Introduction
The tax bill passed in 2017 includes a provision creating various benefits for investors that move capital gains into designated low-income census tracts, known as Opportunity Zones, through special investment vehicles known as Opportunity Funds.
This tax benefit has captured the attention of a wide range of stakeholders — from investors attracted by a new tax incentive to community development practitioners drawn by the promise of increased investment in low-income areas.
Many elements of this new investment tool are uncertain, including if and how Opportunity Funds will manage and report on the social and environmental impact of their investments. Yet even amid this uncertainty, investors are looking to take advantage of the benefit.
Moving Toward an Impact Framework
What is certain is that Opportunity Funds are another tool in the community development tool kit — primarily for state and local players — and they underscore the importance of place-based investment. The tax benefit will drive capital to the nation’s most distressed areas, but the activities that capital supports must be rooted in a local context.
Ensuring that these investments result in meaningful and inclusive economic development will require a coordinated effort by a diverse consortium of leaders. With that in mind, on July 19, the U.S. Impact Investing Alliance, the Beeck Center, and the New York Fed convened a roundtable of community development investors, researchers, and practitioners to discuss the future of Opportunity Zones.
Participants discussed the potential for a shared framework to evaluate the impact of investments in Opportunity Zones. Dr. Rajiv Shah, President of the Rockefeller Foundation, and Dr. Eric Belsky, Director of the Division of Consumer and Community Affairs for the Federal Reserve Board of Governors, provided opening remarks signaling support for ensuring that resulting investments benefit low-income communities. We were also joined by legislative staff for U.S. Senators Tim Scott and Cory Booker, the sponsors of the Opportunity Zones legislation, who spoke about the goals and genesis of this initiative.
Several critical takeaways emerged from the day’s discussion and informed potential next steps, which include developing a shared understanding of how to measure impact in Opportunity Zones and helping shape the market for Opportunity Funds. Other key aspects include encouraging community engagement, market transparency around baseline transactional data, and coordination across a wide range of stakeholders.
Understanding Opportunity and Needs in Communities
As the data make clear, Opportunity Zones are deeply distressed communities. In the average Opportunity Zone, the median household income is $33,345, the poverty rate is 31.75%, and the unemployment rate is 13.41%. However, there are several ways to assess the needs of low-income communities.
One approach is to combine metrics that capture performance over time and across dimensions. Economic Innovation Group (EIG) developed a Distressed Community Index to measure economic well-being across zip codes. Kenan Fikri, Director of Research at EIG, noted that relative indices allow us to “control for what’s happening in the macro environment,” adding that the data should demonstrate if Opportunity Zones are moving toward parity with better-off places.
Another approach is to create a detailed, data-driven profile for each low-income community. This is the goal of Opportunity 360, a tool from Enterprise Community Partners that aggregates 200 data points to identify characteristics of opportunity by census tracts. Some states used this tool in deciding zone nominations. “What we’re exploring now is: how can we pivot and iterate on this data? How can investors use it to make informed decisions on where they’re investing?” said Rachel Reilly, Director of Impact Investing at Enterprise Community Partners.
Participants also stressed that using data is only one lens of many for understanding needs. Truly finding the opportunity in Opportunity Zones requires conversations with the community. Kevin Boes, President and CEO of New Markets Support Corporation at the Local Initiatives Support Corporation (LISC), has toured designated zones to identify gaps and how investors can fill them. Boes emphasized that “there is a huge need for more community engagement” in understanding needs and ensuring that communities are poised to benefit from investment.
The families living in these areas and community-based organizations serving them are in the best position to identify the needs, priorities, and opportunities to invest for strong community outcomes. But their engagement is not baked into the Opportunity Zones legislation, so it will fall to local leaders and private actors to create space for community voices in the market.
Establishing Evidence of Outcomes for Communities in Need
Gathering baseline data on Opportunity Fund investments will allow policymakers, researchers, and community development practitioners to assess the short- and long-term impact of these flows of capital to underserved communities. Tracey Hsu, Director at Social Finance, pointed out the importance of having a shared understanding of what improvement looks like in a particular Opportunity Zone — not only to assess impact, but also to align this incentive with existing community development programs.
Nick Fritz, Senior Associate for Sorenson Impact, suggested that a best practice may be to establish “impact measurement” milestones at the five-, seven-, and 10-year marks, tracking progress by reporting on specific yearly data points, while also recording and reporting on specific metrics each year. These metrics could build off of transaction-level data (location of investments, investment size, type of project or enterprise, etc.) to determine alignment with community needs and with an Opportunity Fund’s investment thesis.
In the same way that community voices will help to determine need, Opportunity Zone residents will also help to contextualize data on outcomes and raise awareness of unintended consequences. “The great thing about the Opportunity Zones is that we are talking about place, but more importantly we are talking about people in place. A bottom-up approach is where we start to win”, said Frank DiGiammarino, a Senior Fellow at the Beeck Center.
DiGiammarino also highlighted the importance of transparency, saying, “investment tends to be a black box,” but openly discussing what investments are being made in Opportunity Zones will help ensure that the benefit is effective. And as early movers will shape the market, he urged participants to act swiftly and cautioned that “perfect is the enemy of the good”. Endlessly discussing the “right” data to gather may dampen the interest of investors from contributing to the development of the market place.
Existing Frameworks for Evaluating Impact with a View Toward Investor Demand
Participants discussed key considerations when developing tools that help funds and investors to quantify impact and maximize opportunities. This will also require collection of impact data from recipients of Opportunity Fund investments, which may include start-ups and other local businesses.
First, the development of these market-facing tools has been driven by investor demand. Institutional and high-net worth investors have become increasingly aware of the ways that their financial decisions can align with their values. Greater market transparency enables investors to better understand risk and opportunity, ultimately helping them to make better decisions and improve returns. Amanda Kizer, Director of Impact Management at B Lab, spoke specifically about “a frame of maximizing stakeholder value rather than viewing impact through the lens of compliance.”
Second, business owners are seeing the benefit of collecting and reporting data. “Impact occurs at the point where an enterprise touches the people in the community,” said Brian Trelstad, Partner at Bridges Fund Management and representing the Impact Management Project. Understanding impact as a business owner is fundamentally a matter of understanding your customers and your market. Learning to glean and interpret these insights also develops skills and expertise in entrepreneurial ventures, preparing them to succeed and grow.
But powerful as these benefits can be, participants in the roundtable underscored the need for flexibility. Impact reporting should focus on data that is both material to impact goals and responsive in nature, allowing businesses to adapt if they aren’t meeting community needs. It should also be practical from the standpoint of collection, according to Paige Chapel, President and CEO of Aeris, who noted that “impact accountability and transparency shouldn’t serve as an undue burden to those Opportunity Fund managers who are explicitly and intentionally centered on community impact.”
Building the necessary environment to ensure effective reporting about investments in Opportunity Zones will take sustained effort, and a collaborative approach will help shape the market in these critical early stages.
Next Steps
The day-long meeting ended with a clear call to action: develop a shared understanding of how to measure impact in Opportunity Zones and how to help shape the nascent market for Opportunity Funds. A growing number of investors now acknowledge that incorporating impact metrics into their strategy can serve as an important risk management tool and produce better results. How do we build consensus and the necessary community to enable that action?
First, the Opportunity Zones legislation should lead to the creation of a market where there really wasn’t one — investing in communities that have otherwise been overlooked. The hallmark of a healthy marketplace is transparency. Investors and communities need access to baseline, transactional data about Opportunity Zones to enable targeted investment. Transparency will also produce data to observe the effectiveness of this new incentive and demonstrate accountability.
Second, a framework for impact will require authentic community engagement. The Opportunity Zones policy was designed to benefit low-income communities, and the residents of those communities must have a voice in the process. An impact framework must have clear and accessible avenues for communities to provide input.
Further, we must expand the conversation. This first roundtable was meant to articulate the potential for a shared impact framework, understand the existing tools at our disposal, and establish the impetus to act. Carrying the conversation forward will require input from actors across this new market, weaving together the diverse expertise of each stakeholder — policy makers, academics, researchers, investors, wealth advisors, fund managers, businesses, and, of course, the communities themselves.
Finally, we need to be prepared to learn and grow over time. “This policy is in a state of becoming,” was a common refrain, underscoring the need to move swiftly to shape it for the highest community benefit. But with the market developing at a heady pace, a lack of consensus regarding a successful impact framework cannot stand in the way. Rather, we should look at this as an opportunity to enable the flow of capital to the places most in need and also those most ready to use it.
Beeck Center
The Beeck Center mobilizes talent to drive social impact at scale by taking a systematic approach to delivering exponential outcomes that leverages the tools of data, technology, policy, and finance to improve people’s lives. The Beeck Center incubates and spreads cutting edge ideas; creates unique and unconventional networks of government, private and social sector leaders who come together through to solve complex problems; and equips and trains students, practitioners, and executives with the mindset and tools necessary to take action.
U.S. Impact Investing Alliance
The U.S. Impact Investing Alliance is a field-building organization committed to raising awareness of impact investing in the United States, fostering deployment of impact capital across asset classes, and working with stakeholders, including government, to help build the impact investing ecosystem. Its vision is to catalyze a movement that will transform finance by putting measurable social and environmental impact, alongside risk and financial return, at the core of investment decisions.
CoDeFi at the New York Fed
The New York Fed works within the Federal Reserve System and with other public- and private-sector institutions to foster the safety, soundness, and vitality of our economic and financial systems. The New York Fed’s Community Development Finance initiative (CoDeFi) helps community organizations, banks, and investors work together to increase the effectiveness of the community development investments in low- and moderate-income communities.
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
