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2023 Impact & ESG Outlook

New Challenges and Opportunities in EB-5, OZ, and more

Two findings from our forthcoming Impact investing survey – to be released in full next month – encapsulate the complex year ahead for ESG and Impact investing. First, investor perceptions towards ESG and Impact investing are overwhelmingly positive – a notion supported by another recent report, which sees ESG investing “soaring” 84% to nearly $35 trillion by 2026. Second, nearly two-thirds of US respondents believe the two terms are interchangeable.

What does this mean for investors and fund managers in 2023? On the one hand, the sector continues to grow and shows no signs of slowing down. On the other hand, with more and more investments incorporating ESG criteria, and without a comprehensive industry standard for measuring Impact, identifying funds and investments as “ESG-focused” or “Impact-focused” won’t be enough to differentiate in a crowded marketplace.

As we move ahead into 2023, it’s important for those operating in the Impact space to understand the specific issues affecting the sector. Here are some of the key challenges and opportunities for investors and fund managers in the areas of ESG and Impact investing, Opportunity Zones, and EB-5.

ESG & Impact Investing Challenges

  • As the number of metrics and standards proliferate – and the spotlight on greenwashing continues – accurate reporting and measurement will remain a substantial hurdle. The ability to accurately report on environmental and social impact will be an important way to stand out, as will whether a company is able to prove it walks the walk on Impact and ESG.
  • The SEC is expected to solidify its proposed climate disclosure rules, adding to companies’ regulatory burdens and administrative costs. While we’ll have to wait until April to see what the final version of these disclosures will look like, they come with both positives and negatives. The positives are that they could help cut down on greenwashing and bad actors confusing the issue of sustainability for investors, and can help those doing good to stand out. The negatives would be confusion over which rules apply in which situations and the additional costs to companies and investment funds.
  • Shareholder proposals related to ESG will continue to play a critical role. In some cases, shareholders may demand greater transparency to better evaluate an investment’s future in an ESG-dominated world, while in other cases, shareholders may be hesitant to adopt ESG measures that are considered costly in the short term.

ESG & Impact Investing Opportunities

  • An injection of capital from the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) could help catalyze certain Impact investments, reducing risk and making them more attractive to investors who have been late getting on the ESG bandwagon.
  • Investors are increasingly concerned about ESG/Impact: A new survey from PwC shows that ESG issues are now among investors’ top 5 concerns, while Deutsche Bank found that “more than half of investors (53%) regard climate change as the most important factor affecting their investment decisions, up from 47% last year.”
  • As we’ve written before, now is the time to offer more focused, tailored ESG/Impact investing opportunities that meet an investors’ particular passions and can be measured in a specific, quantitative fashion. “The key to making ESG reporting cost effective is to approach the sector with a view to ‘Specialty Financial Administration,’” said Reid Thomas. “Traditional fund administration solutions don’t work. These funds have unique requirements that are best solved with purpose-built technology, and specialized expertise. In other words, you need to use the right tool for the job.”

Opportunity Zones Challenges

  • While capital continues to flow into OZ funds, these dollars are increasingly concentrated with larger, institutional funds – which means smaller, mission-based funds may have a more difficult time raising capital. Legislation allowing for bridge funds (i.e., where a larger fund could invest in a smaller one) could help.
  • Potential legislation regarding OZ could have other effects as well. Many in the industry are hoping that legislation to redraw the OZ map and institute Impact reporting requirements will help change some of the negative perceptions surrounding OZ.
  • The economic slowdown could impact the flow of funds into OZs, which declined in 2022. When equities markets are down, investors don’t have as much capital gains to defer into OZs.

Opportunity Zones Opportunities

  • Despite a YOY decline, fundraising into OZs during 2022 still hit new highs: Novogradac data from last October showed QOFs on their list were on pace to surpass a $10 billion single-year increase in equity for the first time since the organization began tracking the data. Research also shows that nearly 50% of OZs received funds by 2020 – a number that will likely increase as more data comes in.
  • Perception of OZs (via our 2022 and 2023 surveys) is still overwhelmingly positive, with more investors seeing the program as both a tax incentive and economic development tool, and understanding that OZ investments are Impact investments. In our forthcoming survey, over 70% of those considering an OZ investment say that it is likely to happen in the next year.
  • The Inflation Reduction Act of 2022 restored and enhanced nearly two dozen clean energy tax credits, one of many ways OZ can be combined with other tax credits and government initiatives to make OZ projects easier to fundraise and make OZ investments more enticing to risk-averse investors.

EB-5 Challenges

  • The EB-5 Reform and Integrity Act of 2022 added crucial integrity measures to combat fraud and abuse, including a requirement for fund administration. Issuers working with a third-party fund administrator have a leg up on attracting capital by providing needed transparency for investors, while those that don’t may find the many rules of the RIA difficult to understand and comply with.
  • Investors are becoming more sophisticated and diligent as well. As EB-5 attorney Ronnie Fieldstone put it in a recent Globe St. Q&A: “We are also noticing that the type of investor this time around is a lot more sophisticated when it comes to scrutinizing EB-5 investment opportunities. They will either look and review everything themselves or have a family office do the due diligence on their behalf. Developers and Regional Centers will need to have all their paperwork in place and a strong business plan to capture the attention of this new generation of EB-5 investors.”
  • Many of the RIA’s rules were poorly defined and USCIS was slow to come out with specifics, resulting in legal action and causing some in the industry to doubt the prospects for EB-5’s future.

EB-5 Opportunities

  • As part of the RIA, TEA amounts have changed, Adjustment of Status can be applied for concurrently with I-526 applications, and a percentage of visas will be reserved for rural, infrastructure, and high-unemployment projects. This provides an opportunity for investors from countries like China and India with long wait times to effectively “skip the line” by investing in rural projects.
  • As interest rates rise and traditional financing gets harder to come by, EB-5 can help fill gaps in the capital stack.
  • The RIA includes stiff penalties for Regional Centers that don’t follow rules regarding flow of funds, recordkeeping, and fund administration, including termination of Regional Centers found to be in violation. It’s possible many in the industry won’t continue to operate because of the increased burdens presented by the RIA, but this also means those who’ve already committed to best practices can dominate fundraising by inspiring more confidence in wary investors.
JTC Can Help

JTC had a game-changing year in 2022 as well, and is perfectly positioned to help fund managers and investors in 2023. In addition to being named “Fund Administration Challenger of the Year,” we made important acquisitions to better serve our clients, including the purchase of SALI Fund Services, a US-based, market-leading provider of fund services to the Insurance Dedicated Fund and Separately Managed Account market.

Meanwhile, our virtual Chief Sustainability Officer (vCSO) platform enables clients to access the benefits of an in-house Chief Sustainability Officer on a flexible, outsourced basis, providing fund managers, corporations, and family offices with a cost-effective way to meet their complex ESG regulatory and reporting obligations.

As fund managers and investors navigate 2023, we expect a continued shift towards more focused, mission-based impact projects to rebut claims of “greenwashing” and differentiate in an increasingly crowded ESG/Impact investing marketplace. That’s where we’ve always played, and we look forward to tailoring our specialty fund administration expertise and purpose-built technology to meet the needs of clients in what will surely be another exciting year for Impact investing.

Learn more about our Impact Investing Services

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