06/15/2012 10:03 am ET Updated Aug 15, 2012

Impact Investing + Policy = Collaboration Needed

Utter the word "policy" in a crowd of impact investing types and watch the eyes roll.

It's understandable. The culture of impact investing is strongly influenced by the relentless energy of business-school grads toiling on the question of private sector provision of basic services like water, health and education. Glued to laptops in shared workspaces like the Hub Bay Area, these social entrepreneurs are responding to customer demand that is often unmet because governments are too incapable or incompetent to deliver.

Roger Martin, esteemed Rotman School of Management Dean, captured the sentiment succinctly when, at the Skoll World Forum, his response to a question on what governments could do to spur innovation (and by extension social enterprise) included a look of bemusement and then this gem: "That's a toughie."

Policy skeptics should enjoy the moment while it lasts ("it's fun to say, government should get out of the way") because, whether we like it or not, government is an increasingly central player in social and environmental markets. After all, there is a clear public interest in the positive benefits impact investing can bring, but also in protecting customers comprised of underserved populations, lest we face repeated crises like the microfinance debacle in Andhra Pradesh, India.

The irony at Skoll was that, just moments after Martin's comments, social enterprises held up as models of success included The Visayan Forum Foundation, which is saving children from human trafficking in the Philippines by partnering with law enforcement and port authorities, and Amazon Conservation Team, which is reducing deforestation in Brazil by leading an extensive coalition of activists, indigenous groups and, you guessed it, government agencies.

Of course impact investing extends far beyond social enterprises to more established markets like those for affordable housing and clean technology. And the more developed the market, the more government becomes out-and-out ubiquitous. In the US, for example, a plethora of tax credits, procurement policies, and co-investments underwrite impact investing in everything from community development and green building, to health care and education.

The difficulty with policy is that it often seems overwhelming or abstract. Take the commitment of the US Department of Defense (DOD) to meet 25 percent of its energy needs with renewable energy by 2025. DOD is likely to be a key driver in the growth of the renewable energy business for years to come, through RFPs like the recent call for $7 billion in new renewable energy contracts. However, it seems like a step too far connecting the dots to the inevitable opportunities this will create for impact investors.

In an effort to make plain the role of government in impact investing, consider this partial list of more focused US Administration efforts in just the past year:

  1. Catalyzing the creation of new funds: The Overseas Private Investment Corporation (OPIC) announced a commitment of $285 million to six impact investing funds last October, which are expected to raise $875 million in total.
  2. Leveraging additional capital without spending a dime: The Small Business Administration's (SBA) Impact Investing Initiative provides targeted capital, like OPIC, but also certification for private equity funds that makes it easier for banks to provide them with capital. SJF Ventures III LP was licensed as the first national SBA Impact Investment Fund in March and, because of this government assurance, received a $15 million commitment from Citi Community Capital.
  3. Providing new platforms for investment. Capital will be more readily available for impact investing from retail investors and foundations, thanks to the Administration. Liberalization of securities rules in the JOBS Act has created the opportunity for social enterprise crowdfunding platforms, while the Treasury Department and IRS have proposed new regulations making it easier for foundations to make Program Related Investments (PRIs).

Roger Martin was right. There is less government can do to incentivize innovation directly. But even on that front there are exciting developments. One idea that merits further attention is public sector innovation labs, which bring the public and private sectors together to interact and experiment on up-stream program innovations that address root causes where "current expenditure remains trapped managing symptoms downstream," according to Canada's Social Innovation Generation.

Building on ideas like public sector innovation labs is precisely what a new international network, the Impact Investing Policy Collaborative, has been established to do; a network of researchers and government partners actively exploring opportunities to grow impact investing in over 15 countries. The Collaborative launches June 20 at the Brazilian Development Bank in Rio de Janeiro and will live online at InSight at Pacific Community Ventures is proud to be one of the Collaborative's creators. We welcome your participation.