Some might look at the Opportunity Zone market and focus on its benefits in deferred capital gains taxes and financial returns. However, for many OZ fund managers and investors, social impact is already an important consideration, and its level of importance is increasing over time. The bottom line is that impact investors care about real and objective quantitative results, and fund managers – whether focused on impact or not – care about seeing the OZ initiative being extended. Measurement and reporting of those results need to be increased for the long-term viability of the OZ market. This aligns with the primary goal of the OZ initiative as it continues to receive bi-partisan support: to incentivize economic development and growth in distressed communities, previously overlooked by investors. However, some people in the industry have pushed back on measuring and reporting due to perceived increased burdens and costs. With advanced technologies, algorithms, and available tools, there are ways around this concern today, pushing the industry to expand toward the bigger goal behind the OZ initiative.
So, how can participants best measure social impact in OZs? What are the four critical elements that need to be evaluated, and why do those measures need to be standardized and scalable? How can the industry best achieve the right blend of financial returns and social impact while investors, fund managers and policymakers benefit from this data?
THE TIME IS NOW TO SHOW THE VIABILITY OF OZs.
As the final Treasury regulations and multiple recent legislative proposals aim to provide meaningful reporting, the time is now for the industry to embrace OZ social impact measurement. Nearly $2.3 billion went into OZs between early December and early January due to the final regulations coming out – a 51% increase from the month before. The recent market sell-off, after the longest bull market in history, most likely means that many investors may be sitting on significant capital gains that are eligible for the benefits that OZ investments offer.
Additionally, investments that are counter-cyclical might become more attractive in the uncertain economic environment that has emerged. The COVID-19 crisis has clearly shown that there is a link to a heightened focus on health, safety and doing good as witnessed by many generous acts of kindness being carried out to help those in need. Asset classes like affordable housing and assisted living have historically held up well in an economic downturn, and these types of assets are well suited for OZs – and, by extension, this will build on the emphasis towards making a positive social impact. Measuring and promoting the social impact of the investments an OZ is making will only become more important to investors as investment increases.
HOW TO BEST MEASURE SOCIAL IMPACT
Unlike previous community-investment initiatives, current federal rules for OZs don’t necessitate investors meeting affordability or job-creation mandates – nor do they require OZ funds to report the social impact of their investments.
Several organizations have built social impact reporting frameworks or offer consultant-like reports that showcase just how much good a specific project might do.
These reporting frameworks are a critical step in the process, however many of the resulting implementations are cost-prohibitive for some. They’re also less standardized, specific, and scientific than they could be, which certainly provides the flexibility in application but may not provide a complete picture. For instance: Are the frameworks capable of measuring numerous specific, place-sensitive variables? Can they account for a project’s efficiency in doing so? And, if everyone’s using different contexts with different methodologies, are we missing out on an opportunity to achieve some set of industry-wide standards, which can be benchmarked over time?
Today’s era of advanced technologies and analytics tools enables something more algorithmic to be developed, which means the costs of implementation and time to market can be dramatically reduced. A good solution should tell investors the impact effectiveness of their investment per dollar spent – an ROI of sorts displayed via an easy-to-read mechanism: as one number on a scale. The algorithm should consider the current market environment, and data from crucial aspects of an OZ project, including location, development type, census tract and investment size, and time.
In a purpose-built fund administration platform for OZs, a social impact tracking and reporting capability should be included. This type of dashboard will help fund managers and investors get the full picture of their OZ investments. This can help all stakeholders. It will certainly help to attract additional impact-focused investors by proving the social benefits of the funds and it will help fund managers and developers in working with local municipalities to get projects off the ground.
MOVING TOWARD A STANDARDIZED, SCALABLE MEASUREMENT
Getting to full-scale adoption of impact tracking and reporting tools is possible through regulation or legislation. However, it is also possible, and arguably preferable, if stakeholders drive the adoption. For this to happen, barriers to adoption need to be removed, and incentives need to be aligned between investors, fund managers, developers, and government.
Algorithmic-based solutions that are compliant with broader industry frameworks go a long way to achieve these goals. By their nature, they can be implemented quickly, and – when done so properly – at virtually no incremental costs. The solution also creates a platform to enable fund managers to work together with investors and government entities to optimize investments to benefit all stakeholders.
FINDING A BALANCE OF FINANCIAL RETURNS AND SOCIAL IMPACT
Of course, even for an investor base increasingly interested in social impact, financial ROI is crucial. Some may worry that as this social impact goes up, returns will go down. Again, having a standardized measurement of impact can only benefit these investors. A clear, thorough, real-time view of a given project’s efficacy can help fund managers create a blend of developments that balance desired financial returns with social impact.
SOCIAL IMPACT MEASUREMENT IS VITAL TO THE OZ INITIATIVE’S LONG-TERM SUCCESS
We need to demonstrate that OZs are doing the good they’re supposed to – in an objective, transparent, standardized, scalable, and specific way.
Standardized tools might offer a path forward. These tools can help government officials evaluate the projects most worthy of funding (and bolster the OZ initiative’s continued existence) and can empower fund managers with real-time reports for use in marketing and planning efforts. For investors, it offers a transparent, easily understood tool for making more informed decisions with their money. Scaling up such a solution – and making it a standard, automatic practice – is what’s next. It will require all of us, industry and government alike, to come together for the good of those communities most in need.
The appetite for OZ investment, and the push toward social impact, is stronger than ever. Industry participants have the capabilities, technology, and drive to show that OZs are doing the good they are supposed to do. Now more than ever, we need to measure this social impact. Let’s get it done.