Local Impact Investing

Local Impact Investing

Private foundations are required to spend at least 5% of the average market value of their net investment assets on charitable purposes.  Foundations then invest the remaining 95% in ways that will maximize returns to enable them to award more grants in the years to come.

In most foundations, the investment of that 95% of assets takes the form of traditional equities and fixed income securities.  But with a local impact investing approach, foundations can invest in local businesses, organizations, and funds with the intention of generating measurable community benefit alongside financial returns.

Here we don’t mean grants that we call “investments” as a figure of speech.  These are real investments that should provide financial returns for the investor even as they produce positive impact for the community. And the opportunities aren’t just for foundations. Anyone with investments that they’d like to deploy for local impact can consider these strategies.

The January 2019 GPP meeting hosted LOCUS Impact Investing for a session on local impact investing and how it can benefit both the investor, the nonprofit, and the community.

Impact investing isn’t a new concept.  For years, foundations and individuals have sought to align their finances with their values by screening their stock portfolios, for instance, for companies that manufacture products incongruent with their mission or values, or for corporations that have either favorable or unfavorable governance or labor practices.

But place-based impact investments hold particular promise for place-based funders.  When local funders play a leadership role in catalyzing lasting change to persistent challenges in a way that benefits all residents, they often find that the challenges are greater than their annual grant budgets can support.  Local impact investing aligns all of a foundation’s work to, as LOCUS representatives said, “Not just do good, but do better.”

LOCUS representatives pointed out that there’s a continued contraction of resources that support community and economic development, such as diminishing federal funding for housing and public transportation.  In addition, there is a growing sense among philanthropic partners that more than grant dollars are needed to address critical community issues.  And these complex community issues require collaborative solutions – no single organization or form of investment will create transformational change.

Why are foundations turning to local impact investing?  Quite simply, it’s a way to leverage more resources for community benefit.  Impact investing is just another tool in the toolkit.  And investing this way lets communities bring solutions to scale; far more housing, for instance, can be built with an infusion of patient capital than with single grants.  Furthermore, it helps capital flow to underserved communities.

This is no small thing. A $10 million foundation makes grants of around $500,000 per year.  But that means $9.5 million is likely not working for the local community until it can be deployed as a grant.  In a local impact investing approach, even a small fraction of it could be invested in, say, local small minority owned business or an affordable housing development but still making money for later charitable grants.

LOCUS emphasized that although this is simple, that doesn’t mean it’s easy.  Place-based foundations do face challenges in starting with impact investing. Getting board buy-in is difficult, especially when some board members were recruited for their traditional investment expertise and feel it’s their fiduciary responsibility to avoid these new and unusual investments.  There needs to be an alignment and development of resources, both inside the foundation and in the community, to facilitate the work. It can be difficult to define and measure impact, since the S&P 500 doesn’t exist for Greenville-based opportunities.  And local funders may not have the skills to identify and assess investment opportunities and then to deploy the capital and monitor progress.

But there are foundations who use local impact investing as a beneficial tool in their community impact toolkit.  LOCUS presented several examples of these.

An easy point of entry for any funder is to make a deposit at one’s local Community Development Financial Institution (CDFI).  CommunityWorks Carolina is one such organization in our area.  As described by the Opportunity Finance Network, CDFIs are “private financial institutions that are 100% dedicated to delivering responsible, affordable lending to help low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. By financing community businesses—including small businesses, microenterprises, nonprofit organizations, commercial real estate, and affordable housing—CDFIs spark job growth and retention in hard-to serve markets across the nation.  CDFIs are profitable but not profit-maximizing. They put community first, not the shareholder.”  CDFIs are certified by US Treasury and may operate as community loan funds, banks and credit unions, or equity funds. The FDIC and National Credit Union Administration insures deposits of up to $250,000 at local CDFI banks and credit unions such as Self Help Credit Union (formerly CommunityWorks Federal Credit Union), giving confidence to place-based funders as their money is deployed in the local economy.

There are many other points of entry for impact investing.

  • Funders can respond to financial needs in local projects.  A local nonprofit may need gap financing and/or a construction loan; this could be provided at a low interest rate by a foundation.
  • They can invest in an intermediary, like a CDFI or other entity, for strategic smaller investments in housing, transportation, or small businesses (Homes of Hope has offered investment opportunities for individuals and organizations to support its development of affordable rental housing).
  • Funders can develop an endowment impact investing strategy in which they dedicate some portion of their assets to use for things like small business loans, housing, or investing in intermediaries. The Coastal Community Foundation has recently decided to invest $3 million of its $258 million endowment in place based impact investing through a competitive process, with deals ranging from $50,000 to $600,000.
  • Rather than use their own assets, some foundations – particularly community foundations – have created new funds in which donors who are interested in impact investing can contribute funds to be deployed in this way. These opportunities are especially interesting to angel investors and Millennials who are interested in a more hands-on and highly tactical approach to community support.
  • Individuals and businesses can use many of these strategies just as intentionally as foundations.
  • Several things are important to note:

Impact investing is just another tool to impact the community.  If you are determined to make a difference, especially on big and difficult issues, putting these additional dollars to work can create additional leverage.

Grants can be part of an impact investing strategy.  Sometimes, extra capacity is needed within an intermediary like a CDFI or housing trust to recruit and deploy impact investments.  A grant to bolster that capacity strengthens the investing ecosystem.

Identifying and screening deals, deploying the funds, and monitoring progress are essential parts of impact investing.  If funders feel they can’t currently do this, it’s important to either bring those skills on board, use an intermediary to do so, or join with other investors to share that workload.

Because GPP is comprised of mostly small funders, several members have expressed interested in joining in a cohort to “learn while doing” – to identify one or a few mission-aligned investment opportunities and make smaller impact investments in it together.  In addition, a few of our colleagues in Spartanburg County – notably the Mary Black Foundation and Spartanburg County Foundation – have already put impact investments to work, and some GPP members are interested in taking a field trip up I-85 to learn more.  If you’d like to participate in this work, please let us know.

GPP was established to “maximize the impact of philanthropy on our community.”  Impact investing is another way to do so, especially for foundations who can put that 95% of their assets to work for local benefit.

LOCUS Impact Investing presentation