Essentially, community investing involves allocating investments to support low-income and other underserved communities with capital, credit, and training, primarily in the following areas:
- Needed services – this includes fostering healthy communities, education, childcare, and access to transit, jobs, food, and affordable housing
- Economic development – this includes creating
quality jobs and developing the infrastructure to support the community - Sustainable communities – this involves growth strategies, environmental considerations, and energy resilience1
The need for these types of investments is evident in many communities. As of 2017, the U.S. Census reported that 12.3 percent, or 39.7 million people, live in poverty in the United States.2 Particularly due to urbanization, rising costs of living are surpassing the wages of lower-income people. On average, there are only 37 adequate and affordable housing options for every 100 extremely low-income households, and there is a shortage of seven million affordable and available rental homes for households with extremely low incomes at or below the poverty level.3
The U.S. education system is also desperately in need of funding. It would reportedly cost $197 billion to bring all K-12 school buildings into good overall condition; and, the nation is $46 billion a year behind what it should spend to provide healthy and safe modern facilities.4, 5
For investors interested in providing support, there is a wide range of community investment options – more than ever before – with attractive scale, providing improved access and opportunity.
The Opportunity To Invest
While there are an increasing number of investment options, there is also some hesitation given the unconventional nature of many of these types of strategies. Although some community investments are concessionary, there are many options that can provide a competitive market rate return for your clients.
According to the US SIF: The Forum for Sustainable and Responsible Investment, the community investing space grew more than 50 percent from 2016 to 2018. The largest growth was among community development credit unions, whose assets have nearly doubled since 2016, mainly due to mergers and acquisitions within the sector.6
If your clients are seeking these types of investments, a customized strategy typically starts with just two questions:
- What location would you like to target? Are you personally tied to the neighborhood you live in, the town you were raised in, or a particular district, city, state, or region?
- What type of community impact would you like to have? Are you interested in education, financial literacy, healthcare access, food access, or other something else?
From there, you can identify the investments best suited for their interests.
How To Access Community Investment Options
One of the most common and accessible ways to invest in communities is through depository institutions, such as community development banks and credit unions, with deposits and CDs. A bank or credit union can be designated as a Community Development Financial Institution (CDFI), which means it offers credit, capital, and financial services to organizations engaged in work that benefits low-income communities.
In order to be designated a CDFI, the investment must meet specific federal guidelines regarding the level of support provided to underserved communities. There are also options to invest directly in a CDFI loan fund; some vehicles provide microfinance to entrepreneurs and small businesses in underserved communities.
Another option is to invest in a fixed income mutual fund that has a community focus in its mandate, stating in the prospectus that there is a designated allocation to CDFIs, or an allocation to municipal bonds that have an explicit use of proceeds directed at underserved communities.
There are community investment opportunities within the public equity space as well. Here you might identify investment strategies that, within stock selection and portfolio construction, consider how companies interact with the communities in which they operate. For example, evaluating a company’s commitment to create jobs in underserved communities. Or, for a company that operates in areas where indigenous people live, assessing how that company is incorporating indigenous perspectives in relevant decision making. Companies that pay attention to the communities in which they operate are better positioned for long-term success, reducing reputational risks and building positive brand value and awareness.
Fund managers that incorporate this level of analysis have the potential to create meaningful community impact through engagement with holding companies around what they’re doing to create social benefit for the communities they effect.
Some fund managers have an investment objective to provide current income deemed to be qualified under the Community Reinvestment Act of 1977. The Act was put in place to encourage depository institutions to help meet the credit needs of low- and moderate-income neighborhoods, and CRA regulators ensure that the investments meet those standards.
A crucial aspect of a community investment is the managers’ ability to report on the positive impact of the investment. You can use these metrics to communicate the social benefit of the investment to a client. For example, if a key theme within the portfolio mandate is affordable housing, how many tenants were provided access to housing, what was their demographic and income breakdown, and over what time horizon were they supported? If an investment has a focus on financial inclusion, how many people were provided access to credit or what is the increase in “banked” adults? It’s important to see clearly defined financial and social return expectations.
Community investments are now more accessible than ever. And with that, there is an unprecedented opportunity for advisors to deepen conversations with clients around meaningful and personal investment impact, whether it be in the town they grew up, the place they live now, or anywhere in between.
