The Future of Impact Investing is Local

THE FUTURE OF IMPACT INVESTING IS LOCAL

September 21, 2018 / Key takeaways of the City First Community Development Finance Impact Forum/ Blog

Why Local? Coffee & Conversation

Brian Argrett, President and CEO, City First Bank

  • The purpose of this event is to share insights and lessons learned that can pave the way towards economic equity.
  • This forum is one of three events that will focus on specific topics in more depth instead of having one event.
  • Who is in the room? Investment, think tank, government, corporate, and foundation leaders. City First has convened people across sectors to participate in this conversation.
  • The focus of this forum is on local community investing and why it matters. This is an opportunity to talk to leaders who are moving the needle forward on impact.
  • Economic inequity is linked to racial equity. City First works towards shrinking social, racial, and economic disparities in DC. White households have 8x the wealth of African American households.

Rodney Foxworth, Executive Director, Business Alliance for Local Living Economies (BALLE)

  • I see myself as a community advocate in which my role involves challenging a system that maintains inequality.
  • BALLE supports and equips fellows to empower communities through entrepreneurship. We focus on the most marginalized communities by using business as a lever for change. For change to happen communities need to determine how to move forward. Communities build power by developing their own economies. The problem is that communities are not determining their economic development. Communities don’t really need help. They need investment. Local business ownership is critical. The problem is that policies take away access points for businesses to begin.
  • What does a community look like when the majority of the population are people of color and there is a significant wealth divide? If we don’t invest in communities we all feel the impact. We need to recognize that we’re part of the community. We all succeed or fail based on what happens in our community.
  • Our work at BALLE is how to leverage capital so that it benefits communities. Restorative is a concept that BALLE is using to prioritize democratic investment that incorporates racial and economic justice. How do we make sure that what we do has meaningful impact in low-wealth communities? How do we increase new local business development? This work is ultimately about creating systems change.
  • Impact investing is intended to drive social change, but the problem is that it overlooks the fact that market forces drive inequality. To bring about meaningful change we need to prioritize community members over impact investors.
  • I’m excited about how capital is being used to go to work for communities. We need to address the wealth gap by increasing African American ownership of local businesses.

 

Data Presentation

Rachel Bass, Manager of Research, Global Impact Investing Network (GIIN)

  • GIIN’s mission is to increase the scale and effectiveness of impact investing.
  • Impact investing is defined as an investment that is intended to bring about positive change and has a financial return, which can be a below-market or market rate.
  • Community investing seeks to deliver social benefits to low-income or marginalized communities while also generating a financial return.
  • The purposes of community development loan funds (CDLFs) are to directly finance individual clients, projects, and companies to effect change; to build knowledge and expertise; to engage deeply with clients to increase impact; and to maintain a robust level of financial performance.
  • Key sectors and impact themes are employment generation, affordable housing, food security, health improvement, education, and financial inclusion. The average weighted interest rate on notes is 2.9%. A narrow range of 1%-4% of returns, along with a lower write off rate across funds, are indicators of stability. CDLFs grew from $4 billion in 2012 to $5.6 billion in 2016.
  • The key takeaways of this study are that CDLFs offer stable returns, follow a low-risk investment strategy, and seek impact through a range of sectors. CDLFs primarily target low market returns as a low-risk investment option. These factors point to an opportunity for the continued growth of low-risk investments.
  • Housing is the top sector of investment in the US. The reason for this is that it requires a larger amount of capital. Another key area of focus is innovative approaches to education that generate deep impact.

 

Accelerating Social Impact Strategies

Lisa Hall, Senior Fellow, Case Foundation

  • Impact investing is not new. City First has been investing in communities for 25 years. Although community investing has been going on for decades, impact investing is a relatively new term.
  • Impact investing is about doing well by doing good in communities. This involves intentionality by holding yourself accountable, having a commitment to measurement, and generating a financial return alongside a social benefit.

Carol Thompson Cole, President and CEO, Venture Philanthropy Partners (VPP)

  • VPP is a philanthropic investment organization. VPP does impact investing with a focus on education, health, and youth development (focusing on ages 0-24), without
  • generating a financial return. VPP helps create and deliver solutions that are keeping nonprofits from being successful. The goal is to get promising nonprofits to high performance through capacity building.
  • VPP collaborates with nonprofits so that they are able to work together to create greater impact. VPP uses a place-based approach and leverages opportunities to generate greater impact (i.e., enabling people to remain in their communities).
  • VPP is interested in replicating its model in other communities, like Fairfax County.

Kimberlee Cornett, Managing Director, Social Investment Practice, The Kresge Foundation

  • The Kresge Foundation began a journey in 2010 to incorporate impact investing into its Social Investment Practice to bring about greater change.
  • We learned over the years to tell people that the Foundation is interested in more than providing grants. We’ve been marketing other investment tools.
  • We’ve had to adjust our systems and staffing to accommodate impact investing. Our culture was calibrated to more of a financial orientation. One of our challenges has been accommodating enough risk and holding ourselves accountable for it.
  • We’re 80% of the way through deploying a $350 million commitment to impact investing that was made in 2015.
  • My advice for doing impact investing is don’t overthink it. Focus on basic tools, like investing in a CDFI, buying a community bond, or doing business with a credit union. Focus on the fundamentals first and then learn from this experience.

Bill Bynum, CEO, HOPE Federal Credit Union

  • HOPE is a CDFI that also operates a credit union, a loan fund, and does policy advocacy. HOPE works in communities in the Southeast that have the highest level of poverty. We want to double our lending capital to support more businesses.
  • We need to influence the resources that have created disparities and get communities to have a greater say in how capital is deployed.
  • Poverty is a financial construct. Capital is needed to solve this problem. Sixty percent of black-owned businesses report difficulty getting access to credit while 30% of white- owned businesses face the same challenge.
  • We need to be intentional about directing resources to where they can make the most difference and have the greatest impact.

Bruce McNamer, President and CEO, Greater Washington Community Foundation

  • The Greater Washington Community Foundation seeks to build thriving communities by encouraging philanthropists to invest in the greater DC area. The Foundation partners with donor advised funds to pool money and invest these funds in the community.
  • The Foundation primarily provides funds through grants. We’ve done bespoke impact investment through 0% interest loans. We’re being more intentional about making loan opportunities available to investment partners.
  • We have a new project that provides housing to people coming out of homelessness that will generate a 2%-3% return to fund holders.
  • One of our challenges is getting funders to shift their mindset from philanthropy as a way to do good to investing as a way to make a social impact, which requires marketing.

 

Moderator-Led Q&A

Kimberlee Cornett: Kresge is examining how to direct its investing in the future. Thirty percent of the population is projected to lack access to affordable housing. Debt investments to CDFIs and equity investments to affordable housing developers are specific opportunities that are being explored.

Bill Bynum: The wealth gap is shrinks to 3% for black-owned business owners, but the main challenge is access to credit. We need CDFIs to invest in black-owned businesses. Our loss rate is less than 3%. We need to dispel the myth that African American entrepreneurs are high risk. We need to be intentional about investing in communities of color. In addition to providing capital, technical assistance is needed to address other challenges entrepreneurs face, which is something that HOPE does. Local businesses are drivers of jobs and services, such as affordable housing, health care, and education. Advocacy is important to demonstrate that investments can generate social and financial returns. Investors and CDFIs are needed to help turn low- wealth communities around. Material benefits are needed for communities and investors so that investments don’t end up being extractive. CDFIs have the opportunity to be a conduit for Opportunity Zone investments in ways that genuinely benefit communities.

Bruce McNamer: The Foundation is on a journey from being a large grantmaker to leveraging the potential for returnable capital that can be returned to the community.

Carol Thompson Cole: VPP is on the journey of building the capacity of nonprofits. We’re learning about the complexity of getting social and financial returns. Building capacity for measurement and addressing a lack of investment-ready opportunities are critical needs.

 

General Q&A

Who is not in the room? The right people are in the room. The federal government needs to pay more attention to benefitting communities. The government is a significant investor to CDFIs, so CDFIs need to do more advocacy for these funds.

How can we use government funds to pay for pre-development for high-performing impact deals? The problem is that no one pays for time to learn what works and demonstrate impact. The public sector is the largest investor, but advocacy is needed to get the government to pay for pre-development costs. Another significant source is donor advisory funds. Foundations can guarantee a portion of the return in the event of a loss as a way to encourage pre- development loans. Philanthropic capital can be deployed in a way that is flexible. The challenge is getting the government on board. Policymakers are influenced by getting people to vote. HOPE gets unbanked people a bank account and encourages them to vote. People with bank accounts are more likely to vote.

How can we think more deeply about what impact investing means? For example, impact investors support job creation, but jobs that are created may not be living wage. The community needs to hold impact investors accountable, not just for outputs, but for outcomes. Nonprofits can play a backbone role in driving results and accountability that genuinely benefits communities. Market interventions can augment public subsidies to address limitations.

How can nonprofits position themselves to provide a financial return? Not everything that generates a social return can deliver a financial return. We need to be clear about what can and can’t be financed when it comes to delivering social impact. Nonprofits need to be robustly supported by public and philanthropic funds since the services they provide are no less important than those that deliver a financial return. We need support for both. The risk of impact investing is only focusing on initiatives that deliver a financial return. We need a mix of public, philanthropic and investment resources because impact investment is not sufficient on its own. Impact investment is not meant to be over-complicated. Focus on the investee’s leadership and track record to help promising initiatives get to scale.

 

Breakout Session – Opportunity Zone Presentation

Sharon Carney, Economic Strategy Director, Office of the Deputy Mayor for Planning and Economic Development

  • Opportunity Zones are a new federal incentive that offer capital gains deferrals, reductions, and abatements for investments made in designated low-wealth zones. The intent is to create economic opportunities for under-invested tracts. Investors can contribute to an Opportunity Zone fund and without having to pay taxes on the appreciation of their investment. By keeping their money in this fund for a minimum of five years investors can obtain a 10% appreciation. The goal is to encourage long- term investment in ways that benefit communities.
  • The next step is to receive federal regulations for implementing this program.
  • DC is treated as a city and a state for participating in this program. Community engagement took place as part of the process for selecting tracts. This included putting out a public survey and talking to ANC Commissioners.
  • The DC Government looked at different opportunities for investment hooks. Attention was given to balancing need and opportunity as part of selecting tracts. We sought to include various business opportunities, such as makers, light industry, and technology.
  • Tract selection prioritized east of the Anacostia River in which 72% of the tracts selected are in Wards 7 and 8.
  • The DC Government’s goals for the Opportunity Zone program are: preserve affordable housing, capitalizing local businesses (focus on underserved entrepreneurs), deliver new amenities, and create jobs that create pathways out of poverty. This program is one tool for achieving better outcomes for residents. The critical question is how to achieve these outcomes.
  • The DC Government is considering how to move these actions forward by:
    1. Maximizing benefits to residents by aligning projects with community priorities and the program’s goals. We have developed robust criteria for project selection.However, the challenge is coming up with a process that is broad and transparent.
    2. Helping investors connect with projects.
    3. Partnering with funds that are aligned with Opportunity Zone goals, provide data, and require measurement of social impact.
    4. Tracking data tracking in coordination with state/federal data.
    5. Training and community engagement. An investor prospectus template is being developed along with best practices for providing technical assistance to small businesses and community wealth building. The DC Government is seeking partners for technical assistance and community wealth building.

 

Q&A

How can we engage communities for the long-term to avoid flipping for short-term gain? We need to think about the future state and create incentives for businesses to stay beyond ten years so that they genuinely engage in communities and help build wealth instead of focusing on short-term extraction. This involves creating a framework to achieve desired outcomes and tapping into available resources. Raising awareness about this initiative in the community is also important as is engaging business leaders who support financial inclusion.

How can the DC Government go beyond being a matchmaker between investors and developers to being a matchmaker between entrepreneurs and capital providers? The DC Government is not a matchmaker, but it creates opportunities for those who want to work together, like creating the space for Opportunity Zone projects to happen. We need to think more broadly and expand resources that are available for achieving desired outcomes. We need to keep the goals front and center and treat this program as one tool to accomplish them.

The DC Government is engaging with the 11th Street Bridge project around the Opportunity Zone initiative and is seeking input on ensuring community engagement.

We need to do more to ensure that community priorities are respected. There is also a need to obtain more data to track social benefit, such as mitigating gentrification.

A challenge is finding those who want to invest in DC because the process is difficult and there is a belief that the market is tapped.

Contact Sharon at sharon.carney@dc.govwith your ideas, resources, and connections.

 

Key Takeaways

  • Supporting the development of local businesses, such as through access to credit and technical assistance, is essential for reducing the wealth gap in low-wealth communities.
  • Entrepreneurship is a significant lever for change. However, this is not enough on its own. Because the root causes of racial, social, and economic injustice are systemic, impact investing can be effective and sustainable over the long-term if it is applied as part of a systems approach to change that includes advocating for policy change, encouraging more low-income people to vote, incentivizing the investment of more resources in low-wealth communities, strengthening access points for starting new businesses, and enabling residents to determine their own economic future.
  • Policy advocacy and voting are critical strategies for increasing investment in low-wealth communities since the public sector has the largest amount of funds available. Philanthropy is another significant source of impact investment funding that can be leveraged by lifting up the need for the deployment of flexible and patient capital as well as creating more opportunities for individuals to participate in impact investing through donor advisory funds and investment notes.