Impact Finance

U.S. Department of Labor Releases Guidance on Consideration of ESG Factors for ERISA Plan Fiduciaries


On April 23, 2018, the U.S. Department of Labor issued Field Assistance Bulletin No. 2018-1, which provides guidance on environmental, social and governance (“ESG“) issues.

The Bulletin’s stated purpose is to provide guidance to the Employee Benefits Security Administration’s to assist in addressing questions they may receive from ERISA plan fiduciaries and other interested stakeholders about two previous DOL bulletins, Interpretive Bulletin 2016-1 relating to exercise of shareholder rights and written statements of investment policy, and Interpretive Bulletin 2015-01 relating to “economically targeted investments.” The Bulletin notes that the DOL has a longstanding position that ERISA fiduciaries cannot sacrifice investment return or take on additional investment risk as a means of promoting collateral social policy goals. The Bulletin states that ERIS fiduciaries must always put the economic interests of the ERISA plan first in making investment decisions, and that fiduciaries “must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.” The Bulletin also notes that ESG issues could constitute material business risk or opportunities to companies that would be treated as economic considerations under generally accepted investment theories, and that to the extent ESG factors involve business risks or opportunities that are properly treated as economic considerations in evaluating alternative investments, the weight that the fiduciary gives to those factors should be “appropriate to the relative level of risk and return involved compared to other relevant economic factors.”

IRS and Treasury Announce First Opportunity Zone Designations


On April 9, 2018, the U.S. Treasury and the IRS designated the first “qualified opportunity zones” in 18 states. A list of the designated opportunity zones is available here.

The U.S. Tax Cuts and Jobs Act (the “Act“), signed into law on December 22, 2017, created a process to designate certain low-income community census tracts as “qualified opportunity zones.” Investments in opportunity zones receive preferential tax treatment. The provision is designed to encourage investment in these low-income areas.  States were required to nominate low-income communities to be designated as qualified opportunity zones, or request a 30-day extension to submit the nominations, by March 21. The U.S. Treasury then has 30 days from the submission date to approve the designations. On April 9, the designations for all states that submitted by the March 21 deadline were announced.

Under the Act, the designated opportunity zones will retain the designation for 10 years. Tax on prior gains can be deferred until no later than December 31, 2026, so long as the gain is reinvested in a “qualified opportunity fund”, an investment vehicle organized to make investments in qualified opportunity zones. In addition, if an investor holds an investment in an opportunity fund for at least 10 years, the investor is eligible for an increase in its basis. According to the U.S. Treasury press release announcing the first designated opportunity zones, U.S. Treasury and the IRS plan to issue additional information on the certification of opportunity funds under the Act.

EC Releases Action Plan on Sustainable Finance

On March 8, 2018, the European Commission (“EC“) released an Action Plan on sustainable finance. The goal of the Action Plan is to provide a strategy on sustainable finance for the EU, and in particular to reorient capital toward sustainable investment, manage financial risks stemming from climate change, natural disasters, environmental degradation and social issues; and foster transparency and long-termism in financial and economic activity. The Action Plan builds on the priorities identified in the final report published in 2018 by the EU High-Level Expert Group on Sustainable Finance.

The key actions proposed in the Action Plan are: creating a unified classification system for sustainability, identified as the most important action of the Action Plan; creating standards and labels for green financial projects; clarifying duties of investment managers such as pension funds, insurance companies and asset managers to ensure they consider environmental, social and governance issues in investment decisions; incorporating sustainability in capital requirements for banks and insurance companies; and strengthening issuers’ sustainability disclosure and improving accounting rule-making to ensure accounting rules do not discourage sustainable investment. The Action Plan includes a timetable for all actions to be taken by the second quarter of 2019, and the first identified action is the tabling by the Commission of a legislative proposal in the second quarter of 2018 that will include tools allowing for the establishment of a sustainability classification system.

The European Commission’s press release announcing the publication of the Action Plan is available here and includes links to the full Action Plan, an FAQ document and a summary memo.

Bill Introduced to Create New U.S. Development Finance Agency

On February 28, 2018, a bipartisan bill was introduced in the U.S. Congress that would create a new, expanded U.S. development finance agency.  The bill, titled the Better Utilization of Investment Leading to Development, or BUILD Act, would create a new agency called the U.S. International Development Finance Corporation which would replace OPIC and would also take over some functions of USAID.  The bill was introduced simultaneously in the House by Republican and Democratic representatives and in the Senate by Republican and Democratic senators.

The bill would give the new agency additional powers that OPIC does not currently have and would also increase the amount of investment that can be made.  Under the bill, the maximum contingent liability of the new agency would be increased to $29 billion from OPIC’s current cap of $60 billion and would be adjusted regularly based on inflation.  In addition to providing loans and insurance, the new agency would have the power to make equity investments and make grants, neither of which OPIC has authority to do.  The bill would also move USAID’s Development Credit Authority, enterprise funds and Office of Private Capital and Microenterprise into the new agency.

The bill as introduced in the senate is available here.

U.S. Pay-for-Results Funding


The U.S. budget bill enacted on February 9, 2018 provides funding for states and localities for pay-for-success projects and feasibility studies. Title VIII of the bill, titled “Supporting Social Impact Partnerships to Pay for Results,” authorizes the U.S. Treasury to award $100 million of competitive funding to states and local governments for “social impact partnership projects” that “produce one or more measurable, clearly defined outcomes that result in social benefit and Federal, State, or local savings.” The legislation also provides for up to $10 million of the total available funding to be awarded for feasibility studies to apply for project funding. READ MORE

EIB and European Commission Launches Advisory Service to Help Cities Plan Investments


On November 28, 2017, the European Investment Bank (“EIB“) and the European Commission launched UBRIS (for “Urban Investment Support“), an urban advisory service with the goal of assisting cities in member states in accessing finance.  UBRIS will help design, plan and implement investment strategies and projects, including providing technical and financial advice.

Cities can apply for UBRIS assistance at the European Investment and Advisory Hub.  Eligibility criteria note that URBIS will prioritize cities seeking support related to a sustainable urban strategy with a view of developing, financing and implementing urban investment programs and that advice should be given on sustainable urban investments, in particular smart, green and socially inclusive investments.

According to press releases of the European Commission and the EIB, UBRIS will help with the following:

  • Improve a city’s investment strategy by giving advice in strategic planning, prioritizing and optimizing of investment programs and projects.
  • Bring projects and investment programs to a bankable stage, including by providing analysis on demand or support in financial structuring and by reviewing draft grant applications.
  • Explore opportunities for financing under the European Fund for Strategic Investments and/or the Cohesion Policy funds.
  • Support the preparation work for investment platforms and facilities combining funds, liaise with financial intermediaries and set up implementation arrangements for these facilities.
  • Develop financing approaches aiming at alleviating the burden on municipal debt and at helping municipal companies and private urban service providers access funding.

UBRIS will initially use EIB advisory and project services and focus on selected assignments.  The EIB and the European Commission will assess the initial work in the second half of 2018 and may consider additional resources at that time.

The EIB and European Commission press releases announcing UBRIS are available here and here.

European Commission Launches Consultation on Investors’ and Managers’ Duties Regarding Sustainability


On November 13, 2017, the European Commission launched a public consultation on institutional investors’ and asset managers’ duties regarding environmental and social sustainability.  The consultation is open for responses until January 22, 2018.

The consultation is in response to a recommendation in the EU High-Level Expert Group on sustainable finance interim report published in July 2017.  The interim report recommended that the Commission clarify that fiduciary duties of institutional investors and asset manages explicitly integrate material environmental, social and governance factors and long-term sustainability.  The Consultation Document notes that the Commission has commenced an impact assessment process assessing how such a clarification of institutional investors’ and asset managers’ duties regarding sustainability could contribute to a more efficient allocation of capital and sustainable and inclusive growth.

The consultation seeks evidence from “all citizens and organizations” of how clarifications or amendments to investor duties can contribute to more efficient allocation of capital and to more sustainable and inclusive growth; of how to ensure that end investors and beneficiaries have the right information to help them make sustainable choices; and from leading responsible investors on their strategies for considering environmental, social and governance issues.  Further information about the consultation, including how to respond, is available here.

OECD Development Assistance Committee Adopts Blended Finance Principles


The Development Assistance Committee (“DAC”) of the Organisation for Economic Co-operation and Development (“OECD”) has adopted policy guidance on the use of blended finance for development.

The guidance includes five nonbinding principles, which are described in Annex 1 to the DAC High Level Communiqué: October 31, 2017, which was published after a DAC convention on October 30 and 31, 2017. The five principles are referred to in the Communiqué as The OECD DAC Blended Finance Principles for Unlocking Commercial Finance for the SDGs. The principles are: (1) anchor blended finance use to a development rationale; (2) design blended finance to increase the mobilization of commercial finance; (3) tailor blended finance to local context; (4) focus on effective partnering for blended finance; and (5) monitor blended finance for transparency and results. The Communiqué provides additional detail with respect to each principle, including how each principle can be implemented.

In a separate publication, the OECD previously defined blended finance as “the strategic use of development finance for the mobilization of additional finance towards sustainable development in developing countries.”

The Communiqué also provided guidance on how aid can be spent on refugees arriving in transit or host countries, including a list of aid-eligible and noneligible expenditures.

The Communiqué is available here.

FMO and Shell Foundation to Create Fund to Provide Capital to Social Entrepreneurs


On October 24, 2017, the Dutch development bank FMO announced that FMO and the Shell Foundation, in cooperation with the U.K. Department for International Development, will cocreate a fund to provide growth capital to social entrepreneurs.

According to a press release by FMO, FMO and the Shell Foundation signed a Memorandum of Understanding agreeing to cooperate in the field of access to energy in Sub-Saharan Africa and India. This will include investing in financial institutions with specific goals of increasing access to finance, reducing inequality, and promoting green financing and agribusiness. The growth capital fund is planned to launch in the first quarter of 2018.

The press release is available here.