Community Investing Grows and Goes Global(A)
Amy Hilliard and Fatouma Dijbril Issifou may not seem to have much in common. Several years ago, Amy left her job as a marketing executive to start a Chicago-based dessert company, Comfort Cake Co. LLC, with clients that include United Airlines and the Chicago Public Schools. Fatouma lives in the West African Country of Benin where she runs a tiny vegetable stand in a crowded market. Yet both these women run successful businesses because community investment banks granted them loans when no other banks would. In Amy’s case, a loan from ShoreBank provided capital that helped her grow her business to meet expanding demand. For Fatouma, help came in the form of two loans totaling just $390 from a local community development bank in Benin that is part of a global community investment network called Accion International. Those small loans allowed her to buy her vegetables in bulk at lower prices, helping boost her returns enough so that she could afford to send her two children to school.
Every day, more and more people like Amy and Fatouma are benefiting from community investing, which provides loans and financial services to individuals and community organizations that traditional commercial banks often fail to serve, including the poor, minorities, small entrepreneurs, and many others. Community investments help finance mortgages for low-income home buyers, the development of nonprofit community childcare centers, and the establishment of sustainable enterprises like locally owned ecotourism companies in the developing world, to name just a few examples.
Community investments currently represent the fastest growing asset class in socially responsible investing. According to the latest figures from the Social Investment Forum, in the last two years, the amount of assets invested with community development financial institutions (CDFIs) in the U.S. nearly doubled from $7.6 billion in 2001 to $14 billion today. This amount includes investments in a range of CDFI types, including community development banks and credit unions, community investment loan funds, guarantee funds and venture funds.
Community development banks and credit unions offer the same types of federally insured certificates of deposit and other investment products as a traditional bank or credit union does. The difference is that a traditional bank uses your deposits to fund a broad portfolio of loans. In extreme cases, your savings account could be helping to finance a destructive pipeline across the Amazon rainforest. In contrast, deposits with community development banks are targeted to help finance local community development projects, offering investors the satisfaction of knowing what they are financing.
Community investment funds are not federally insured, although they are often backed by risk reserves aimed at reducing the chance of investor losses. Community development loan funds and guarantee funds help finance community projects like affordable housing. A subset of these, microenterprise loan funds, provide very small loans and business assistance to individual entrepreneurs. Community development venture capital funds provide financing for new or existing businesses, and generally target businesses that provide jobs in low-income communities or that focus on environmentally sustainable enterprises. There are also a number of community investment pools such as the Calvert Social Investment Foundation that act almost as “community investment mutual funds,” distributing investments across a set of CDFIs.
Some large institutional investors have also created their own community investment programs, which have returned generated tremendous benefits in both community impact and investment returns. Last year the nation’s largest pension fund, the California Public Employees Retirement System (CalPERS) announced the surprising news that its best performing category of investment over the past decade was not stocks, bonds, or complicated hedge funds. Instead, it was its Single Family Housing Program, which has earned more than 20 percent annual returns since its inception and has built more than 32,000 units of badly needed housing in 200 communities in California. Similarly, the General Board of Pension and Health Benefits of the United Methodist Church has invested almost $1 billion in affordable housing since 1990 and has earned returns since inception of over 7 percent. Michael Lohmeier, the General Board’s investment manager for Community Development and Affordable Housing told SocialFunds.com last year, “Our affordable housing investments have outperformed our equity and fixed income instruments over the last three years.”
These returns demonstrate an important point about the perceived versus actual risks of CDFIs. CDFIs loan money to low-income individuals, entrepreneurs who may or may not have a proven track record, and community groups that may or may not meet the collateral hurdles that traditional financial institutions demand. However, this does not mean that investments with CDFIs represent more loss of capital than traditional investments. Indeed, many CDFIs face lower default rates on their loans than traditional financial institutions that loaned money to the now bankrupt Enrons and Worldcoms of the world. CDFIs do face higher transaction costs because they loan money in small amounts, assess their borrowers on a case-by-case basis rather than relying on exclusionary one-size-fits-all metrics, and provide technical assistance and help with business planning to promote the success of their borrowers. CDFIs defray these expenses with grant funds and by encouraging investors to accept below market rate returns. A growing number of community development banks and credit unions now offer products with both market rate and below market rate returns.
In recent years there are a growing number of CDFIs engaged in community investing globally. The Social Investment Forum found that $72 million of the $14 billion in community investment assets in the U.S. support international community development projects. Many of these have been particularly successful in using microcredit strategies to help people move towards economic empowerment and self-sufficiency with loans as small as $100 and less. Even large scale financial institutions like the World Bank have developed their own microfinance initiatives modeled on the successes of community investment approaches.
Another innovative way CDFIs can leverage small amounts of capital for greater social impact is through loan guarantees. Shared Interest, for example, uses loan guarantees to get South Africa’s major banks to lend to communities they would otherwise fail to serve as a result of their race, gender, poverty and—more recently—health status.
Since the country’s first fully democratic elections in1994, Shared Interest has served as a catalyst for the creation of 6,000 small and microenterprises, 12,000 jobs and 62,000 low-cost homes—benefiting 350,000 black South Africans. Each dollar in guarantees issued has produced more than the equivalent of $10 in loans to low-income South Africans.
One of them, Rose Ramalana, lives on the farm where she was born, which has been repurchased from the previous owner and given to the 27 black families who have worked it for three generations. Along with thousands of other rural women, Rose is being equipped and trained by a group called the Bee Foundation to own and operate a bee-keeping business that will benefit the farm and send her children to school. A loan guaranteed by Shared Interest is enabling the Bee Foundation to extend credit in the form of fully stocked hives to women like Rose. Rose will pay back this loan with the honey she produces and have enough left to support her family. She says she plans to “spread the gospel of bee-keeping” – a powerful metaphor for enterprising collective activity.
Throughout our two-decade history, Trillium Asset Management has been a leader in helping our clients participate in community investing. Our president and founder Joan Bavaria explains the firm has always had a “strong commitment to catalyze investment in community investment vehicles with high social impact.” In 1981, Joan initiated and organized some of the very first meetings to bring together community development organizations and the investment community. Trillium Asset Management is one of only a few active investment management firms with more than 1% of assets under management in community investment instruments. All of our community investments are client directed, and many of our clients choose to allocate a portion of their portfolios to community investing. Community investment instruments are customized for each client, and can be targeted both geographically and by area of interest. In addition to their high social impact, community investments can also provide diversification and risk control helpful in meeting some clients’ financial goals. Interested clients can talk with their portfolio managers about how community investments fit into their investment strategies.