Impact-focused investors should be paying attention to developments in the Opportunity Zone space. For taxable investors, the reason is clear – the potential triple tax advantage with federal capital gains tax deferral, reduction, and exemption. Experts calculate 2%–3% in tax alpha can be achieved by investing in a Qualified Opportunity Fund (QOF) over the same investment with non-qualified dollars. But more important than tax savings, investors can align their personal values and directly impact a community in need, maybe even in their own back yard.

While non-taxable investors don’t benefit from the legislation’s tax advantages, they can still realize returns by investing alongside QOFs which have the potential to lift all ships through the flow of capital to the 8,700 designated zones throughout the United States and which won’t change for the duration of the program.

There are several compelling reasons why Opportunity Zone investments are well positioned to make a social impact and produce financial returns. For one, impact investors are known as being “patient capital” who are more interested in stabilizing a community than “hot money” looking for a quick return. The 2016 Global Survey of Individual Investors1 found that 7 in 10 individual investors would like their investments to do social good. Opportunity Zones provide an avenue for making direct investments – real estate or new businesses – in their neighborhood. New Yorkers, for example, can back entrepreneurs at one of a hundred startups incubating at New Lab in the zone that covers Brooklyn’s Navy Yard.

Asset allocators who have been allocating to ESG-focused (environmental, social, governance) equity and fixed income funds may consider carving a slice of their allocation for a QOF. Options can range from bigger developments like the new DoubleTree at the Tucson Convention Center to more focused endeavors like building grocery stores in the Southeast’s food deserts where fresh fruit and vegetables are hard to come by.

From a risk perspective, impact-focused funds can mitigate one big risk – reputational. Fund sponsors will need to work with local leaders to conduct a community needs assessment and for zoning and regulatory approvals. This cooperative nature is more prevalent in the world of impact investing where the double bottom line matters. Community blowback and negative headlines are less likely when the community has been consulted in advance.

Local political leaders are acutely aware of the balancing act required to attract capital, create jobs, and grow their tax base while also not diminishing the quality of life of their citizens through displacement, longer commute times, and higher crime. Impact-focused Qualified Opportunity Funds will likely target affordable housing, healthcare, early education, grocery stores, and agriculture.

While the legislation doesn’t require impact reporting, industry groups are encouraging private funds to state their intended impact and track progress over time. The US Impact Investing Alliance created a voluntary reporting framework with dozens of data points, including number of new jobs created; percentage of woman- or minority-owned enterprises; number of affordable units renovated; high school graduation rates; and NGO (non-governmental organization) partnerships. The tax advantages of Opportunity Zones, combined with the ability to make a direct local impact, are powerful. Moving beyond real estate and encouraging entrepreneurs to start and grow businesses in these low-income communities has the ability to produce both social and financial returns for impact-focused investors. This will help achieve the legislation’s purpose which is to help direct long-term resources into low-income communities through a market-driven approach.
1 Natixis Investment Managers, Global Survey of Individual Investors conducted by CoreData Research in February and March 2016. Survey included 7,100 investors from 22 countries.

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This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of January 14, 2020 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

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