Calvert Giving Fund
GreenMoney Journal
September 2006
Is $19.6 Billion of Community Investment Enough?
Community investing - placing real investment dollars into low income housing, microcredit, small business development and other social enterprises - is the fastest growing segment in the socially responsible investment landscape. According to the most recent Social Investment Forum (SIF) report, community investing has grown 20% compounded per year over the last two. That's $19.6 billion from US investors now at work each and every day in communities of need across the world. But this is a veritable drop in the bucket, representing a mere 0.9% of SRI assets and 0.1% of all investment assets in the US. Its practitioners continue to work toward a time when the market system fully embraces community investment. Risk-Return Paradigm Redefined
As the above percentages indicate, community investment is still relegated to the fringe. This is due to quirky transactional structures and often "below market" rates. Community investment continues to befuddle the conventional ideals of our market's culture, and in so doing it remains challenged in terms of adoption by a broad investor base. However, community investment converts ask…does it make less sense than philanthropy - giving funds away for impact but no return? Individual and institutional philanthropists give more than $200 billion away each and every year in the US.
Modest proportional commitments aside, more investors are discovering that community investing is the piece of their portfolio they can align with their values to help make the world a better place. There is direct, positive benefit to low-wealth communities that is measured in jobs created, homes built and lives changed. How does community investment translate into social value? Just for example, each $100,000 investment for three years into community development groups in the US creates 15 affordable homes, or starts 10 small businesses to create 35 jobs for low-income workers. Internationally, 580 micro enterprises and 870 jobs could be created.
(Figures from the "Social Return on Investment Calculator" at http://www.calvertfoundation.org )
Investors want their money to create tangible positive impact, and financial advisors are waking up to the appetite in their client base.
The Growing Landscape of Community Investing
So, who are these investors that are rethinking value and returns? A recent survey of 400 community investors, by Calvert Foundation in August 2005, indicates the average community investor tends to be of the baby-boomer generation, a democrat, balanced between male and female, with a majority having household income of $100,000 or less. Community investors are a highly educated group with over 68% holding post-graduate degrees. They invest over half their assets in SRI, with a 14% average allocation to Community Investments and 10% of income set aside for philanthropy each year - these averages have also grown over time. An increasing percentage is working through financial advisors, and prefers an investment advisor whom they consider to be "socially responsive."
The recent SIF report already referenced - http://www.socialinvest.org
found community investing experienced significant growth over the last two years. It expanded to almost $20 billion in 2005, from $13.7 billion in 2003, with 52% of assets in community development banks, 26% in credit unions, 18% in loan funds and microfinance institutions, and 4% in community development venture capital funds.
This landscape includes an increasing number of community loan funds open to individual and/or institutional investors. And, insured community development banks and credit unions now number in the hundreds. For those investors not willing to take on the burden of assessing and placing funds with individual organizations, several Community Investment Pools exist. These intermediary facilities allow investors to purchase an investment note that is a piece of a larger pool of community-based investments. And, more mutual funds than ever have a community investment component built right in - though most of these mutual funds give investors a very small percentage exposure to community investment, and very few go meaningfully beyond purchasing bank or credit union CDs.
The good news for those investors and advisors interested in making sense of the increasingly complicated sector is that SIF has rolled out a web resource, - The Community Investment Center at http://www.communityinvest.org
Perhaps most noteworthy, the site partners with Calvert Foundation and the CDFI Data Project to publish a database of 539 organizations - including all those mentioned below.
Some Recent Highlights from the Industry
The Community Reinvestment Fund is packaging community development loans into bonds that are getting rated by Standard and Poors - the current issue that just came out (focused on business development) had 70% of its issue rated AAA.
University Bank, Shore Bank and many other community development banks continue to list their certificates of deposit on the wire house trading platforms of Schwab. These tradable CDs are now available from almost 20 institutions on a monthly basis.
CARS (the CDFI Assessment and Rating System) now offers 16 assessment reports of Community Development Financial Institutions, with that many more again in the pipeline for release in the coming months. See - http://www.communitycapital.org
for more information.
CDARS (the Certificates of Deposit Accounts Registry Service) allows depositors to access community development bank CDs for a total insurance per investor of $25 million. More information is available at http://www.cdars.com
Calvert Foundation has now deployed its Calvert Community Investment Notes through wire house trading systems, and has partnered with a leading underwriter, Incapital, for distribution. And, they just announced that the Notes have topped the $100 million mark in outstanding balance.
Developing World Markets' recently completed transaction, Microfinance Securities XXEB, was a $60 million securitization of cross-border loans to approximately 30 microfinance institutions in 15 countries. It is the first microfinance Collateralized Debt Obligation ever to be rated, and adds to the similar previous $90 million closing of Blue Orchard OPIC guaranteed securities.
Of further note, the Access Capital Strategies Community Investment Fund and the CRA Qualified Fund continue to grow rapidly, with approximately $1 billion between them. Though they are primarily dedicated to buying publicly traded bonds that meet community development needs and deliver conventional market rates of return, they do extend the community investment "product line" to engage investors comfortable in more mature segments of community development.
And, foundations seem to be accelerating their interest in community investment (aka Program Related Investments), as evidenced by a January 2006 conference held by the newly formed PRI Makers network of the National Funders Group -- see http://www.primakers.net
Seventy foundations gathered at Stanford University, representing nearly $100 billion in investment assets, to discuss growing interest in investment of this kind.
So, where is Community Investment going and why does it matter?
Investors find that the most appealing community investment is not necessarily the one that has the highest financial rate of return or greatest level of liquidity. For example, a local loan fund in a hometown, or one that supports a social issue close to one's heart will often provide the most compelling impact. The tradeoff may be a lower rate of financial return or less liquidity, for a more direct and/or more targeted social return. Alternatively, increased liquidity and closer-to-market-rates of risk adjusted financial return will no doubt bring new investors to the table with more dollars, more quickly.
But, with maturation and growth in the number and types of vehicles, comes new challenges. There are exciting and somewhat messy times ahead for community investment. As I wrote in these pages two years ago, we need to engage in an honest articulation of the differences between investment vehicles, the trade-offs and the rationalization of social impact into considerations of risk and financial return. We are seeing a full spectrum of vehicles emerging (as measured across liquidity, risk, financial and social returns). The industry owes it to itself and its investors to build clarity about the spectrum of opportunity available, without getting completely confused by absolute returns.
Simply put, if I can buy investment grade community development oriented affordable housing bonds returning 6%, why should I consider placing investment at 4% in an unrated local community development corporation that builds housing? The answer is not easily captured in a marketing blurb, but there is an answer - the local organization may not have ready access to the conventional market due to costs it must bear. Is this a hierarchy of virtue? No, it's just a different need met. It is complimentary, for these very houses built eventually course through the secondary markets of affordable housing mortgages that the bonds bundle. Often it is about a gap in the capital market being filled.
So community investment wrestles with the radical proposition of redefining conventional risk return paradigms. The reasoning of it must be distilled into compelling value that can move the "zeitgeist" of our investment culture. In a black and white and somewhat binary world, largely governed by the conventional wisdom of Milton Friedman, community investment is at the vanguard of a more sustainable relationship between capital and global equality. Community investment need not be apologetic for its often "unconventional market rates of return." It must find ways to break through to the broadest adoption possible, for in so doing it supports a truly deep shift towards a new social contract, and understanding of value, that must be propagated if tomorrow's capitalism is to become better than today's.
Heady stuff? Nah. This is nothing more than a broad-based rediscovery of what every investor knows already - that value and return go far beyond dollars and cents. We all make decisions in our lives every day that defy market conventions…philanthropy, 0% loans to family and choices around work for a more balanced life. And, all signs point to an accelerating opportunity (and need) for the sector as the world around us descends into greater tension and wealth disparity. Community investment is chipping away at the big audacious questions confronting our future. Let's hope the stream turns to a flood in the coming years. Next stop, 1% of the total US investment market: $200 billion and a better world.
Article written by Timothy Freundlich, Director, Strategic Development of Calvert Foundation, a 501(c)(3) nonprofit community development intermediary, and a separate legal entity from Calvert Group. Its investment products are not FDIC insured, nor are they mutual funds. For more information, visit its website at http://www.calvertfoundation.org
or call 800-248-0337.
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