Prior to our Opportunity Zones webinar on February 12th, we spoke with Howard W. Buffett, professor at Columbia University and president of Global Impact, about a formula he devised called “iRR” — impact rate of return.

The iRR® framework provides new ways for Opportunity Funds (among many others) to measure and report on their social impact. During the webinar, we also spoke with Howard about his approach, and demonstrated what iRR® reporting looks like in the context of an advanced fund administration solution.

A week before our OZ webinar, we asked Howard a pressing question many have about social impact reporting and why it’s important to OZ Funds.

Since social impact reporting is not currently a requirement, why should OZ Funds do it?

This is a great question, and one that is asked often. To begin with, let’s discuss the spirit of the legislation. OZs are intended to drive long-term investment capital into underdeveloped or underserved communities across the U.S., typically through real estate development or investments in small businesses, startups, and other operating businesses. These community-based investments are, in turn, expected to improve economic conditions where they are made. From a moral perspective, tracking impact is the right thing to do because of the potential benefits to project management that may further improve community conditions. But, there are also clear business incentives to take impact measurement and management seriously at the project level, at the fund level, and even at the investor portfolio level.

I see a number of important reasons why OZ funds should implement impact measurement and reporting processes for their OZ investments. For instance:

  • First, OZ investments are community-based by definition and should prioritize local engagement in project design and development. Community trust and support is critical for the success of any long-term development projects, and building this trust with the community up front is much easier than restoring it once it has been lost. Fostering community consensus for development strategies based on direct input from locally based nonprofit organizations, the business community, individuals, government representatives, and neighborhood organizations will help streamline this critical engagement, and will diminish potential barriers for OZ investors.
  • Next, tracking impact-related data takes intentionality and a well-designed system to achieve the outcomes that various stakeholders (residents, city officials, community associations, etc.) are hoping to see in OZs. Funds that choose not to integrate impact tracking into their efforts, or fail to do so early on, increase the risk of negative reactions by these important stakeholders. Deploying an effective impact data tracking system and capturing community change data over the lifecycle of a project will be much easier and more accurate if done from the outset of a project, rather than trying to rediscover the data retroactively.
  • Finally, it is possible that Congress or the Department of Treasury will change reporting requirements over the next decade. The greatest tax benefits for OZs come after ten years; in the interim we will see two presidential election cycles and numerous congressional elections. Future executive branch actions (from Treasury or the IRS) or new legislation could require impact tracking by OZ funds, which is difficult to achieve without proactive and intentional efforts. Should tax breaks need to be justified in the future, it will be much easier and more cost effective to do so if impact-related data is tracked throughout project design, development, and deployment.

There are an array of impact measurement and management models available to OZ investors, each with various advantages and drawbacks. Impact Rate of Return®, which I developed over the course of the past decade, has proven highly effective for a variety of public, private, and philanthropic sector partners. In addition, there have been some important developments in the OZ impact and reporting space, including the OZ Reporting Framework developed by the U.S. Impact Investing Alliance, the Beeck Center for Social Impact + Innovation at Georgetown University, and the Federal Reserve Bank of New York.

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The material in this interview is copyright Howard W. Buffett. Social Value Investing, Impact Rate of Return, and iRR® are federally registered trademarks of Global Impact LLC and all rights are reserved. This material is used with the express permission of Global Impact LLC/Howard W. Buffett.