From regulatory changes at the U.S. Department of Labor (DOL) that allow retirement funds to invest for environmental and social impact to an Internal Revenue Service (IRS) announcement on private foundation investments to changes at the Securities and Exchange Commission (SEC) that allow small businesses to solicit funding in new ways, recent developments are opening up new potential sources of capital for community and economic development.

DOL Update to the Employee Retirement Income Security Act of 1974

The concept of impact investing has been gaining popularity in recent years.2 One major impediment to growth in this industry, however, has been a restriction under the Employee Retirement Income Security Act of 1974 (ERISA) regarding the definition of “fiduciary duty.” In 1994, the DOL stated that fiduciaries, or those responsible for managing the assets of plan participants, were able to take social and environmental factors into consideration when making investment decisions as long as everything else was equal (i.e., as long as those considerations do not require a loss of financial returns for plan beneficiaries). In 2008, however, a revision to ERISA was made “to clarify that fiduciary consideration of collateral, noneconomic factors in selecting plan investments should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA's rigorous fiduciary standards.”3 This change made many asset managers reluctant to engage in impact investing or socially responsible investing because of the concern that these actions would violate their fiduciary obligations under ERISA.

In October 2015, the DOL announced an update to ERISA that withdrew the 2008 revision and reinstated the language of the guidance passed in 1994, reaffirming that private pension plans subject to ERISA can take social and environmental factors into account when making investment decisions as long as financial returns are not compromised.

The DOL explained the new guidance in a news release4:

“The financial health of retirement plans and participants remains paramount under federal law. The new guidance, Interpretive Bulletin 2015-01, confirms the department's longstanding view from IB 94-1 that fiduciaries may not accept lower expected returns or take on greater risks in order to secure collateral benefits, but may take such benefits into account as ‘tiebreakers’ when investments are otherwise equal with respect to their economic and financial characteristics. The guidance also acknowledges that environmental, social, and governance factors may have a direct relationship to the economic and financial value of an investment. When they do, these factors are more than just tiebreakers, but rather are proper components of the fiduciary's analysis of the economic and financial merits of competing investment choices.”

Recent research from Calvert Investments showed that there is demand for these types of options from retirement plan participants. Nearly nine out of 10 plan participants surveyed said they wanted investment options that align with their values, and 82 percent said they were likely to select a responsible investment option if offered in the plan.5 It may be too early to tell how plan sponsors will respond to the changes from the DOL, but some believe that this slight change to ERISA, in addition to increased demand from plan participants, could open up new major sources of capital for activities such as domestic community and economic development,6 among other investment options. A 2015 Organisation for Economic Co-operation and Development report on pension funds showed that, at roughly $14.5 trillion, pension fund balances totaled 83 percent of U.S. gross domestic product.7

IRS Announcement on Private Foundation Investments

Impact investments in activities such as domestic community development come in many shapes and sizes. Some investments may provide a market rate of return comparable to traditional investments and, therefore, would be feasible investment options for the retirement plans previously discussed. Other community development investment options, however, will by their very nature require a concessionary rate of return but may yield a high return on investment in regard to their social impact.

Foundations were some of the first impact investors in community development. Foundations, including the MacArthur, Ford, Rockefeller, W.K. Kellogg, and F.B. Heron foundations, have been making targeted investments to further their missions in addition to their grantmaking activity. Recognizing the spectrum of investment opportunities and their various projected financial and social returns on investment, these institutions have become leaders in developing various capital tools that can be used in different investment scenarios.

Two such tools are program-related investments (PRIs) and mission-related investments (MRIs).

  • PRIs: According to the IRS, a PRI is an investment with the primary purpose of accomplishing one or more of the foundation’s exempt purposes and in which the production of income or appreciation of property is not a significant purpose.8 Examples could include low-interest loans to nonprofits or high-risk investments in low-income housing projects. PRIs can allow organizations to build capacity, establish a credit history, attract new investors, or bridge expected future funding. PRIs allow foundations to provide a different type of capital that, following repayment, can be recycled to make future PRIs. PRIs count toward a foundation’s required minimum 5 percent annual distribution, which must be made in order to maintain tax-exempt status.9
  • MRIs: An MRI, broadly defined, is any investment activity that seeks to generate a positive social or environmental impact in addition to providing a financial return. Unlike PRIs, MRIs typically yield a competitive market rate of return and do not count toward a foundation’s 5 percent annual distribution requirement but are made in addition to a foundation’s grantmaking and PRI activity. MRIs are typically made from the foundation’s corpus assets or endowment. Examples include investments in social enterprises or companies creating accessible jobs in economically distressed areas. An additional MRI strategy may include screening out investment options directly in conflict with a foundation’s mission.10 Unlike the traditional investment management practice of focusing solely on generating maximum risk-adjusted financial returns so that the gains in a foundation’s endowment can fund the program activity of the foundation, MRIs allow foundations to take into account risk, return, and impact when making investment decisions.

In September 2015, the IRS released a notice stating that “[w]hen exercising ordinary business care and prudence in deciding whether to make an investment, foundation managers may consider... the relationship between a particular investment and the foundation’s charitable purposes.”11 While the lack of guidance from the IRS regarding MRIs has not deterred some foundations from engaging in this activity, this notice may help to encourage more foundations to align their investment management processes with their overall missions. Again, this regulatory change potentially could result in more capital being invested in industries such as community development as foundations tap into the 95 percent of their capital not being used for grantmaking activity.

SEC Rules on Crowdfunding

As the field of impact investing develops and demand for investment options increases, some note the challenge of finding investment opportunities available to retail, nonaccredited investors.12 Crowdfunding is an emerging method of raising capital from these individual investors via the Internet to fund a variety of projects. Crowdfunding allows individuals to invest their capital in the causes they care about, potentially including community development projects in their own communities.

In October 2015, the SEC adopted rules under the Jumpstart Our Business Startups (JOBS) Act to permit companies to offer and sell securities through crowdfunding.13 Under these new rules, companies are permitted to raise a maximum of $1 million through crowdfunding offerings in a 12-month period. Individual investors, including nonaccredited investors under Title III of the JOBS Act,14 are permitted over a 12-month period to invest up to $2,000 for low-income/low-net worth individuals and as much as 10 percent of income/net worth for those with greater resources.

SEC Chair Mary Jo White stated, “There is a great deal of enthusiasm in the marketplace for crowdfunding, and I believe these rules and proposed amendments provide smaller companies with innovative ways to raise capital and give investors the protections they need.”15

Crowdfunding for community development is a newer concept, and a recently published working paper from the Federal Reserve Bank of San Francisco claims that, in order for it to reach its potential scale and to involve the full range of potential stakeholders, better standards of data reporting and collection need to be established. The working paper established a crowdfunding data model to enable community development professionals and the crowdfunding industry to better understand the potential for this new capitalization strategy.16


The community development industry has historically been financed by Community Reinvestment Act–driven bank capital, philanthropy, and government funding. However, new regulatory changes may enable the field to diversify its capitalization strategy by tapping into the growing trend of impact investing. Though it may be too early to tell what effect these changes will ultimately have on investment behavior, enabling policy updates from the DOL, IRS, and SEC present new opportunities for community and economic development stakeholders to rethink their capital-raising strategy by engaging with new partners in innovative ways.

Additional Resources

The views expressed here do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

[1]The Global Impact Investing Network defines impact investments as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.” See

[2]Various definitions of impact investing have led to discrepancies in quantifying the current size of the industry. According to the U.S. Forum for Sustainable and Responsible Investment (US SIF), impact investing assets in the U.S. rose 76 percent from $3.74 trillion to $6.57 trillion between 2012 and 2014. While this research (executive summary available at includes products such as socially responsible mutual funds that screen out investments with “negative” impact, other reports have quantified the assets that are proactively being invested into vehicles seeking to create positive social impact. A 2015 report (available at by J.P. Morgan and the Global Impact Investing Network estimates current impact investing assets under management at $60 billion, an increase of more than 20 percent from 2014. Further, a 2013 report by the World Economic Forum (available at projected that the impact investing market will reach $500 billion by 2020.

[3]“Economically Targeted Investments (ETIs) and Investment Strategies That Consider Environmental, Social and Governance (ESG) Factors” (press release), U.S. DOL, October 22, 2015, available at

[4]“New Guidance on Economically Targeted Investments in Retirement Plans from U.S. Labor Department” (news release), U.S. DOL, October 22, 2015, available at

[5]“New Survey: Responsible Investment Options Could Boost Retirement Plan Participation, Contribution Rates,” Calvert Investments, September 2015, available at

[6]For a full landscape of the opportunities and challenges in scaling U.S. community investment opportunities, see “Scaling U.S. Community Investing: The Investor-Product Interface,” under Additional Resources at the end of this article.

[7]“Pension Markets in Focus,” Organisation for Economic Co-operation and Development, 2015, available at

[8]“Program-Related Investments,” IRS, last updated April 21, 2016, available at

[9]“Strategies to Maximize Your Philanthropic Capital: A Guide to Program Related Investments,” Mission Investors Exchanges, Linklaters, and TrustLaw, April 2012, available at

[10]Joshua Mintz and Chelsey Ziegler, “Mission-Related Investing: Legal and Policy Issues to Consider Before Investing,” MacArthur Foundation, available at

[11]“Investments Made for Charitable Purposes,” Notice 2015-62, IRS, available at

[12]Rule 501 of the SEC’s Regulation D defines an accredited investor as a person who earns an individual income of more than $200,000 per year, or a joint income of more than $300,000, in each of the last two years and expects to reasonably maintain the same level of income; has a net worth exceeding $1 million, either individually or jointly with his or her spouse; or is a general partner, executive officer, director, or a related combination thereof for the issuer of a security being offered. See

[13]“SEC Adopts Rules to Permit Crowdfunding” (press release), U.S. SEC, October 30, 2015, available at

[14]Direct public offerings (DPOs) are also a method of raising capital from individual investors, including nonaccredited investors under certain exemptions. For a more detailed comparison of DPOs and crowdfunding, see Amy Cortese, “Old-School Crowdfunding: Meet the Direct Public Offering,” Locavesting, September 17, 2015, available at

[15]See “SEC Adopts Rules to Permit Crowdfunding.”

[16]Rodrigo Davies and Amanda Sheldon Roberts, “Understanding the Crowd, Following the Community: The Need for Better Data in Community Development Crowdfunding,” Federal Reserve Bank of San Francisco Working Paper 2015-07, December 2015, available at