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Best Practices in Opportunity Zones Fund Administration: Measuring Social Impact

28th Feb 2023

Tracking and reporting on impact to strengthen the case for Opportunity Zones

We’ve previously discussed the need for best practices in Opportunity Zones fund administration and how strong compliance standards will ensure the program is successful. Let’s look at one of the most important and yet most difficult areas that needs to be addressed: measuring and reporting on the social impact of projects.

Created as part of the Tax Cuts and Jobs act of 2017, the Opportunity Zones initiative is intended to “spur economic growth and job creation in low-income communities while providing tax benefits to investors.” Data shows those investors have shown up: more than $16 billion has been invested, with many successful projects already off the ground. OZ investments could provide needed capital to aid economic recovery in already-distressed areas hit hard by the COVID-19 pandemic.

According to the U.S. Treasury, up to $100 billion annually in new capital could move into over 8,700 eligible economic areas over the next decade, while the net cost in tax revenues would be only $2.6 billion. Investors clearly like Opportunity Zones, but the program does currently have limitations.

There have been many government programs aimed at helping distressed areas, but most fall short of expectations and aren’t continued. Those who believe in Opportunity Zones have their work cut out for them if they’re going to prove to lawmakers and citizens that these incentives are having a positive effect, which is why a set of best practices is vital.

So how do we prove that these projects are making an impact?

As of yet there is no requirement for tracking or reporting information that would enable social impact to be measured. That means not everyone is going to do it, and a lack of impact data could bring the program down if there is insufficient justification for continuing the initiative.

Tracking and measuring impact would not only help justify the program’s continued existence, but could also attract investors eager to find projects that make an impact while providing solid returns.

Rather than simply wait for standards to develop, JTC is taking a proactive approach, implementing extensive social impact reporting capabilities in collaboration with Howard W. Buffett and his advisory firm, Global Impact LLC, to objectively measure the impact Opportunity Zone Funds are making in distressed neighborhoods across the country.

This approach leverages Buffett’s Impact Rate of Return® methodology, which allows for measurement and evaluation of social impact and gives fund managers the ability to compare investments with different impact goals.

Buffett has encouraged a set of OZ impact best practices based on his Social Value Investing framework. He argues that to maximize the social, environmental, and economic impact of Opportunity Zones, fund managers should consider the following aspects of their impact approaches:

  • Design of a comprehensive impact strategy
  • Development of diverse investment and project teams
  • Engagement of a broad group of stakeholders
  • Deployment of a thorough investment strategy
  • Focus on performance-driven management using industry-standard methodologies such as Impact Rate of Return®

According to Buffett, “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.”

By measuring and reporting on social impact, funds will not only be able to set themselves apart with evidence of the success of their projects, they’ll also be encouraging an industry-wide shift toward best practices that will show lawmakers why they should keep the OZ program going and implement strict standards that will help keep bad actors out and allow the initiative to do the good it was intended to do.

Learn more about how your fund can measure social impact by downloading the Measuring Social Impact of Investments collateral!

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