Impact investing regulations

We come from successful private enterprises, leading financial institutions, groundbreaking nonprofits, innovative universities, market-shaping investment funds, pioneering public agencies, and major foundations. Strong partnerships must be sustained and strengthened between government, private investors, foundations, intermediaries, the social sector, and entrepreneurs, in order to develop a thriving impact investing marketplace. Today, investment areas once considered tenuous—from low-income housing to charter school development—have been proven, thanks to innovative partnerships between private-sector leaders and the government. And to reach its potential, this marketplace must provide investors with sufficient data to make informed investment decisions.

First steps for regulations that encourage and support long-term investment

Account Access. Individual Investor. United States. Provides access to a diversified portfolio of private equity investments that seek to achieve compelling financial returns together with a demonstrable and measurable positive social and economic impact. Alternative investments are speculative and include a high investibg of risk. Investors could lose all or a substantial amount of their investment.

Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy. Our flagship business publication has been defining and informing the senior-management agenda since Pension funds can play an important role in fostering long-term investment and economic growth. While banks continue to withdraw liquidity from the capital markets by making fewer loans, pension funds and their asset managers are well suited to fill that funding gap. Because our mandate is to fund the retirements of workers who may not be leaving the workforce for decades, we are able and willing to make very long-term investments. A long time horizon fits both the large scale and global nature of our operations and our fiduciary responsibility.

Our mission is to help leaders in multiple sectors develop a deeper understanding of the global economy.

Our regluations business publication has been defining investimg informing regulayions senior-management agenda since Pension funds can play an important role in fostering long-term investment and economic growth. While banks continue to withdraw liquidity from the capital markets by making fewer loans, pension funds and their asset managers are well suited to fill that funding gap.

Because our mandate is to fund the retirements of workers who may not be leaving the impac for decades, we are able and willing to make very long-term investments. A long time horizon fits both the large scale and global nature of our operations and our fiduciary responsibility. More important, maintaining a long-term perspective benefits our pensioners, in whose interest we act.

For these reasons, we strongly support the imoact global efforts to stimulate long-term investment. It is, however, not only a matter of ability and willingness. We need to create the right incentives and at the same time remove barriers that constrain long-term investment. Unfortunately, regulation often forms one of those barriers. Obviously, regulation is vitally important: it serves as a traffic officer in the crowded streets of the financial invsting.

When drafted and applied correctly, it can be an effective impadt for creating financial stability and restoring and maintaining confidence in the financial markets. When it functions to enable long-term investment, it can pave the way for citizens to meet impact investing regulations future financial needs.

But when regulations have the unintended effect of discouraging or even prohibiting long-term investment, they need to be identified and eliminated. Over the past few years, an enormous number of new rules have been created in reaction to the global financial crisis. In many cases, these rules have been too wide ranging.

Failure to appropriately tailor regulations can close off opportunities to make long-term investments that could be widely beneficial.

For example, new margin requirements for derivatives are meant to reduce systemic risk. Pension funds are highly creditworthy institutions that pose little or no such systemic risk to the financial markets. Forcing them to set aside assets for collateral purposes in the same manner as a bank or hedge fund does not make kmpact, and it results in a direct loss of long-term-investment opportunity. The impact of regulation on long-term investment is a complex matter.

This is not investiny due to the fact that such investments involve a variety of products, market players, and jurisdictions. It is also because the inhibiting effect of regulation is often difficult to see and to quantify. To address this issue, we tend to ihvesting different categories invvesting regulatory impact on long-term investment in our discussions with regulators and regu,ations. The rules that encourage long-term investing positive impact are to be separated from those that discourage it negative impact.

Both forms of impact can either be direct or indirect. We classify rules that apply to actual long-term-investment products or strategies as having a direct impact.

Rules that apply to other levels, such as investors, or to other products or parts of the market can also impact the ability or willingness to engage in long-term investment. We call this investting indirect impact of regulation. That results in four categories of impact: direct and indirect positive impact and direct and indirect negative impact. The problem is not only with the regulations that exist but also with the regulations that do not exist.

In circumstances where regulation could have a positive impact on long-term investment but is refulations, it needs to be created. This goes for both the direct and indirect forms of positive impact. For example, standardization of regulations relating to covered and green bonds and cross-border investment through real-estate investment trusts would encourage more long-term investment.

In a more indirect way, a general regulatory push for increased availability of long-term-investment projects and harmonizing of local insolvency regimes would regulationss have a positive effect. We elaborate on these examples. Failure to fill existing regulatory gaps will ultimately depress long-term investment.

Prominent examples of direct negative impact include proposed securitization regulations and rules on asset-based capital charges. These regulatory initiatives have the opposite effect of what we need: they hamper long-term investment.

Indirect negative impact is more hidden in nature and thus less visible. Nonetheless, it can be just as important as direct negative impact. This is particularly true if the rules result in investors having fewer funds available for long-term investment.

Regulationss requirements for derivatives transactions and the increase in banking costs that are passed on are crucial examples of indirect negative impact of regulation. Negative indirect impact of regulation has taken a back seat in long-term-investment discussions. Impacf on financial regulatory factors affecting the supply of long-term invesging Report to G20 Finance Ministers and Central Bank GovernorsFinancial Stability Board, September 16,jnvesting.

In its report, the FSB concludes that empirical evidence suggesting that regulatory reforms have had material adverse effects on the provision of long-term financing is lacking. In its continued search for data, the FSB then formulates a set of key indicators that could be taken into account. These indicators focus on inveshing capital flows and sources of funds. But this is only part of the picture.

The funds not invested need to be mapped as. If not, the indirect negative effects of regulation on long-term investment could become the assassin of long-term-investment growth. Understanding the four kinds of impact can help bring about rules that safeguard markets while maximizing the opportunity for long-term investment. We offer specific examples regultions each category. Although these examples are not exhaustive, we believe they offer good starting points for taking innvesting toward regulatory investung.

In addition, they may help inform thinking in general on the investting ways regulation can encourage or inhibit long-term investment. Standardizing incesting rules regarding covered and green bonds would be a straightforward way of creating direct positive impact. Currently, covered bonds, which are backed by a dedicated pool of assets, are subject to regional and even bank-specific rules.

Regulators and investors should work together to create a global level playing field. In particular, standards should be formulated for overcollateralization, haircuts, valuation, the legal position of bondholders, and the treatment of residual debt. In addition, regulators and the industry should work to create common accounting standards for bondholders, as well as clear collateral requirements. Standards should include a requirement that covered bonds be rated by at least two rating agencies.

Similarly, invesfing bonds, which could be a powerful force for mobilizing capital for projects with environmental benefits, must be supported with effective regulation that mitigates the risk of greenwashing, or the unjustified appropriation of environmental virtue. Failure to formulate effective regulations will dampen the growth of this potentially beneficial market.

Real estate, too, should be an important asset class for long-term investors. To that end, we would welcome the introduction of EU-based real-estate investment trusts, which could be invwsting to facilitate cross-border real-estate investments, but again, they must be supported with effective and standardized rules.

One barrier to long-term investment is a shortage of long-term-investment regulatiions. Even taking market-generated and government projects together, there are simply not enough opportunities.

There should be a broad assessment of how to stimulate the demand side of long-term investment through supporting regulation. Part of that assessment should take into account risk-return profiles and other relevant investment criteria for large institutional investors. The blueprint contains a practical set of recommendations for governments on attracting private capital for infrastructure projects while creating clear social and economic value for their citizens.

As we have publicly stated, 3 3. This should include eliminating fossil-fuel subsidies, higher prices for CO2 emission rights, and increased support for research into cleaner energy, to make investments more attractive to pension funds and allow them to meet regulafions sustainability goals.

Discrepancies in local insolvency laws form a powerful indirect impediment to long-term, cross-border financing, especially within the European Union. These discrepancies create uncertainty and, therefore, risk in credit-financing transactions. They can also lead to excessive price fluctuation, especially in the case of default. The proposed regulatory framework for securitization transactions has had a direct negative impact on investment innvesting. Securitized assets are an appropriate investment for pension plans, assuming they are properly structured and of good quality.

They allow pension plans to infesting to the financing of real economy assets such as residential houses, consumer-loan leases, and loans to small and medium enterprises. There seems to be investnig today that the securitization markets need to be revived. In resetting the regulatory framework, however, special care must be taken to avoid unintended consequences.

Rule makers must acknowledge that not all securitizations carry the same level of risk and make efforts to avoid unduly burdensome regulations.

Another area of direct negative impact concerns asset-based capital charges. Capital requirements for specific asset classes imposed by Solvency II will limit the amount of capital available for long-term investment.

Here again, regulatory measures should take into account the varying risk profiles of different types of revulations. There are numerous examples. Current regulation of over-the-counter derivatives has, for instance, an indirect negative effect on the ability to contribute to long-term investment, as the rules reduce available funds. Measures like the European Market Impct Regulation result in increased allocation to high-quality government bonds and cash for collateral purposes.

Since returns on government bonds are and will continue to stay low, such measures force a deviation from an optimal investment mix. Derivative collateral requirements, whether imposed by regulation or by central clearing houses, can have a pro-cyclical effect in distressed markets by forcing fire sales of assets. Scarcity of eligible collateral will then have serious liquidity—and thus long-term-investment—consequences.

The increased banking costs that result from new regulatory measures are another source of indirect negative impact. Those costs are passed along to clients, including pension funds, once again reducing the amount available for long-term investment and forcing pension funds and other clients to pay the price for a crisis they did not cause. The net stable funding ratio, created by the Basel Committee on Banking Supervision, could prove to be yet another source of negative impact, since the rules would make it much more expensive to provide for certain equity products that are frequently used by pension funds.

In the invesring debate on ways to enhance long-term investment, pension funds have correctly been identified as a potential source of nonbank funding.

Executed correctly, regulation can stimulate our ability to engage in long-term investment. Done poorly, it can regulafions the opposite effect. Care must be taken to avoid regulation that results in constraints on long-term investment in both direct and indirect ways. The serious problem of indirect negative impact, in particular, tends to be overlooked in this debate.

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It says governments should now do more to improve fiscal and regulatory incentives for impact investing and put in place the necessary regulationd structures for the market to function. And the federal government is an extraordinarily powerful stakeholder with the ability to move and shape markets. The US government has a long history of legislative and regulatory support for impact investing. We come from invwsting private enterprises, leading financial institutions, groundbreaking nonprofits, innovative universities, market-shaping investment funds, pioneering public agencies, and major foundations. Read the report. While state and local government have essential roles to play in further support of impact investing, these policies focus on the federal government. The National Advisory Board that produced this report represents the diversity of the impact investing marketplace. The federal government exerts significant influence on where and how investors place their funds, regulating the use of pension funds, writing tax rules for foundations and others, and creating incentives to direct private capital. Vision and Mission. Strong partnerships must be sustained impact investing regulations strengthened between government, private investors, foundations, intermediaries, the social sector, and entrepreneurs, in order to develop a thriving impact investing marketplace. Click to view larger.