A Lesson in Community Investing
by Jeremy A. Pearce and Barry WindA critical component of socially responsible investing is community investment. Depending on who is making the investment and how the community is impacted, community investing has multiple objectives. One objective might be to invest in targeted companies with the intention to generate measurable social and environmental impact alongside a financial return. Another is the direct investment in disadvantaged communities, the same communities that we want to see thrive, regardless of their makeup. Other community investments impact how women are treated in the workplace, how small businesses access capital and how housing is made affordable for more people.
Community investments have many attributes that might make them attractive for your investment portfolio. The first is that many community investment funds are open to investors of all stripes and financial backgrounds—not just those a with generous income or a high net worth. With low minimum investment requirements, most anyone can put a small portion of their hard-earned savings toward a community project that will enhance the lives of others, create jobs where none existed or revitalize neighborhoods and rural agricultural economies. Further, many endowments and retirement plans are incorporating these same investments into their investment options, boosting the financial impact in communities around the nation and around the world, providing access to capital where it is needed most.
Community investing has grown rapidly due its proven ability to benefit under-resourced populations. A total of 880 community investing institutions, including community development banks, credit unions, loan funds and venture capital funds, collectively manage $64.3 billion in assets. These community investment funds include private equity funds for accredited investors and fixed-income investment notes for retail investors.
While an investor has many options from which to choose for making a community investment, the financial objective can be to reduce the volatility of the portfolio and better diversify the investor’s allocation toward fixed income asset classes, such as corporate or municipal bonds. Community investment notes are directing needed financial resources to underserved sectors such as minority-owned businesses or historically underutilized business zones.
Examples of projects in the United States supported by community investments range from dairy creameries to solar installation companies owned by women to restaurants and theaters in abandoned urban neighborhoods. One business is transforming an abandoned meatpacking factory into a vertical farm and sustainable foods business incubator with a loan from a community investment fund. The project, which will convert its waste into biogas to heat and light the building, will also bring local foods to a historically distressed, culturally rich community. Another program provides financing for the purchase of housing by families of modest income who are first-time homebuyers. The program offers competitive interest rates that keep monthly payments affordable, allowing families with smaller incomes to purchase a home.
In summary, community investments are made to deliver social and environmental benefits while serving a positive role in one's investment portfolio. The ultimate goal of community investing is to enable a sustainable solution to some of the world’s most pressing social challenges by empowering people left out of the financial mainstream. Providing greater access to capital can have a positive impact on investor returns as well as lead to stronger communities, a just nation and a healthier planet.
Barry Wind and Jeremy A. Pearce are financial advisors in the Washington, D.C., area, specializing in socially responsible investing with SharePower Responsible Investing, Inc. Comments and questions can be sent to [email protected] and [email protected]
Investing involves risk including loss of principal. Different types of investments carry varying degrees of risk and clients and prospective clients should be prepared to bear investment and original principal loss. Investing, including socially responsible investing, does not guarantee any amount of success. These are the opinions of the author and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.
Securities offered through Cambridge Investment Research, Inc. member FINRA/SIPC. Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and SharePower Responsible Investing, Inc. are not affiliated.