By Shrupti Shah, Director of GovLab, Deloitte Consulting | 25 June 2014
Can we put achievement of social good at the center of business? This question addresses the very basis of what today is being recognized as the impact economy. Across industries and in business both big and small, leaders, investors and entrepreneurs are investing in opportunities that create positive social impact – so that businesses can be both profitable and socially conscious at the same time. This is a new economy, the impact economy, where profit and social good are aligned.
And it’s paying off. The impact economy employs about 10 million people and generates nearly $500 billion in revenue annually. Doing well by doing good is possible. The impact economy has the potential to reach $1 trillion by 2020. Increased federal support could help expand it, create more jobs and spur market action that results in sustainable and socially-motivated business practices.
What role can the federal government play in growing the impact economy? We see three major roles: convener, buyer and regulator.
One of the greatest assets of the federal government is its ability to foster dialogue and encourage collaboration among public and private sector participants who often find themselves working in isolation toward similar outcomes.
During this early stage, sharing knowledge – particularly about new “Pay for Success” (PFS) finance structures that link payment to results – can accelerate growth. The social impact bond, a subset of PFS, is an emerging finance model in which investors provide capital for social interventions, while government agencies repay them if and when the services deliver value.
For instance, a state government agency may be working to develop an innovative financing mechanism – and not know that PFS structures have been researched, drafted and are actually being implemented with success elsewhere. Without knowledge sharing and collaboration, each deal ends up being custom-made and time intensive. By convening state and local officials with private sector participants working on social impact bond agreements, the federal government could help end the isolation and speed adoption of recommended practices.
Taking this a step further, the federal government could create a repository of these leading practices and data that would help market participants address issues, such as how to value social outcomes; how to choose the best evaluation methodologies for various situations; how to structure PFS contracts; and what information to consider when negotiating investor returns. Doing so could make it easier for state and local governments to adopt PFS models, such as social bond agreements, while reducing ambiguity for investors.
As one of the largest buyers in the world, the federal government can use its purchasing power to pay for success (PFS) – tie spending to desired social impact outcomes. This pay for success model ties spending to desired outcomes that are both financially and social motivated. With a direct tie to desired outcomes, the government can support – either directly or indirectly – businesses that achieve positive outcomes on both ends of the fiscal and social scales.
Social impact bonds, in which investors provide capital for social impact projects and government agencies pay for outcomes if and when the services deliver results, are one example of a PFS financial model. The PFS approach could be extended to the departments of Education, Labor, Justice, Health and Human Services, Commerce, Housing and Urban Development and Veterans Affairs. In fact, Congress could endorse the Obama Administration’s proposal to create a $300 million PFS Incentive Fund at the Treasury Department to address challenges the impact economy currently faces – mainly by establishing a federal entity to collect data, set standards and provide guidance for other agencies, and also accelerate social impact investments and PFS transactions. With the support of the federal government, social impact investments could help attract additional private investments sooner and faster. Finally, with the government as a buyer, it can put quality and social impact as a procurement requirement in its grants.
The business of government is to govern. In the role of regulator, the federal government can establish rules and guidelines for the impact economy that drive transparency, investor certainty and measurable results. A lack of legal definitions is holding back investments in the social impact sector. Federal definitions for social impact structures such as benefit corporations (B Corps) and low-profit liability companies (L3Cs) could help encourage the formation of social impact organizations. B Corps have already been authorized in 23 states and the District of Columbia. Tax code provisions, such as a tax credit for early investments in social impact businesses, could spur investment. In addition, revising the Employee Retirement Income Security Act (ERISA) could encourage more impact economy investments by pension funds.
With the success of the impact economy to date, there are many more opportunities for growth in the years ahead. Now is the time to use public and private investment to generate real, measurable results that can grow the impact economy to $1 trillion by 2020.
Shrupti Shah is the Director of GovLab within Deloitte Consulting LLP’s Federal Practice and co-author of “Government and the impact economy” published in June 2014.