Exploring new opportunities to invest for impact in your own community
By Cece Derringer, Homewise
Director of Resource Development and Communications
A new survey published in May 2014 by the Global Impact Investing Network and J.P. Morgan offers clear evidence of the impressive growth of impact investing. The survey, the authors’ fourth annual report on the state of impact investing, queried leading fund managers, foundations, and development finance institutions in the United States and Europe, and found that the amount of capital they had committed to impact investing increased by 10 percent between 2012 and 2013, and the number of investments increased by 20 percent. The groups surveyed also reported that it committed $10.6 billion to impact investments in 2013 and intended to invest $12.7 billion in 2014 — an increase of 19 percent.
While the popularity of impact investing is reaching unprecedented heights, the practice itself is anything but new. Community investing has long been considered one of the three main strategies that form the foundation of socially responsible investing. What sets it apart from the other two strategies, social screening and shareholder advocacy, is that it offers a way for investors to make a tangible, even visible, difference in the communities where they invest. Indeed, community investing has the power to transform communities and the lives of the people who live in them.
Nevertheless, community investing has never been as widely practiced as social screening and shareholder advocacy. A variety of issues — including the limited number of investment options and a general lack of public awareness of the practice — have checked its growth.
But that is beginning to change. As impact investing is gaining new popularity, the menu of investment options is growing. Investors today can choose from a variety of market rate and below market rate impact investment options, including cash deposits in community development banks and credit unions, loans to community development loan funds, equity investments in small businesses, microenterprises, community projects, and innovative new products such as social impact bonds and Calvert Foundation Community Investment Notes.
One form of impact investing that is drawing the attention of social investors is Community Development Financial Institutions (CDFIs). CDFIs are specialized financial institutions dedicated to serving the underserved. There are four basic types — loan funds, banks, credit unions, and venture capital funds — but all four have the same basic mission of serving low-income communities that lack access to credit, capital, and financial services from mainstream financial institutions.
Like community investing itself, the CDFI industry in the United States has a low profile but very deep roots. In 1865, for example, the Freedman’s Savings and Trust Company was established to serve recently emancipated African-Americans and eventually maintained 37 offices in 17 states. And in the first decades of the 20th century, other banks were established to serve a variety of minority communities, including members of the Cherokee tribe in Oklahoma, the Chinese community in San Francisco, and women in Cleveland, Ohio. These institutions were among the forerunners of what we now call community development banks.
The modern CDFI industry received a major boost in 1994, with the passage of the Reigle Community Development and Regulatory Improvement Act, which authorized the creation of the Community Development Financial Institutions Fund, a new federal agency dedicated to advancing the work of CDFIs.
Today, there are 884 federally certified CDFIs in the United States that serve their communities in a variety of ways. They provide loans to build small businesses and microenterprises, affordable housing, and social service organizations; they provide mortgages for low-income homebuyers and retail banking services for the unbanked; and they also provide credit counseling, homebuyer education, and business development services to enable their borrowers to use credit wisely.
What most CDFIs typically have not provided is a way for investors to invest in their work, but that, too, is beginning to change. One CDFI that offers its own investment program is Homewise, a nonprofit that focuses on affordable homeownership in Santa Fe, New Mexico, and introduced the Homewise Community Investment Fund in 2010.
Homewise is backed by decades of experience in community development. The organization was established in 1986 to finance home rehabilitation projects in Santa Fe’s poorer neighborhoods. As home prices in the city began to rise, however, Homewise saw that many of its customers were concerned that their children and grandchildren would never be able to buy homes in Santa Fe, so it added a home purchase program while continuing to expand its home improvement lending.
Since then, Homewise has grown to become a full service agency dedicated to promoting affordable homeownership in Santa Fe and northern New Mexico. Its work is rooted in the awareness that affordable housing not only enables individuals to achieve long-term financial security and build stronger families but also increases economic and social vitality in the community.
To those ends, Homewise offers a variety of services to bring homeownership within the reach of low- and middle-income income residents. Its programs include free homebuyer education workshops and one-on-one financial counseling to prepare prospective homeowners to buy a home, real estate services to help buyers find a high quality home that fits their needs and budget, and lending services that provide low-cost, fixed rate mortgages.
In addition, the organization continues to provide home improvement loans and mortgage refinance loans to help homeowners take care of the homes that are quite likely their most valuable financial assets. Homewise also builds homes in Santa Fe using green building practices for long-term affordability, durability, and comfort.
Those services have had a real impact in the community. Since its inception, Homewise has made more than $346 million in loans. In 2013 alone, the organization helped 249 families become homeowners and provided 62 home improvement loans and 72 mortgage refinance loans. On average, it also has provided free financial and homebuyer education to more than 500 individuals each year since 1995.
Homewise launched the Homewise Community Investment Fund to attract new and diverse sources of capital. The minimum investment in the Fund is $1,000, and the term can range from one to 15 years. The interest rate varies from zero to 4 percent depending on the terms the investor selects.
Homewise is using the new capital it attracts through the Fund to support its lending programs. So, in addition to offering investors a financial return, the Fund generates a social return that is measured in the number of Homewise borrowers with decreased debt and increased savings and credit scores, as well as an environmental return that is measured in the amount of energy saved through home improvement loans and the number of energy-efficient homes built.
That combination of financial, social, and environmental return clearly is something that appeals to the Fund’s investors. Andrew Spingler, the founder of the trial consulting firm The Focal Point LLC, is both an investor in the Fund and a longtime member of the Homewise board of directors. He is concerned about the growing wealth gap between the haves and have-nots in Santa Fe and beyond, and believes that Homewise is doing something very real and very effective to address the issue. “Homeownership is the number one path for folks to become financially stable and independent,” Spingler says. “In a community like Santa Fe, it’s really important for some organization to be all about that and we really are all about that. We have created a lot of financially stable people in this community.”
Still, while he was attracted by the Fund’s community impact, he also recognized that it was imperative to take a good look at the financial aspect of the investment before he invested. As a member of the board’s finance committee, he was in an excellent position to evaluate the organization’s fiscal stability as well as the quality of its staff, and when he did, he gave the Fund a thumbs-up. “It stands on its own as a great investment and then serves a much greater good,” he says.
The Santa Fe Community Foundation reached a similar conclusion. In August 2012, the Foundation launched a local impact investing initiative that over a seven-year period will commit at least 5 percent of the Foundation’s pooled assets to investments directly aligned with its mission. In February 2014, the Foundation announced its first investment under the initiative, allocating $250,000 to the Homewise Community Investment Fund.
According to Joohee Rand, the Foundation’s Director of Strategic Initiatives, the organization’s interest in impact investing has been driven by its desire to build its capacity and expand its philanthropy. She adds that there was an ethical dimension to the question of how the Foundation might best use the assets that it had sitting in financial markets. “In a state like New Mexico, where there are such limited resources, it made sense that we learn about impact investing,” Rand says. “I think it’s almost irresponsible not to at least think about what we might be able to do with the assets that we have.”
Rand emphasizes that impact investing requires a much higher level of due diligence than grant making does, because, as she says, with investments, “you have to get the money back.” But the Foundation had already established a strong relationship with Homewise and became even more comfortable with the idea of investing in the Fund after examining the organization’s financials and strong track record as a CDFI. “Affordable housing is definitely a key area of need that we have identified,” Rand says. “We saw Homewise not just as our first investment but as a real partner as we start this initiative.”
Read full story at: www.greenmoneyjournal.com/october-2014/backyard/