Impact investing refers to investments made into companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return. It is a form of socially responsible investing that serves as a guide for various investment strategies.
During the past ten years, impact investing has emerged as the most widely used language within the social investment industry. Impact investing has quickly gained extraordinary global coverage in financial and mainstream media. It’s hard to think of a major financial news source from the Wall Street Journal to Forbes to the Economist that has explored this issue. The interest by wealth holders (corporations, family offices, individuals) is part of the maturation of the corporate responsibility movement. Impact investing draws some of its U.S. narrative from the track record of CDFIs. A recent study on domestic opportunities for impact investors sponsored by the GIIN and Carsey School of Public Policy notes the prominence of CDFIs as a high-impact opportunity for U.S. impact investors.
While impact investing has gained momentum, so has the CDFI industry. The industry has grown and transformed at an impressive rate for over 20 years CDFIs have made steady impact over the past years across various industries they finance including affordable housing, small businesses, and community facilities. When CDFIs were introduced by the U.S. Government in 1994, the concept was considered to be very innovative, even though some of these entities had been operating for decades. Instead of directly investing in community development projects, the government could fund intermediary financial institutions to do the work more efficiently. As community needs changed and adapted, the intermediary financial institutions could change and adapt to those needs quickly.
While the concept of CDFIs was considered innovative back in the 90’s, we now have a new generation of investors heading down a new path. With more impact investors in the market than ever before, the CDFI industry needs to figure out how to leverage the impact investors’ capital to make social impact investments that meet the new investors’ needs. While this will be challenging, there is definitely an opportunity for the CDFI industry to seize an opportunity to raise more capital. Dealing with the practical gulf between the impact investor movement and the CDFI industry is imperative.
CDFI investors working in institutions that make CDFI and impact investments note the cultural gap that exists between the two industries. Conversations with both investors and CDFI practitioners noted several areas of differences, some of which are outlined below:
- Market versus concessionary expectations: Many impact investment proponents do not believe that you have to take a concessionary perspective regarding rates of returns. This is not typically the way that CDFIs view their industry. CDFIs largely seek capital at reduced rates, with the exception of investments driven by tax policy.
- Equity vs. debt structures: Many impact investment proponents are interested in equity investments rather than debt instruments. CDFI equity investments are much less prevalent than similar debt products.
- Private versus public sector orientation: The impact investment movement is more enterprise-focused than social or public sector-oriented. There is no connection with the tradition of social reform embedded within many CDFIs.
- Environmental versus community development focus: Much of the impact investors’ focus is global and environmental. While many CDFIs are involved with environmental projects and sustainability, it is not well-marketed through the industry. Community development impact is important to the banking industry, foundations and religious community investors, but it may not translate as well with family office investors.
How can the impact investment field produce more capital for CDFIs? How can CDFIs best market and develop investment products that appeal to the impact investment industry? How do we simplify and provide consistency in the CDFI field around impact investing? What are the most important impact metrics to identify for CDFIs with the new generation of investors? Getting started answering these questions will be critical to the next stage of CDFI industry growth.
Recent conversations with both impact investors and practitioners in the CDFI industry lead to the conclusion that the CDFI world, along with its mission investment supporters, needs to take a focused approach to connecting its practice with the impact investor appetite. While there are many dimensions to the approach, four themes stand out:
- Simplify and market: CDFIs have a brand that can be too complex and can require too much explanation. The impact investment industry uses a language that is accessible. CDFIs need to brand themselves as a proven domestic social impact vehicle and make their story similar and easy to understand.
- Challenge profit maximization: The CDFI industry has to present itself through a theory of its practice that includes a rationale behind certain forms of subsidy and the value of being profitable without being profit-maximizing.
- Innovate around products and platforms: Product innovation needs to take place at the CDFI level this innovation should be actively supported by the entire CDFI industry. An example of this innovation would be developing more equity-like products.
- Cultivate new relationships: The CDFI industry needs to create bridges to the new philanthropy
CDFI-like work within their institutions, particularly through wealth management and trust divisions. Many foundations view impact investing as a way to frame additional work across their institutions that will increase the flow of social investment capital. Recent announcements at several major national foundations regarding increasing their impact investment portfolios reflect that perspective.
One of the continuing breakthroughs of CDFIs relates to their ability to shift public policy at local and national levels. Capital-led institutions continue to be remarkably important policy platforms. Given the heightened nationwide interest in issues of income inequality, poverty and racial justice, this is an important moment for CDFIs to reinvigorate their profile within the broader impact investment world. It will not happen without intentional efforts by CDFIs to do so.