Recently, the Global Impact Investing Network (GIIN) released Scaling the Use of Guarantees in U.S. Community Investing, an issue brief that takes a detailed look at the application, benefits, and scalability of financial guarantees in impact investing. Supported by the Kresge Foundation, the study outlines how guarantees have been used in community investing nationwide, challenges associated with their use, and existing opportunities to use guarantees at greater scale to support communities and the environment. Read the report here (and don’t miss the case studies!).
The research intrigued CDFI Connect. To learn more, we turned to the GIIN's Research Manager Hannah Schiff, who authored the report with Research Associate Hannah Dithrich. Schiff answered a few of our questions about the network, impact investing, and guarantees as a tool for CDFIs.
Tell us a little about the GIIN. The network is almost 10 years old. How has it evolved since it came together in 2009? How has the field of impact investing evolved?
As a global network of more than 230 organizations spanning 30+ countries, we’ve seen a lot of growth and momentum over the past decade. From our research, we can estimate that existing players are growing their impact assets under management by 18% a year, and there’s also a wide array of new investors joining the space. I always think it’s important to keep in mind depth of impact alongside growth, and we at the GIIN have been encouraged to see progress in the sophistication of the practice of measuring impact and in the use of different kinds of investment tools that can help meet the needs of entrepreneurs and projects who are improving lives and protecting the environment.
What types of questions or topics in impact investing does the GIIN’s research tackle? And what, specifically, sparked this research?
Our research is very practitioner focused. We try to fill knowledge gaps to help investors better understand the market, and to help impact investors learn from each others’ experience to improve their practice. In earlier research, we’ve looked into the topic of credit enhancement because of its critical role in the impact investing industry—credit enhancement is needed to help test and prove new business models and to facilitate finance for impactful deals that don’t necessarily offer risk-adjusted rates of return. The new report is a natural extension of our earlier work, since guarantees are one form of credit enhancement.
Together with the Kresge Foundation, we had a hypothesis that guarantees had great potential to unlock capital, but were not being utilized as much as they could be. After conversations with a number of market players, we decided it would be valuable to take a deep dive to explore how this instrument is being used in community investing and what opportunities there are for greater use.
Were there any surprises while you were researching/writing this brief—any unexpected findings?
While not a surprise, what I found especially encouraging was the enormous interest on both sides of the equation—those providing and receiving guarantees. While some practitioners already had deep knowledge about the tool, it also became clear that the more people learned about it, the more excited they were to find ways to use it in their own work. The GIIN Working Group also showed an amazingly collaborative spirit and readiness to share experiences—this really enriched the report.
The brief describes four case studies—in energy efficiency, affordable housing, and health care financing—why do guarantees work so well for these investment areas? Can you provide an example or two where guarantees were used in another investment area?
Guarantees can be helpful in any sector where an investor or lender needs risk mitigation to participate in a deal—either temporarily while they learn about a new type of investment, or because the deal doesn’t fit their credit parameters. For example, there’s a lot of technical expertise required to underwrite energy efficiency savings into loans, so it’s risky until you develop that expertise. Another investment area not profiled, but that we heard about in our research, is in access to healthy food—grocery stores are hard to finance because they’re a low-margin business, and food deserts often also carry market risk. But they offer opportunities to improve health outcomes and create jobs, so guarantees could play a role there.
The audience for this brief are potential guarantors and recipients of guarantees, where do CDFIs fit in? Broadening the question, would you categorize CDFIs as impact investors or impact investees or both. Please explain.
CDFIs play important roles in the impact investing space—whether as investors into projects and companies, or as conduits for impact investing capital to reach community members through retail financial services. In many of the guaranteed transactions we studied, CDFIs received a loan or investment that was partially guaranteed. In other cases, they were the investors receiving a guarantee directly. The case study on the Collaborative for Healthy Communities provides a great example of CDFIs receiving a foundation guarantee to expand their impact—and eventually bringing in additional capital from a bank that also benefitted from the risk protection of the guarantee.
What would you most want each audience to take away from this research?
Personally, I’d encourage CDFIs to think about where a guarantee might help them to expand their own work and create more impact—either by taking on additional calculated risks, entering new sectors, or expanding to new geographies. Existing partners like foundations or banks that know them well are good potential candidates to provide guarantees. For potential guarantors like foundations, the GIIN would like them to see the opportunity to increase their impact by playing a catalytic role that doesn’t necessarily require up-front capital outlays. The report includes resources to help start conversations with potential collaborators about how to leverage their respective resources to scale up benefits for communities and the environment—work that is needed now more than ever.