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Putting your capital to work.
by Timothy Freundlich, Calvert Foundation
In a world filled with publicly traded securities issued by large corporations, mutual funds, options and derivatives -- it's very easy to lose touch with what your money is actually doing for (or doing to) the planet on which we live.
It's exactly this 'disconnect' that has been fueling the growth of Community Investing, perhaps the least well-known sector of Socially Responsible Investing -- and the one which has the most direct impact on our communities. Amid stories of urban decay, economic dislocation and real hopelessness, people are putting their money where their hearts are.
Community investment capital flows into non-profit loan funds and community development banks, credit unions and corporations - hundreds of programs, domestically and internationally. Individual investors are funding vital community development lending, and financing programs that enable others to work their way out of poverty, and into jobs and homes. Investors are also enabling local non-profits and small businesses to maintain the critical facilities that healthy communities depend on. These investment opportunities vary widely in terms, rates and risk.
What does Community Investment accomplish?
The impact of community investing is direct and measurable. In addition to geographic concerns, you may consider a number of social impact areas when looking at community investing. There are four primary sectors of lending that community investing supports: Affordable Housing, Microenterprise, Small Business, and Community Development.
Affordable Housing lending builds or rehabilitates housing for low-income families. Many programs also provide important and pivotal support in helping individuals secure and repay mortgages, and even offer training and empowerment programs that help support new homeowners in other areas.
Teresa Coles worked her way through college and earned her teaching credentials while she and her children were living at Comstock Apartments, a Mercy Housing property for families in Nampa, Idaho. Today, Teresa is a new homeowner, thanks to Mercy Housing's Lease-Purchase Program. Mercy houses more than 10,000 low-income and special need residents nationwide. In the U.S., the gap between the number of affordable housing units and the number of people in need is 4.7 million -- the largest on record.
Microenterprise Development focuses on assisting low-income people in starting their own businesses by providing very small loans, usually less than $10,000. Internationally, loans can be as small as $50. Some programs lend directly to individuals, while others use a peer-lending model that binds individuals together in a supportive group of borrowers whose access to loan capital is dependant upon the success of all its members. Many programs also offer technical assistance. In some very poor areas of the world, an investment of $1,000 could provide loans to help a dozen families, and their children, transform their lives.
Nurjahan from Bangladesh was married at twelve and became a single mother at the age of thirteen. With the help of Grameen Bank, Nurjahan was able to take out a $180 loan and start a business selling vegetables. Five years later, she owns land and farm animals. She can now feed her family and has made a better life for herself.
Small Business Development lending is more traditionally structured and supported than micro-loans. This category of lending assists low-income people in disadvantaged communities to start or increase the scope of their own businesses by providing loans generally over $25,000.
Native Seeds has been collecting and preserving endangered plants since 1983, working to conserve the traditional crops that have sustained Native American peoples. Thanks to a $25,000 loan from the Environmental Support Center, Native Seeds can now prepare the soil and plant the hundreds of seeds in their seed bank that need to be "grown out" to provide fresh seed stock. This will ensure that plants like Hopi string beans and Navaho Hubbard squash will survive into the next century.
Community Development lending supports non-profits or small businesses that are working directly with disadvantaged populations and communities to develop enterprises that provide core social resources, such as health services and daycare centers. Others activities include banking services in targeted communities and critical funding to non-profits, cooperatives and environmental programs.
The Mary Neal Child Care Center in Pittsboro, NC was started with technical and financial assistance from Self Help Credit Union. This nonprofit provides quality childcare from early morning until after midnight, accommodating parents who work both day and evening shifts. Thanks to the efforts of a few committed citizens who established this nonprofit facility, this center gives small children a place where they can learn and grow in a secure environment.
Who puts the Community Investment capital to work?
Local financing programs do the lending and development work, providing the means for your community investment capital to impact disadvantaged communities. As a group these organizations are known as Community Development Financial Institutions (CDFIs).
CDFIs range from small non-profit microenterprise lenders with a few hundred borrowers, to good sized banking institutions like Self-Help Credit Union and Ventures Fund with 3600 borrowers and loans totaling $190 million. Yet, they're all CDFIs, and are capable of putting your community investment capital to work. CDFIs fall into the following categories, and offer various investment opportunities:
- Community Development Banks (CDBs) are for-profit regulated entities with FDIC insurance. They target disadvantaged communities to provide banking services, loans, and community revitalization programs. There are only a few CDBs in the United States. They offer insured depository accounts and CDs, most of which have pretty competitive returns (as much as 5%), and are very safe (FDIC insured to $100,000).
- Community Development Credit Unions (CDCUs) are non-profit regulated and insured entities serving their members in low-income communities. Self-Help Credit Union in North Carolina is an example of a CDCU, of which there are more than 200 in this country. Like CDBs, these also offer insured depository accounts and CDs, similarly priced and insured.
- Community Development Loan Funds (CDLFs) are non-profit, unregulated and uninsured entities. CDLFs such as the Environmental Support Center administer loan funds for community development and various lending activities, including the environment, housing, small business, and non-profit facilities funding. They sometimes have limited microenterprise programs, too. CDLFs are able to make loans that banks and credit unions would hesitate to make, and often partner technical assistance with their capital. Many CDLFs accept private investment. Offerings tend to be below market rate, typically ranging between 0-5%, for terms of 1-5 years.
- Community Development Corporations (CDCs) are non-profit, unregulated and uninsured, primarily involved in housing, neighborhood revitalization and community development. They may also have community loan funds within their programs. Mercy Housing is a CDC, and it's one of more than 2000 active in this country. CDCs often develop their own umbrella of projects, funding and building a portfolio of deals. Some CDCs accept direct investment from individuals, with similar rates and terms as those offered by CDLFs.
- Micro Finance Institutions (MFIs) are non-profit microloan institutions that are also unregulated and uninsured. Grameen Bank is an example of an MFI (in fact, it's one of the oldest and largest). Although microlending has gained much recognition internationally, there are a growing number of programs in the U.S. MFIs often target some of the poorest of the poor, and may offer technical assistance and employ the peer-lending model. A few MFIs accept direct uninsured investments (again, about 0-5% return for 1-5 yrs).
All of the investment notes and CDs issued by CDFIs are typically illiquid, meaning you have a set term of investment. Early withdrawals may be possible with some penalties against interest or principal.
How can I make a Community Investment?
Now that we've seen the what and who of community investing, you may be wondering how to take the next step. As a potential community investor you can start by clarifying what it is you're looking for in a community investment:
- Decide on the amount that you feel comfortable with (always consult with your financial advisor) -- and how charitable you can be (market or below-market return, generally between 0-5%). Remember to think of community investing as a piece of the asset allocation pie.
- Decide how long your funds can be committed for (usually between 1 and 5 years -- longer terms allow CDFIs to be more flexible).
- Decide where you want your capital put to work - locally, domestically, or internationally, and what you're most interested in funding: housing, microcredit, small business, or other forms of community development.
- Think carefully about your risk tolerance (e.g. insured or uninsured). Consult with programs directly to attain current offerings, and always request full documentation.
There is probably a community investing option for almost any combination of the above concerns, especially if you are willing to be flexible about your rate of return. Once you have decided on the basic parameters, you will need to determine how to make the actual investment. There are three distinct options: Direct Investment, Community Investment Portfolios, and Mutual Funds.
- Direct Investment: As previously discussed, many CDFIs accept direct investments from individuals. All Community Development Banks and Credit Unions offer insured accounts and CDs, while only some Loan Funds, CDCs and MFIs offer investment notes (all uninsured). Rates generally fall somewhere between 0%-5%, with terms of 1-5 years, for all options.
- Community Investment Portfolios: Intermediary facilities allow you to purchase a note that is a piece of a larger pool of CDFI investments. With this option you can reach many different types of programs at once. Community investment portfolios may benefit from active monitoring and diversity, and also can have additional security enhancements built in, though they are not insured. Terms and rates are roughly those of the CDLFs, CDCs and MFIs they invest in (e.g. 1-5 years and 0-5%).
- Mutual Funds: Several mutual funds have a community investment component built right in. These mutual funds give you a very small percentage exposure to community investment, one that may or may not effect the overall return of the fund. If you want to make a substantial commitment to community investment, though, it may be hard to reach the desired amount with this option (since only a small percentage of every dollar is reaching CDFIs). Mutual funds do have the attraction of being very liquid, and can be held easily in brokerage accounts. You have to look closely to find out what, if any, commitment a given mutual fund has to community investment.
You may even find that the most appealing community investment is not necessarily the one that has the highest financial rate of return (for instance, a local loan fund in your home town, or one that supports a social issue close to your heart). The tradeoff here is a slightly lower rate of financial return, for a higher social return:
A Way To Think About
'Below-Market' Community Investment
When you make a $20 donation: * When you invest $1,000 in a community investment at 3%: * You give $20 * You may sacrifice $20 in interest * And only that $20 goes to work helping people. * While your entire $1,000 goes to work helping people help themselves! * * Compared to a T-Bill investment of 5%.
As socially responsible investors, we must always be concerned about portfolio diversification, responsible asset allocation, and performance, but we should also be on the lookout for the human element. Value in the form of powerful and responsible social impact should be something to be considered. Community investing is an opportunity to do just this, to further align your financial resources with your social mission, in meaningful and measurable ways.
Community investment demonstrates a sustainable partnership between capital and humanism that cuts across partisan lines -- one that is compatibly capitalist in its nature. It, therefore, presents the opportunity to involve, and even educate, a broad range of individuals and institutions.
Regardless of the option you choose, you can have the satisfaction of knowing that every dollar of your community investment capital is directly partnering with hard working people down your road, across the country, or around the world -- helping people like Nurjahan, Teresa Coles, and their families.
NOTE: None of the information contained herein should be taken to be investment advice from the author, from socialfunds.com, or from GreenMountain.com and is not a solicitation to buy or sell securities.
Timothy Freundlich is the Development Officer for Calvert Foundation, a non-profit community investment facility channeling funds to, and developing information on, 80 CDFIs globally for individual and institutional investors. Calvert Foundation and SocialFunds.com have developed an online tool based upon this information and is available at the Community Investment Center.
Links to CDFI Membership Organizations
Association for Enterprise Opportunity - the national membership organization for microcredit programs
CDFI Coalition - the national coalition and advocacy group for the CDFI industry with over 350 members
National Congress for Community Economic Development - a membership organization for 800 CDCs
National Federation of Community Development Credit Unions - membership group of 200 CDCUs
Opportunity Finance Network - umbrella organization for over 40 CDFIs