Indeed, we believe that the new guidance will help advance investment in new sets of opportunities that maximize growth and value.

Ultimately, we believe this policy change will have a dramatic impact on the capital available for impact investing. In reverting to the wisdom of the past, the Department of Labor and the administration of President Barack Obama blow new wind into the sails of impact investing — a global movement that J.P. Morgan and the Global Impact Investing Network estimate to be worth more than $50 billion today and growing fast. Revising ERISA moves us a step closer to a world that more effectively harnesses private capital, entrepreneurship and innovation for public good.

Sir Ronald Cohen is co-founder of Apax Partners, Big Society Capital, Bridges Ventures and Social Finance UK and chair of the Global Social Impact Investment Steering Group , which succeeded the G-8 task force he headed. Matt Bannick is managing partner of Omidyar Network . Tracy Palandjian is CEO and co-founder of Social Finance US . Bannick and Palandjian served as co-chairs of the U.S. National Advisory Board to the Social Impact Investment Taskforce .

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