Originally posted to Exponent Philanthropy’s blog.
By Kristina L. Wahl and Paige Chapel
Local giving is a priority for the vast majority of Exponent Philanthropy members. This is probably no surprise for those of us who associate charitable giving with supporting our local nonprofits, places of worship, or community members who are in need.
On average, like most private foundations, Exponent Philanthropy members give away approximately 5% of their assets each year. But what about the other 95% that are invested in return-generating financial instruments? Where does that cash “sleep” at night? In the local community where it can benefit people and places? Or on Wall Street?
These days, impact investing or mission-aligned investing are hot topics, but to many it is not always clear how to get started. We suggest taking a look at mission-aligned investment opportunities in your own backyard: investing in CDFIs and supporting a local social enterprise.
Community Development Financial Institutions (CDFIs)
CDFIs are private financial institutions with a 100% impact focus. They finance affordable housing, small businesses, and a range of community facilities—from schools, to health clinics, to arts venues.
The Barra Foundation discovered a great onramp to local investing in a loan fund managed by Philadelphia’s Reinvestment Fund, an Aeris-rated CDFI. (The Barra Foundation is a $90-million foundation, with three full-time staff, that invests in the Greater Philadelphia region. At Aeris, we offer information to foundations and other investors that accelerates the flow of capital into impact investing.)
Individual and institutional investors like Barra loan money to Reinvestment Fund, which in turn uses those dollars to finance socially and environmentally responsible development projects that benefit low-income communities. Investors earn a financial return while supporting mission-focused economic development projects. Investors can participate in the fund for as little as $1,000. The paperwork is simple to complete, but investors do have to commit to leave their money in the loan fund for a minimum of three years.
The Barra Foundation saw in Reinvestment Fund a financial institution that had not defaulted on a commitment to an investor for more than 30 years. It also saw an opportunity to earn a market-rate return that was comparable to that offered by other types of fixed-income investments (such as bonds), with the added benefit of having local impact. To make the investment, the Barra Foundation’s Investment Committee and investment consultant reviewed the prospectus (available online) and approved the investment. Barra’s investment consultant tracks the loan fund in the monthly investment performance reports with all of Barra’s other investments. Reinvestment Fund provides an annual report that discusses its impact on communities.
In addition to loan funds, CDFIs also come in the form of banks—as well as venture funds and credit unions. CDFI banks use depositors’ funds in the service of helping underserved communities. Aeris, for example, keeps its operating cash in an account with City First Bank of DC, a certified CDFI that serves residents, community-based organizations, and businesses in distressed, low-wealth communities. City First, like several CDFI banks, offers access to Certificate of Deposit Account Registry Service (CDARS) products, a program that enables City First to offer FDIC insurance for large deposits—i.e., above the $250,000 insured limit.
If you would like to find a CDFI (bank, loan fund, venture fund or credit union) that services your community, groups such as the Community Development Bankers Association (CDBA), National Community Investment Fund (NCIF), and Opportunity Finance Network (OFN)maintain search tools to help you locate a CDFI bank in your community.
Social Enterprises
What about investing directly into a social enterprise? In some cases, a pilot or test can be a great way to get started with mission investing while limiting your risk exposure. For example, a program-related investment (PRI) or recoverable grant can help orient investment decisionmakers to a new way of thinking about deploying financial resources. Some foundations have taken a first step by making a low-interest loan to a nonprofit or other entity they already know well.
Foundations face a decision with respect to the amount of risk they wish to assume with their mission-aligned investments. Investing directly in an enterprise can be riskier than investing through an intermediary (e.g., a CDFI), though in some cases a direct investment can make stakeholders feel more directly connected to the impact of the investment. A direct investment also can lower the cost of capital to the social enterprise.
The Barra Foundation provided a direct, low-interest loan to New Day Chester, Inc. (a for-profit) to support the rehab of several buildings at the core of an emerging arts district in Chester, PA. Unlike a grant that is not recoverable, a $250,000 loan with 4% simple interest in the form of a program-related investment (PRI) will be paid back to Barra in five years and then could be reinvested into another social impact project. Barra was able to share information—and risk—with two peer foundations who had experience making these types of direct investments. In this instance, Barra was willing to take a below-market rate of return because of the enterprise’s potential to achieve a higher return on the foundation’s impact objectives.
Priming the Pump
Mission-aligned investing often does not happen overnight. It requires some staff and board education. Barra staff began to learn through resources like Mission Investors Exchange and from like-minded foundations. Barra also had educational sessions for its board, where directors heard directly from both experts in the field and recipients of impact investments. This helped them understand more concretely, with examples, how an impact investment can benefit an end user such as a social enterprise. Barra also had its Investment Committee Chair and Board Chair meet with Reinvestment Fund directly—so the President did not have to act as translator.
Barra’s thinking about impact investing continues to evolve, and it plans to take more steps in the coming year to align a greater percentage of its assets toward mission.
Does your lean foundation have a success story or challenge related to mission investing? We would love to hear about it.
Kristina L. Wahl is president of The Barra Foundation, which invests in innovation to inspire change that strengthens communities in the Greater Philadelphia region.
Paige Chapel is president & CEO of Aeris. Since 2004, Aeris has established risk management standards for private community loan funds (CDFIs) and has helped strengthen the development of impact measurement and management practices in the CDFI industry.