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GreenMoney Journal - publishing since 1992
Fall 2010 issue
Socially Responsible Investing – Better Companies, Better Communities
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Community Investing Comes of Age as the Fastest Growing Social Investment Strategy
Timothy Freundlich
Paradigm Shift
Communities in rural areas and in inner city neighborhoods
across the country and in villages around the world are creating their own opportunities with the
help of capital from investors just like you and me - individuals and institutions willing to step
outside the conventional wisdom that their investment assets exist only to maximize financial
return within the traditional stock and bond markets. No longer is financial risk and return
considered in a vacuum, in some calculus of "market rate." Community investors are enjoying stable
financial returns, along with strong social returns measured in jobs created, homes built and lives
changed - as funds are borrowed, repaid and then invested again.
Simply put, community
investment channels critical capital to populations underserved by traditional financial services.
It makes it possible for local development organizations to provide capital to low-income
individuals for small businesses and micro enterprises, and to finance community facilities such as
affordable housing and childcare.
How does this translate into social value creation? A
$10,000 investment for three years into community development groups in the US would create 1.5
affordable homes, or start one small business that creates 3.5 jobs for low-income workers.
Internationally, 58 micro enterprises and 87 jobs could be created. Source: The "SROI Calculator"
at- http://wwww.calvertfoundation.org
Well-respected socially responsible entrepreneur Judy
Wicks from White Dog Café has been known to say, "We all understand the concept of a living wage.
Why not a living return?"
Asset Shift
The Social Investment Forum's
recent 2003 Trends Report (see http://www.socialinvest.org
and article in this issue) found
that community investing experienced significant growth over the last two years, expanding by 84
percent - to $14 billion in 2003, from $7.6 billion in 2001. What is incredible is that the
compound annual growth rate (CAGR) in assets of the last two years is 36 percent, while the CAGR of
the prior four years was only 19 percent. Community investing seems to not only be sustaining a
rapid pace of growth, but also accelerating. If maintained, the current pace of growth will bring
community investing to above $65 billion within the next five years.
As Jean Pogge, Senior Vice
President of Mission-Based Products at ShoreBank, commented at the release of the Trends Report in
November, "This new data shows the growing power and reach of community investing in our
underserved communities across the United States and throughout the world. Investors who hope to
achieve social goals in addition to meeting their monetary gains are seeing great work done with
their dollars."
So, who are these investors that hope to achieve such lofty goals? A recent
survey of 400 community investors conduct by the Calvert Foundation in August 2003 indicates the
average community investor tends to be of the baby-boomer generation, a democrat, balanced between
male and female, with a majority having household income of $100,000 or less. They are placing
roughly three percent of their assets into community investments and use an investment advisor whom
they consider to be "socially responsive." For example, in 2003 Calvert Community Investments saw
70 percent of new assets come in through financial advisors.
Kathy Leonard, President of
Leonard Financial and The Center for Responsible Investing based in CO, sees continued growth in
community investing. "Clients are very excited by the opportunities offered through community
investing. They can have competitive investments while their money helps create jobs, build homes
and end poverty. Some clients want FDIC insurance, others have a specific area of interest (issue
or geographical), some are more interested in impact, verses return, and some are concerned about
the return they will get. The good news is, as an advisor I can help all of them. There are a wide
variety of options available that can fit each investors needs."
"I have never had a client not
interested in community investing once it was explained to them." Ms. Leonard reports that her
clients have approximately 3 percent of their portfolios in community investing, up from about 1
percent a year ago.
Investment Vehicles
Many Community Development
Financial Institutions (CDFIs) accept direct investments. Community Development Banks (with $7.2
billion in assets) and Community Development Credit Unions ($2.7 billion) offer insured accounts
and CDs, and many Community Development Loan Funds, Community Development Corporations and
Microfinance Organizations ($3.6 billion) offer uninsured investment notes. Rates currently fall
somewhere between 0-3 percent with terms of 1-5 years. Resources for CDFI listings can be found at
these web sites:
http://www.calvertfoundation.org
http://wwww.cdfi.org
http://wwww.communitycapital.org
http://wwww.natfed.org.
For those investors not
willing to take on the burden of placing funds with individual organizations, a number of Community
Investment Portfolios exist. These intermediary facilities allow investors to purchase an
investment note that is a piece of a larger pool of CDFI investments. With this option they can
reach many different types of programs at once. 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 organizations they invest in (e.g. 1-5 years and
a 0-4 percent return). Calvert Community Investments, Rudolf Steiner Foundation, the Tzedec Fund,
Leviticus Fund, and Partners for the Common Good are examples - more information at
http://www.communityinvest.org
And, an increasing number of mutual funds have a community
investment component built right in. Most of these mutual funds give investors a very small
percentage exposure to community investment, one that may or may not affect 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). You have to look closely to find out what, if any, commitment a given mutual fund
has to community investment (see www.socialfunds.com for information on funds with community
investment components).
David Sand from Access Capital Strategies notes that the institutional
end of the community investment spectrum also saw increased growth and acceptance in 2003. "The two
leading institutional investor mutual funds in the arena, the Access Capital Strategies Community
Investment Fund and the CRA Qualified Fund, each reached $300 million in invested assets."
These newer funds invest primarily in "agency" bonds issued by organizations such as Fannie Mae
that support affordable housing and other activities. While not as "direct" as community investment
portfolios and community investing into CDFIs, this strategy is a viable and important way to place
capital to create impact at the community level, as the purchase of "secondary market" bonds helps
to refinance mortgage lenders and larger community development groups that place capital into
communities.
Moving to Adolescence
As Shari Berenbach of Calvert
Community Investments says, "Our goal is that every investor will be a community investor - and
that community development organizations will have access to an efficient and effective market for
investment capital."
And, the ongoing effect of the Social Investment Forum's "1% or more in
Community" campaign is no doubt significantly increasing assets devoted to community investing. The
recent Trends Report predicts that "if all social investors shift one percent of their investment
dollars into community investing, this shift will effectively triple the real dollars available to
finance work in economically distressed communities and assist lower-income families."
But,
with maturation and growth in the number and types of vehicles, potential confusion is a "champagne
problem" for community investment's success. A challenge to the growth of the industry is going to
be making sense of a continuum (and sometimes jumble) of relative liquidity, risk, return and
social impact.
Investors may often find that the most appealing community investment is not
necessarily the one that has the highest financial rate of return or greatest level of liquidity.
For example, a local loan fund in a home town, or one that supports a social issue close to one's
heart will often provide the more compelling grass roots impact that investors are seeking to
integrate into their proposition. The tradeoff may be a lower rate of financial return or less
liquidity for a higher, more direct and/or more targeted social return. Alternatively, increased
liquidity and closer-to-market-rates of risk adjusted financial return will no doubt bring new
investors to the table with more dollars, more quickly.
There will need to be honest
articulation by practitioners of the differences between various investment vehicles, the
trade-offs and the rationalization of social impact into the balance of other considerations. This
will be hard work for the industry, and may bring a certain amount of divisiveness between
competing offerings.
But, in the end, a full spectrum of vehicles (as measured across the
liquidity, risk, return and social return range) will emerge and offer investors a plethora of
appropriate vehicles. We will move towards a time when every investor will become a community
investor. Regardless of which community investment is chosen, investors will partner with hard
working people and non-profits - across the country and around the world - to create jobs, build
homes and change lives.
Article written by Timothy Freundlich, Director, Strategic
Development of Calvert Foundation, a 501c3 nonprofit community development intermediary, and a
separate legal entity from Calvert Group. Its investment products are not FDIC insured, nor are
they mutual funds.
For more information contact Calvert Foundation by email at- foundation@calvert.com or by calling (800) 248-0337.
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