Building Scale in Community Impact Investing through Nonfinancial Performance Measurement

Author

Ben Thornley and Colby Dailey

Volume 6, Issue 1 | December 20, 2010

Abstract

The measurement of nonfinancial performance is becoming increasingly important in
the community impact investing industry, where individuals and institutions actively deploy
capital in low-income domestic markets for both financial and social returns. Quality data
ensure that the creation of jobs, construction of community facilities, financing of affordable housing, and other benefits that characterize the sector are delivered cost-effectively and
transparently. This paper discusses the limited practice and future direction of nonfinancial
performance measurement by revisiting four key questions:

  1. Does nonfinancial performance measurement really matter for investors?
  2. If it does matter, is nonfinancial performance measurement even possible?
  3. If nonfinancial performance is possible to measure, what form should it take?
  4. How will nonfinancial performance measurement increase community impact investing?

The paper examines the barriers to a more robust regime of nonfinancial performance
measurement and posits both that innovation in the sector ought to be driven by the discrete
but explicit needs and demands of investors, and that greater accountability has a special role
to play in making disclosure more attractive. The report concludes that nonfinancial performance measurement directly informs the investment process and is essential to growing
community impact investing because it provides latent sources of capital with market-level
information on the tradeoffs between financial and social return. Although the industry is
unlikely to discover the “silver bullet” of nonfinancial performance measurement in the
near future, there is reason to be hopeful: measurement strategies can – and will – converge
through private- and public-sector innovation.

Part I: Introduction

Nonfinancial performance measurement has become a significant focus of the community impact investing industry, where individuals and institutions actively deploy capital in
low-income domestic markets for both financial and nonfinancial return. Many industry
stakeholders have a growing need for effective measurement — the practice of evaluating
and reporting the nonfinancial value that accrues to an investor from investments with a
primary or ancillary social objective. Even so, others within the industry doubt that nonfinancial performance measurement is beneficial to investors at all. And there are those who
simply find measuring nonfinancial performance difficult and frustrating because of bad
data, poorly suited practices, or the volume and diversity of measurement tools that have
emerged in recent years. Even as the industry continues to build much-needed infrastructure
for evaluating nonfinancial returns on investment, our research suggests that, as a first step,
understanding investor preferences and behaviors is critical to more effectively measuring
performance.

This aritcle has three main sections. The first discusses the diversity of community
impact investors and investments. The second highlights existing nonfinancial performance
measurement tools and practices. It also describes the three key impediments to nonfinancial
performance measurement: varied and ambiguous investor preferences; inadequate tools and
practices; and a lack of accountability for nonfinancial return. The third section provides a
framework for advancing nonfinancial performance measurement from an investor-centered
perspective, asserting that investors’ nonfinancial performance objectives ultimately inform,
and are informed by, measurement tools and practices. This third section presents four questions that the field must consider in order to advance:

  1. Does nonfinancial performance measurement really matter for investors?
  2. If it does, is nonfinancial performance measurement even possible?
  3. If it is possible, what form should it take?
  4. How will nonfinancial performance measurement increase community impact investing?

Answering each of these questions in sequence, the third section introduces innovation
and accountability as key factors that shape investor preferences for measuring and reporting
nonfinancial return. We can derive additional insight not by classifying investors as “financial-first” or “impact-first” (the preferred binary approach in the research), but by placing
them on two continua: one representing investors’ willingness to pay for nonfinancial return,
a unique indicator of the value an investor attributes to community impact; and one representing investors’ willingness to disclose, which indicates the extent to which an investor
is willing to be accountable for, and report, nonfinancial return. The article concludes by
discussing opportunities for further research and market development.

Although “impact investing,” broadly defined, has been coined to capture the diversity
of capital actively seeking social and environmental benefits around the globe, the term
“community impact investing” in this report refers only to low-income domestic markets,
and only to investments targeting social returns, for example, in the areas of economic,
workforce, and entrepreneurial development; housing; education; and health. The research
focuses on the nonfinancial performance measurement tools and practices used by those
investors hoping to at least recoup the principal sum of their investment. By extension, the
research does not address evaluation activities at the purely philanthropic level.

Certainly there is a much larger universe of impact investing and nonfinancial performance measurement, including advanced efforts internationally and in sectors such as environmental sustainability and shareholder engagement. Although some of the nonfinancial
performance measurement challenges in these areas mirror those we discuss in this report,
there are distinctive qualities in U.S. community finance that call for a more narrow scope
of research, not least in the type of investors in the sector and the regulatory environment
in which they operate. Similarly, grant making in the community-based sector is an example
of a more mature kind of social impact evaluation. But again, the conditions in which
grant recipients and donors measure performance differ from those in community impact
investing, where funding is directly contingent on both delivering and proving impact, and
thus creating very clear financial incentives for those involved.

Research Evolution and Methodology

This project has required a change in tack multiple times, ultimately leading, in our
opinion, to a compelling understanding of why nonfinancial performance measurement is
important for scaling the sector. At the outset of the project, the goals were as follows: synthesize existing research on nonfinancial performance measurement, survey the landscape of
performance measurement tools, and provide specific recommendations for advancing the
field. We hoped to discover the specific metrics, the nonfinancial performance measurement
tools, and the ideas with the best prospects for drawing additional capital into community
impact investing – in other words, the “silver bullets.” Although we met some of these initial
goals, the direction of the project shifted. Rather than providing a framework for evaluating
performance measurement tools, our research pointed to the need for a new emphasis on the
behavior of investors, as informed in part by measurement tools and practices. Although the
industry has put much thought into how to measure nonfinancial performance, the research
illuminated prerequisite considerations including whether or not it should be done at all
and, if so, why? By understanding the answers to these questions first, and approaching them
through an investor-centered lens, the industry can address common barriers, better serve
investors, and more successfully pursue effective nonfinancial performance measurement,
ultimately leading to additional capital investment in the industry.

The research was conducted from December 2009 to August 2010 and included an extensive review of existing literature on impact investing and nonfinancial performance measurement. An important resource throughout the project has been the report “Investing for
Social and Environment Impact”, published by the Monitor Institute in 2009. This report
outlines the current state of the broader impact investing industry and presents an important discussion on the steps necessary to build scale in the sector. Our research builds on a
central thesis in the Monitor Institute report: that measurement of nonfinancial returns is
one critical prerequisite for industry growth.2

The research involved surveys of and in-depth interviews with industry stakeholders
including impact investors and performance measurement experts. This process, combined
with the literature review, identified the barriers to nonfinancial performance measurement
and the tools that exist to measure nonfinancial return. The interviews also provided important insights into the investor preferences at the center of our analysis. Finally, the research
included a review of nonfinancial performance reporting and disclosure in annual reports of
banks, nondepository financial institutions, community development financial institutions
(CDFIs), and foundations making community impact investments.

Definitions

This paper discusses a number of concepts using the following terminology.

  • Community impact investing involves actively placing capital in businesses, funds,
    and other opportunities that generate social good in low-income communities and
    return at least the principal to the investor.
  • Community impact investment industry, also called “the industry,” includes
    community impact investors, the vehicles by which investors make their investments, the underlying investments, and the measurement tools used to describe
    financial and nonfinancial return.
  • Community impact investors are entities that actively deploy capital for social
    impact in low-income domestic markets – including in the areas of economic, workforce, and entrepreneurial development; housing; education; and health – regardless of whether the entity invests directly or through an intermediary.
  • Nonfinancial return is the social benefit or other nonfinancial value that accrues to
    an investor from an investment.
  • Performance measurement tools, for the purposes of this project, are tools designed
    to report on the nonfinancial return of investments.
  • Willingness to pay is a measure of the quantity of time, effort, investment earnings,
    or other resources that investors are willing to exchange for a preferred value of
    nonfinancial return.
  • Willingness to disclose is a measure of the quantity and quality of reporting of
    nonfinancial returns that investors are willing to provide to the stakeholders to
    which they are accountable.

Part II: The Community Impact Investing Industry

The community impact investing industry represents the combined efforts of a mixed
group of individuals and institutions actively deploying capital in low-income domestic
markets for financial and nonfinancial return. It is a cohesive industry, but one that is also
diverse and multifaceted. It is subsidized in part by government regulations and programs,
yet characterized by significant levels of innovation, particularly in the engineering and
layering of products with disparate risk and return profiles to accommodate the very different
financial and nonfinancial objectives of investors.

2.1 Community Impact Investors

At the broadest level, the current literature categorizes community impact investors on
the basis of their investment motivation: financial-first or impact-first.3
Financial-first investors seek to optimize financial returns, with a minimum requirement for social or environmental impact. They are generally commercial investors searching for subsectors that offer
a market rate of return but yield some social good.4
Impact-first investors seek to optimize
social or environmental performance while maintaining a floor for financial returns. They
accept a range of returns, from principal-only to market rate, and seek social good as a
primary objective.5 Figure 1 illustrates this conception of the market.

Figure 1
Motivations of Impact Investors6

Motivations of Impact Investors

For many years, most investors in the community impact investing market have tended
to be impact-first, including regulated special-purpose community development institutions,
government, philanthropic foundations, banks motivated by regulatory mandate, and private
individuals. Recent investors in the sector, who will likely come to provide a considerable
proportion of new capital, tend to be financial-first, including nondepository institutions
and investment funds.7

For the purposes of this research, community impact investors are entities that are
actively deploying capital in low-income domestic markets for financial and nonfinancial
return, regardless of whether they invest directly or through an intermediary. These investors
fall into one of five structural categories: government, depository institutions, nondepository
institutions, individuals, and foundations. We describe each category in turn.

Government

The public sector is a significant source of community impact investment at all levels.
Federally, the CDFI Fund, within the U.S. Department of Treasury, channels financial
support directly to the community development financial institutions (CDFIs) that register
with the Fund. The Fund also administers the New Markets Tax Credit program, which we
discuss in more detail under “depository financial institutions.”

The CDFI Fund was created by the 1994 Riegle Community Development and Regulatory Improvement Act to promote economic revitalization and community development
through investment in and assistance to CDFIs. CDFIs are investment organizations whose
primary mission is promoting community development in designated markets underserved
by traditional capital. The CDFI Fund attracts an estimated $20 in non-federal government
investments to the sector for every dollar provided to CDFIs.8
Since 2003, the CDFI Fund has
provided 436 financial assistance awards and a total of $346 million in financial assistance.9

Aside from the CDFI Fund, the federal government has invested in discrete sectors of
the industry. For example, the government-sponsored enterprises Fannie Mae, Freddie Mac,
and the Federal Home Loan Banks are active in real estate in low-income areas. The New
Markets Venture Capital program, created in 2003 and administered by the Small Business
Administration to promote economic development and job opportunities in low-income
areas, helped to seed six new venture capital funds.10 At the sub-federal level, significant
investors and co-investors include economic development agencies, state housing finance
agencies, and other public-sector entities.

The federal government also uses other subsidy sources, such as the Low Income Housing
Tax Credit and block grants (including the Community Development Block Grant and
HOME Investment Partnership), to entice more community impact investment in low- and
moderate-income (LMI) areas.

Depository Institutions

Depository institutions, the backbone of the community impact investment sector,
include community development banks and credit unions specifically created to work in
markets underserved by traditional capital, as well as all others commercial banks and thrifts
motivated by the Community Reinvestment Act (CRA). Depository institutions created to
make community impact investments include the over 350 community development banks
and over 290 community development credit unions registered with the CDFI Fund.11

Community development banks are FDIC-insured and federally regulated for-profit
organizations with community board representation. Assets grew from $2.4 billion in
2001 to $13.7 billion in 2007.12 These institutions act like traditional banks but operate in
low-income target markets. Community development credit unions, which offer the same
services as conventional credit unions, are member-owned nonprofit organizations regulated and typically insured by the National Credit Union Administration and/or by state agencies.
They have grown rapidly in assets from $2.8 billion in 2001 to $7 billion in 2007.13

The primary motivation for traditional depository institutions to make community
impact investments is the 1977 Community Reinvestment Act (CRA), which is intended
to “encourage depository institutions to help meet the credit needs of the communities in
which they operate, including low- and moderate-income neighborhoods, consistent with
safe and sound operations.”14 The CRA mandates that all depository institutions receiving
FDIC insurance demonstrate a positive record for helping meet the credit needs of their
entire community. According to CRA guidelines, an appropriate federal banking agency
evaluates each depository institution periodically, taking its record into account in considering any application for new branch offices or mergers and acquisitions. Federal banking
agencies involved in evaluation include the Federal Reserve System, the FDIC, the Office
of the Comptroller of the Currency, and the Office of Thrift Supervision. Among the 998
institutions that reported CRA-motivated lending in 2007, 746 institutions extended $63.8
billion in community development loans.15

Depository financial institutions have also been bolstered by the federal government’s
New Markets Tax Credit (NMTC) program. The NMTC is administered by the CDFI Fund
and allocates tax credits to certified community development entities (CDEs), which then
provide the tax credits to private investors. CDEs must invest the entire private investments
in low-income communities. Like CDFIs, many of which are also CDEs, CDEs are domestic
corporations with a primary mission to serve or provide investment capital to low-income
communities. The CDFI Fund has made 495 NMTC awards totaling $26 billion.16 Although
nondepository institutions typically have the largest number of deals, banks claim the largest
proportion of the flow through credits.17

Nondepository Institutions

Nondepository institutions include those created specifically for the purpose of community investment–community development loan funds and community development venture
capital funds registered with the CDFI Fund–as well as various pension funds, insurance
companies, financial advisors, and investment funds investing for financial and nonfinancial returns.

Community development loan funds are primarily nonprofit organizations certified by
the CDFI Fund that are created to lend in target markets to businesses, real estate and
housing developers, nonprofit organizations, and individuals that are typically unable to
obtain capital at favorable terms from traditional sources.18 Assets in the sector, which
includes more than 500 funds, have grown from $3.1 billion in 2001 to $4.6 billion in 2007.19
Community development venture capital funds, mostly organized as for-profit LLCs and
limited partnerships, invest equity and equity-like debt in small companies with the potential
for rapid growth in underserved communities. Assets in the sector, which includes around 70
funds, have grown markedly, from $300 million in 2001 to $2 billion in 2009.20

Some nondepository, non-CDFI institutions are also motivated to deploy capital to
community impact investment opportunities by stringent mandates or the long shadow
of regulation, although such oversight tends to be at a sub-federal level. For example, the
trustees of a number of significant public pension funds require that the institutions make
economically targeted investments with ancillary social objectives such as urban revitalization, supporting underserved markets, or economic development more broadly.21 Another
example is insurance companies doing business in California, which are subject to California
Organized Investment Network (COIN) guidelines that require investment in community
development. COIN, a collaborative effort between the California Department of Insurance, the insurance industry, and community affordable housing and economic development organizations, was established as an alternative to state legislation, much like the CRA,
that would have required that insurance companies invest in underserved communities.22

Investing Foundations and Endowments

Philanthropic organizations, including corporate, community, religious, and especially
private foundations, are some of the core capital providers to the community impact investment industry. For example, since 1986, the John D. and Catherine T. MacArthur Foundation alone has provided $250 million in grant and program-related investment (PRI) support
to CDFIs.23

Private foundations tend to invest in community impact in one of two ways: through
PRIs, which are investments with an explicit charitable purpose, generally made to advance a
foundation’s mission with the expectation of earning a highly concessionary financial return;
and through mission-related investments (MRIs), which are market-driven investments that typically originate from a foundation’s endowment corpus and are expected to generate a
market return but also to have social impact. From 1990 through 2008, foundations invested
approximately $3.7 billion in 5,400 PRIs, albeit in a tremendous diversity of markets. In
2005 and 2006, the community impact investment sector accounted for at least 30 percent
of PRI allocations.24 The foundation category also includes “place-based” institutions such
as colleges, hospitals, and other large pools of endowment capital with a clear interest in
supporting local community infrastructure and development.

Individuals

Tens of thousands of individuals, including bank customers, mutual fund investors, and
wealthy families, represent a critical source of capital to the community impact investment
sector. For example, Trillium Asset Management, the $1 billion independent investment
advisor devoted to sustainable investing for high net worth families, individuals, foundations, endowments, religious institutions, and other nonprofits, recently added a fifth CDFI
to its list of community investment organizations available for client investment.25 Individuals also account for about one-third of NMTC claimants26 and over 40 percent of CDFI
bank deposits.27

2.2 Community Impact Investments

This diversity of investors is matched only by the breadth of available community impact
investments, which generally fall into three broad categories: investments by CDFIs and
other special-purpose vehicles; investments using CDFIs as intermediaries; and investments
in non-CDFI-driven opportunities. These categories of investments are not mutually exclusive, but rather overlap with each other, as illustrated in Figure 2. In fact, it is precisely the
malleable nature of the market that spurs product innovation. Product innovation, which is
key to attracting additional sources of capital, has typically been aimed at blending investments, particularly by leveraging public- and philanthropic-sector concessionary capital to
better package, manage, and mitigate risk for other investors, including the most financially
motivated ones.28

Figure 2
Community Impact Investments

Community Impact Investments

Investments by CDFIs

The investments by CDFIs and other special-purpose vehicles29 include the loans, equity
and debt-with-equity investments, guarantees, and loan sales that form the core of CDFI
offerings.30 Of the $17.6 billion in CDFI financing outstanding at the end of 2007 from
banks, credit unions, and loan funds, 99 percent comprised loans.31 The remainder primarily
financed equity funds under the purview of banks, credit unions, and loan funds. Assets
managed by the community development venture capital sector represent an additional
$2 billion.32 CDFIs have an explicit social mission, with objectives in community impact
markets including economic development (such as job creation, business development, and
commercial real estate development), affordable housing (including housing development
and homeownership), and community development financial services (such as the provision
of basic banking services to underserved communities and financial literacy training).33

Investments using CDFIs as Intermediaries

CDFIs and other special-purpose vehicles play a critical role in the industry primarily
as intermediaries and hubs for innovation. For investors far from the action who have little
capacity for the difficult work of identifying and making investments with social impact,
CDFIs are the logical path to implementation. For example, in November 2009, Goldman
Sachs announced that it would invest $300 million through a combination of lending and
philanthropic support to CDFIs in order to “increase the amount of growth capital available
to small businesses in underserved communities and to expand the capacity of CDFIs to
deliver enhanced technical assistance to small businesses.”34 CDFI capital under management
comes from a diverse group of investors. For depository CDFIs, these include individuals
(42 percent), private financial institutions including CRA-motivated banks (15 percent), and
government (3 percent). For nondepository CDFIs, key capital providers include CRA-motivated banks (29 percent), government (16 percent), and philanthropic entities (12 percent).35

NMTCs also flow through CDFIs and other special-purpose vehicles into the hands of
non-CDFI investors. The three largest NMTC claimants are banks and other regulated financial institutions (38 percent), individual investors (32 percent), and other corporate investors
(18 percent).36 When the U.S. Government Accountability Office (GAO) asked investors
to specify which factors had a “very great” to “moderate effect” on their decision to invest
in the NMTC program, responses included the wish to improve conditions in low-income
communities (90.1 percent), obtain return on investment (82.1 percent), create or retain jobs
(77.8 percent), obtain the tax credit (76.7 percent), expand lending relationships with specialpurpose borrowers (52.0 percent), and comply with government regulations like the CRA (41.2
percent).37

Product innovation is critical to providing access to the community impact investing
sector for many investors through CDFIs. Examples include:

  • The first rated pool of securities backed by community development assets, known as
    CRF-17 (Community Reinvestment Fund USA Community Reinvestment Revenue
    Notes, Series 17): More than half of the investment classes in CRF-17 were rated AAA
    by Standard & Poor’s (S&P), which used the Small Business Administration’s Section
    504 program as an alternative information source for assessing the quality of securities rather than CRF’s more limited performance track record.38
  • Tranched structures like the New York Acquisition Fund.39 This fund leverages government grants and subsidized foundation capital to fund a $230 million pool for
    bridging the period between property acquisition and construction closing in order
    to finance the construction and preservation of affordable housing. The fund’s originating CDFI lenders include the Corporation for Supportive Housing, the Enterprise
    Community Loan Fund, the Low Income Investment Fund, and the Local Initiatives
    Support Corporation.40
  • Intermediaries that aggregate capital and provide due diligence to CDFIs. Examples
    of these intermediaries include the Calvert Foundation, Trillium Asset Management, and Domini Social Investments. For example, in September 2009, the Calvert
    Community Note had invested approximately half of $170 million in domestic loans
    and companies, partly on behalf of individuals with as little as $1,000 to invest.41

Investments in Non-CDFI-Driven Opportunities

The community impact investing industry becomes more difficult to demarcate once it
moves beyond the territory of the more visible CDFI sector. It is perhaps easiest to describe
the diversity of investor activities and product preferences anecdotally, as in the following
examples:

  • The economically targeted investments of public employee pension funds we
    discussed earlier were estimated in 2007 to include $11 billion of commitments to
    urban revitalization, emerging domestic markets, or economic development more
    broadly.42 Many of these funds are invested outside the realm of CDFIs.
  • More than $133 million invested since 1992 by angel investors, professional venture
    capitalists, foundations, and family offices in more than 200 companies and small
    funds addressing social and environmental issues, facilitated by Investor’s Circle.43
  • Targeted private-sector socially responsible investment activities include the JP
    Morgan Urban Renaissance Property Fund, which has $175 million of capital for
    investing in the “development and redevelopment of real estate projects in market
    rate, affordable and workforce housing, retail, mixed-use development, hospitality
    and other real estate sectors in Urban Renaissance Markets.”44
  • $10 billion has been invested with venture capital companies that target minorityowned businesses, of which 51 percent is attributable to pension funds.45

Financial Performance in Community Impact Investing

Perhaps the only characteristic that truly unites investors and investments in the community impact investment sector is their extraordinary variety. In no small measure, the growth
of the industry depends on this very diversity, by bringing together investors that need exposure to the same asset class and engineering products that allow some to satisfy social priorities and others to meet financial obligations. The Monitor Institute calls these initiatives
“Yin-Yang” deals, blending different types of capital with different requirements and motivations.46 In short, the very premise of community impact investing – the structural bias and
explicit preference of many investors for social impact over and above investment performance – makes any attempt to describe financial return not only fraught with difficulty,
but in many respects irrelevant. Community impact investing reflects the “blended value”
proposition that Jed Emerson promotes:

All organizations, whether for-profit or not, create value that consists of economic,
social and environmental value components – and that investors (whether marketrate, charitable or some mix of the two) simultaneously generate all three forms of
value through providing capital to organizations. The outcome of all this activity is
value creation and that value is itself non-divisible and, therefore, a blend of these
three elements.47

Financial return often appears to be just one variable that an investor can readily and
knowingly trade for another, such as mitigated risks or enhanced social impact. This is
true for many community impact investors, but certainly not for all. A growing number,
including those with the largest pools of nondepository capital who are now starting to enter
the sector, insist that social impact can, and must, be additive, requiring no diminishment
of financial returns.

There is reason to believe that this is possible. For example, in the private equity sector,
the products in which nondepository institutions have invested appear to have delivered a
market rate of return. This includes private equity funds investing in minority-owned businesses, which have produced financial returns that are comparable to or higher than those
of conventional venture capital funds, and at least two larger funds that target job creation
in low-income communities.48 One of these, the Bay Area Equity Fund, had raised over $86
million for its second investment partnership as of July 2010; another, Pacific Community
Ventures, is expected to raise an equally ambitious fourth fund shortly, primarily on the
strength of the performance of its third.49 In real estate, the return on economically targeted
investments of the New York City Employees Retirement System was reported to be 6.5
percent for the three years preceding June 2008, versus 5.48 percent for the benchmark Lehman Aggregate.50 In fact, in the context of pension funds investing in urban revitalization, nonfinancial return is often referred to as “extra-financial” return.51

Not surprisingly, many community impact investments generally underperform traditional financial markets. In equity, the typical community development venture capital fund
has been characterized as delivering returns in the range of 5–10 percent as compared to
20–30 percent for the SBA’s Small Business Investment Company program, which supports
a traditional venture capital model.52 In the area of debt investments, two of the only mutual
funds pooling CRA-qualified loans – one managed by Access Capital Strategies, a part of
RBC Global Asset Management, and another by the Florida-based investment company
Community Capital Management – have underperformed the market benchmark by 0.37
percent and 1.05 percent, respectively, over the past five years.53 At an institutional level,
CDFI Fund awardees tend to have fewer total assets, higher loan delinquency and charge-off
rates, and lower returns on assets than their non-CDFI contemporaries.54 In recent years,
CDFI banks and thrifts have been hit hard by the recession. The ratio of median noncurrent
loans to total loans deteriorated from 2.2 percent at the end of 2007 to 3.82 percent at the
end of 2009, whereas the all-banks median ratio was 1.76 percent. Median return on assets
at CDFI banks fell from 0.71 percent in 2007 to 0.02 percent in 2009, below the all-bank
median of 0.47.55

Although the role and importance of traditional market-rate returns in community
impact investing may be heightened by the entry of more financially motivated investors, the
unique social benefits that community impact investments provide will continue to justify
below-market returns for the many investors who highly value nonfinancial performance.

Part III: Measuring Nonfinancial Return on Investment

There is a wide variety of types of investors and vehicles in which they invest.56 In keeping
with such diversity, community impact investors demonstrate nonfinancial returns using a
wide range of tools and practices to measure performance. As more investors provide capital
to the industry, the notion of nonfinancial performance measurement becomes more important, even as barriers emerge to prevent effective implementation. The following section discusses the methods by which we can evaluate nonfinancial return and the impediments
to the development of more effective approaches. The section surveys a number of existing
tools and discusses current innovations in the field.

3.1 Nonfinancial Performance Measurement Practices

The growth of community impact investing to include more institutional investors such
as public-sector pension funds, foundations, banks, insurance companies, and faith-based
organizations has greatly increased the potential for social benefit.57 However, only through
performance measurement can we understand the true value of the social impact, and thus
its benefit.58 The entry of more investors with more investment capital into the field has
emphasized the importance of understanding nonfinancial performance. High-quality
measurement and reporting provide investors with the data they need to make informed
choices.59

Investors who measure nonfinancial returns use a variety of methods and metrics that are
typically aligned with the asset class in which they invest. The amount of detail in reports of
nonfinancial returns also varies substantially. For example, the $170 billion California Public
Employees Retirement System (CalPERS) uses the third-party services of Pacific Community
Ventures (PCV) to measure the “ancillary” benefits of its $1 billion California Initiative, a
private equity fund targeting underserved markets in California. PCV uses detailed, customized
metrics including jobs created, employee benefits, low-income workers supported, and female
and minority ownership and management at the underlying companies in which CalPERS
invests.60 CDFIs, on the other hand, have converged on the more limited, standardized metrics
required by the CDFI Fund’s Community Investment Impact System (CIIS), including jobs
created and affordable housing units or community facilities financed and created.

In order to further illuminate nonfinancial performance measurement and reporting practices, our research included a review of a number of annual reports published by community impact investors including banks, foundations, CDFIs, and nondepository institutions;
these reports indicated significant differences and clear trends across investor categories.
Some highlights and general observations are listed below:

  • Few impact investors surveyed include nonfinancial performance in annual reports.
    Any measures reported are usually published separately or only on the investor’s
    website.
  • CDFIs reported nonfinancial performance in the greatest depth, with measures of job creation, housing units and commercial/facilities spaces financed, number of individuals served, and minority group representation, as illustrated by the Louisville
    Community Development Bancorp (see Figure 3).

Figure 3
Louisville Community Development Bancorp

Louisville Community Development Bancorp

  • Banks, in particular, use nonfinancial performance primarily as a marketing and
    branding tool in annual reports, featuring stories and photographs but no accompanying analysis. All of the major banks we sampled published separate corporate citizenship/CSR reports or disclosed CRA lending volume on websites. For
    example, Wells Fargo reports that “affordable housing projects in communities across
    the country often face challenges. In Portland, Oregon, a nonprofit group, Cedar
    Sinai, struggled to gather the financing needed to buy and preserve a 235-unit senior
    housing complex. Wells Fargo helped meet the need. We structured a multimilliondollar financing plan for the nonprofit to buy and preserve the building and protect
    residents from potential rent hikes.”61
  • Foundations and pension funds were the least likely to publicly report nonfinancial
    performance in their annual reports, and they reported it in the form of anecdotal
    success stories. Of the annual reports we surveyed, the Calvert Foundation was the
    only foundation that reported impact data, stating that its investments have resulted
    in 2,397 homes built or rehabilitated.62
  • Investment firms generally highlight nonfinancial performance by describing screening
    and selection processes and the characteristics of underlying portfolio companies, but
    not outputs or outcomes.

Perhaps most surprising was that the majority of annual reports failed to discuss nonfinancial performance at all. As a proxy for nonfinancial return, many community impact investors report the total dollars invested and/or the number of loans provided to the industry
as a way of expressing impact, and many annual reports categorize investments by sector
such as housing, workforce development, and education. The small minority of investors
that report outputs used metrics for jobs created or maintained and housing units created.
Anecdotal reporting was by far the most prevalent type of nonfinancial performance disclosure, although the level of robustness anecdotal reporting provides when measuring impact
remains unclear. As one interview subject related, “On the spectrum from social to financial
return, it was clear that, on the social side, we were using stories and anecdotes and there was
no way to differentiate between orders of magnitude.”

In addition to reviewing annual reports, we surveyed investors regarding nonfinancial
performance measurement. The survey demonstrated that, where investors do measure nonfinancial return, they use a wide range of methods and metrics, including jobs created, the
gender and race of executives and company owners, company and worker location in an LMI
community, housing units and other projects financed, child care and education slots created,
environmental risks and benefits mitigated or supported, regulatory compliance, employee
training and education, job quality, and sustainability practices. Interestingly, survey respondents indicated that a key driver of nonfinancial performance measurement is accountability,
saying in effect that they measure and report nonfinancial returns because they are generally answerable for their performance. Most survey respondents were explicitly accountable
to stakeholders, including clients (investors), sponsoring program officers, social investment
committees, governing boards, senior executives, the community at large, funders, employees,
government, and shareholders.

What is high-quality performance measurement and reporting?

The community impact investment industry can look to the traditional finance sector for
examples of best reporting practices. The Global Investment Performance Standards (GIPS),
which underpin the traditional investment management industry, specify that quality
measurement and disclosure at least include the following:63

  • Longitudinal data to reflect performance over time;
  • Comparison to a baseline and external benchmarks;
  • Independent third-party verification;
  • Disclosure of calculation methodologies and definitions; and
  • Timely release and update of information

Table 1
Financial and Nonfinancial Disclosure

Financial and Nonfinancial Disclosure

As Table 1 shows, the community impact investing industry has a long way to go toward
meeting the standards of quality reporting in traditional markets. At least one sector of the
investment industry – corporate governance and shareholder engagement – already measures
nonfinancial performance robustly, and this practice of measurement has catalyzed significant growth. In corporate governance, global standards and the market for active share ownership emerged primarily as a result of data and performance measurement originating from
proxy-service firms including the Investor Responsibility Research Center and Institutional
Shareholder Services, governance ratings firms such as GovernanceMetrics International and
Davis Global Advisors, and the coverage of corporate governance issues by the major credit
agencies including S&P, Moody’s, and Fitch.64 Moreover, the International Corporate Governance Network (ICGN)65 recently approved a set of best practices for disclosure of nonfinancial performance. Intended to further raise standards of corporate governance globally, the
best practices specify that reporting ought to be:

  • Genuinely informative and forward-looking when this will enhance understanding;
  • Material, relevant, and timely;
  • Accessible and appropriately integrated with other information that enables investors
    to gain a whole picture of a company;
  • Linked to strategy and easily comparable using key performance indicators;
  • Presented using objective or evidence-based metrics; and
  • Strengthened where possible by independent assurance.

3.2 Nonfinancial Performance Measurement Tools

This section provides an overview of eight tools for measuring impact. Each has a significant presence in the industry, whether by creating a template and providing a platform for
community impact investors to self-report nonfinancial returns, or by providing third-party
nonfinancial performance measurement advisory services and reporting. We selected these
tools specifically because of their applicability to the scope of our research – namely, that
community impact investors use them concretely. Further, these tools aggregate or publish
data that investors and/or other stakeholders can use to benchmark nonfinancial performance. The list is not exhaustive, but it is substantially representative of the actual measurement of nonfinancial performance in community impact investing. The tools provide varying
levels of customization and service, at different costs to investors.

This overview consists of a short description of each tool’s development and methodology, the metrics it reports, how users collect and report the data, and the categories of investors using the tool. We compiled the information for these profiles using each tool’s respective website and literature, stakeholder interviews, and the report “Catalog of Approaches to
Impact Measurement – Assessing Social Impact in Private Ventures” by Sara Olsen and Brett
Galimidi.66 Table 2 below summarizes the key characteristics of the tools.

Table 2
Nonfinancial Performance Measurement Tools

Nonfinancial Performance Measurement Tools

B Impact Rating System

The B Impact Ratings System (BIRS) is a free, online tool from B Lab that measures
businesses’ impact on employees, the environment, community, suppliers, and consumers,
as well as their accountability to stakeholders. B Lab developed BIRS in 2007 with the feedback of entrepreneurs, investors, and educators. The metrics and weightings in BIRS are
governed by the Standards Advisory Council, an independent body of nine experts in social and environmental sustainability.67 BIRS is intended to help B Lab to certify B corporations (corporations that are committed to meeting BIRS standards) and investors to select
high-impact investments, policymakers to drive tax or procurement decisions, and business
associations to educate their members.68 The report rates a company according to those standards and how well it institutionalizes employee, community, and environmental welfare in
its governance and structure. The assessment is customized for the company undertaking it.
According to B Lab representatives, investors currently using BIRS to evaluate nonfinancial
impact include banks and venture capital funds, but they expect CDFIs, pension funds,
microfinance institutions, and equity funds outside the United States to begin using it soon.

CDFI Data Project

The CDFI Data Project (CDP) is a collaborative effort by key trade associations including
the Opportunity Finance Network, the Community Development Venture Capital Alliance, and the Association for Enterprise Opportunity to collect and analyze CDFI data that
include the sector’s community impacts.69 The goal of the CDP is to ensure access and use
of data by CDFIs and CDFI investors to improve practice and attract resources to the CDFI
field. The data set includes approximately 100 data points on operations, financing, capitalization, and impact, focusing primarily on operational data but including demographic
and socioeconomic borrower and investment recipient information.70 Although 508 CDFIs
reported to the CDP in 2007, the data were disclosed only at the aggregate and sub-sectoral
level, with no attributable institution-level information.71 CDFIs can elect to have the CDP
list their names alongside their data, but at present none of the CDFIs take advantage of the
opportunity, at least in the reporting of community impacts.

Community Investment Impact System (CIIS)

The CDFI Fund uses the Community Investment Impact System (CIIS) to track and
measure the financial and nonfinancial impact of CDFIs and CDEs receiving CDFI Fund
awards. The CIIS, designed to be the primary data source for the CDFI industry, compiles
data for two reports: an institutional-level report (ILR) and the industry’s only standardized
transaction-level report (TLR).72 The TLR includes nearly 200 data points covering each individual loan and investment, although submitting many of those data points is optional. The
ILR captures organizational data that include background information on the submitting
institutions. Any certified CDFI can voluntarily submit a TLR. The CDFI Fund currently shares CIIS data with two additional federal agencies and two private parties conducting
contracted services for the CDFI Fund. CIIS community impact metrics include jobs created,
affordable housing units supported, and the capacity of community facilities financed.73

Global Impact Investing Rating System (GIIRS)

The Global Impact Investing Rating System (GIIRS) is currently under development by
B Lab in partnership with a steering committee of the Global Impact Investing Network.74
The GIIRS is intended to “assess the social and environmental impact (but not the financial
performance) of companies and funds using a ratings methodology analogous to Morningstar investment ratings or S&P credit risk ratings.”75 Although this system looks at global
impact investing, we included it in the tools survey because of its direct implications for
domestic community impact investing. It is intended for use by both institutional investors and investment intermediaries to evaluate, screen, manage, and communicate the social
impact of their investments. According to the GIIRS website, the GIIRS includes surveys
that differ by geography, size of company, and industry. Each survey includes approximately
160 questions divided into five categories: leadership, employees, environment, community,
and products & services. The GIIRS will make its ratings system (including all survey questions and the weightings methodology) transparent to the public.76

Pacific Community Ventures

Pacific Community Ventures (PCV), provides an impact measurement tool and thirdparty advisory service designed to provide detailed employment and job quality data for
each portfolio company to which financially driven private equity investors are exposed,
aggregated at the portfolio level. The analysis is implemented as an in-depth annual or
biannual report based on social metrics that the investor and PCV agree to collect. PCV
provides a detailed report on nonfinancial performance to clients, including most notably the
California Public Employees Retirement System (CalPERS) and foundations including the
Northwest Area Foundation and the Annie E. Casey Foundation. PCV uses metrics including
jobs created, employee benefits, low-income workers supported, and female and minority
ownership and management at underlying portfolio companies. PCV’s report to CalPERS is
publicly available and includes detailed methodological information. The report also benchmarks CalPERS’ performance to the appropriate state and national workforce data.

NCIF Social Performance Metrics

The National Community Investment Fund (NCIF) developed its Social Performance
Metrics tool to measure the social impact of banks and thrifts working in underserved populations, also called community development banking institutions (CDBIs).77 The tool uses a
number of industry-specific metrics, including publicly available census data, branch location
data, and mortgage loan data. For example, NCIF’s development lending intensity metric
assesses the percentage of an institution’s home loan originations and purchases that are
located in LMI census tracts. The goal is to provide investors with information that will help
them make targeted investments based on geographic need. Accompanying these metrics is
a qualitative survey that probes CDBI service area, mission, and partners. The database tool
is located on the NCIF website and is available to the public.78

CDFI Assessment and Rating System (CARS)

The CDFI Assessment and Rating System (CARS), a project of the Opportunity Finance
Network, is designed as a comprehensive third-party assessment of CDFI loan fund nonfinancial and financial performance. The purpose of CARS is to “increase the amount of
capital available [CDFIs] for community development purposes and to promote CDFI
performance as a primary criterion determining the flow of capital through these institutions
to economically disadvantaged people.” CARS provides ratings for both financial strength
and impact performance based on a five-year track record. Information is collected through
on-site examinations that include in-depth interviews with management and board members,
analysis of financial and programmatic information, and thorough review of loan files and
risk management systems. Although high-performing CDFIs often publish their rating score,
the comprehensive results of their analyses are available only by subscription for CDFI
investors. Approximately 55 CDFIs receive a CARS rating, and 35 impact investors have
subscribed to the CARS reports.79

Community Development Venture Capital Alliance’s Measuring Impacts Toolkit (MIT)
The Community Development Venture Capital Alliance’s Measuring Impacts Toolkit
(MIT) is specifically targeted to venture capital impact investors. The MIT is a Microsoft
Excel–based survey with more than 70 questions at its core. Additional survey modules
collect data on benefits, wealth building, and training, and include over an additional 100
data points according to company type. The core social impact data, collected for each
company in a fund’s portfolio, cover three major impact areas: employment, wages and
career ladders, and benefits. The module survey data cover impacts on community and the environment.80 The data are reported in the aggregate in order to preserve the portfolio
companies’ anonymity; however, the MIT is designed to be an inexpensive “off-the-shelf”
product that individual venture capital funds can purchase. There is no provision for entering
individual funds’ data into a central system for sector-wide reporting.

3.3 Barriers to Measuring Nonfinancial Performance

The tools and practices we highlighted above represent a sample of current efforts, but
it remains the case that very few investors either rigorously measure or report nonfinancial
returns. This phenomenon is not new to the industry and has been the subject of discussion among stakeholders for some time. The following section highlights the barriers to a
more robust regime of industry-wide performance measurement, first briefly describing nine
distinct barriers identified in the literature and then explaining how the nine distill into
three major impediments to nonfinancial performance measurement that the industry must
confront.

Nine Barriers Evident in the Literature

The literature enumerates nine specific barriers to industry-wide nonfinancial performance measurement. These barriers underscore the extent to which diversity characterizes the
community impact investing industry. A brief description of each of the nine barriers follows.

  1. Diversity of investor preferences and nonfinancial objectives.
    Each investor – be it a bank, a public sector pension fund, an insurance company, a foundation, or a faith-based organization – places a different value on nonfinancial return.81
    Further, their investments in different sectors reflect their various missions and visions
    (such as investments in job creation, support for emerging domestic markets, or construction of affordable housing). These differences are a significant barrier to any attempt to
    distill the interests, preferences, and aspirations of all investors into a single industry-wide
    nonfinancial performance measurement practice.
  2. Diversity of measurement methods.
    The increasing number of measurement tools points to a state of uncoordinated innovation in which duplicate activity and confusion over language result in inefficiency.82
    Investors feel overwhelmed or misinformed by the lack of consensus around what constitutes a robust or actionable methodology.
  3. Diversity of products and underlying investments.
    The variety of products through which to invest – from loan pools to private equity funds
    – and investment targets – from women- or minority-owned businesses to affordable
    housing – presents significantly different challenges to measuring performance.83
  4. High cost and low capacity.
    Nonfinancial performance measurement can be costly, time consuming, and peripheral
    to the core competencies and capacities of investors.84
  5. Lack of data or information about the provider.
    There is no consistent and detailed information on the performance of community
    impact investing intermediaries, particularly outside of the CDFI Fund, which also lacks
    transparency.85
  6. Lack of data or information about the product.
    Data on underlying community impact investments and the markets in which capital is
    being deployed are often fragmented, nonstandardized, and not widely accessible.86
  7. Lack of infrastructure.
    The network of markets, accountants, auditors, and standards needed to track and verify
    nonfinancial performance as rigorously as financial performance lags; social program
    evaluation lacks maturity; and the current approaches to nonfinancial measurement
    continue to be people- and expertise-dependent, lacking the systemization to ensure basic
    levels of reproducible data, data integrity, and comparability.87
  8. Insufficient demand.
    For many investors, the costs outweigh the benefits of both measuring and reporting
    nonfinancial returns. According to Lisa Hagerman and Janneke Ratcliffe, demand for
    nonfinancial performance measurement is something of a “chicken and egg dilemma,” in
    that “improved and more widespread social impact measurement will only develop to the
    extent investors require it, [even as] investor interest hinges on developing a more clearly
    defined and measurable investment theme.”88
  9. Business practices.
    Stakeholders often view the information necessary for measuring nonfinancial performance as private or proprietary.89 Although legal or technical solutions may address
    privacy concerns, some investors are suspicious of providing data to external parties that
    they are unaccustomed to sharing.90

Three Key Barriers in Practice

These nine barriers create problems of varying magnitude for investors; some are merely
nuisances, whereas others create a very real sense of frustration and hopelessness. Stakeholder interviews suggest that, in practice, they distill into three key impediments: diverse
and ambiguous investor preferences; broadly inadequate tools and practices; and a lack of
accountability for nonfinancial return.

Diverse and Ambiguous Investor Preferences

As we have discussed throughout this paper, the nonfinancial goals and objectives of
investors differ substantially.91 Investor preferences that are driven by different structural,
operational, cultural, and stakeholder priorities result in very different demands for nonfinancial performance measurement and reporting. The problem of ambiguity stems from the
difficulty of expressing or quantifying the value that investors assign to nonfinancial returns,
either because the value is so intrinsic that it may be difficult to fully articulate, or simply
because the value is intangible or immeasurable. Although any attempt to fully describe the
nonfinancial preferences of investors is inherently speculative, objectives beyond measurable
outputs (such as jobs created or properties financed) include brand differentiation, a desire to
influence the behavior of the market, addressing perceived market failures, efforts to achieve
political or values-oriented goals, and the need to satisfy regulatory requirements. Diversity
and ambiguity in investor nonfinancial objectives inherently limit the pool of prospective
investors who might use any single measurement tool or practice.

Inadequate Tools and Practices

Numerous structural and operational limitations render nonfinancial performance
measurement tools and practices inadequate for many investors. These limitations might
include insufficient or unverifiable data, infrastructure and methodological barriers, inefficient
or unsuitable processes and systems, and unaffordable third-party or even off-the-shelf tools.92
Unless investors believe that a tool or practice is truly cost-effective – cost measured in time
and resources, and effectiveness measured in the quality, relevance, and value of the information it provides to key stakeholders – they are unlikely to devote whatever effort is necessary to
supporting nonfinancial performance measurement. The fact remains that measuring nonfinancial performance is simply very difficult. Although tools and practices will become more suitable and effective over time, it is likely to take many years to address underlying impediments.

Lack of Accountability for Nonfinancial Return

Most community impact investors are simply not required to report nonfinancial returns,
reducing the likelihood that they will devote time and resources to measurement, and
reducing their demand for tools and practices. For example, even the largest investor in the
sector – the CDFI Fund – requires that CDFIs report data only when receiving technical
or financial assistance or NMTC allocations. Even then, CDFIs must respond only to a
relatively narrow set of eight community impact survey questions. In any one year, just onefifth of CDFIs are mandated to report to the CDFI Fund.93 Although CDFIs more willingly
provide data to industry-driven initiatives like the CDFI Data Project, the data are presented
only in the aggregate and are not attributable.

The lack of accountability for nonfinancial returns, and by extension the lack of demand
for nonfinancial performance measurement, means that few industry resources are deployed
to develop and enhance practices, with one or two notable exceptions. When accountability
is clear, and creates an incentive to measure nonfinancial performance, measurement and
reporting are likely to be prevalent and robust. For example, because CalPERS demands a
detailed annual report on the “auxiliary benefits” of the California Initiative, the 30 funds
that manage money for the program (and the 200 companies in which they invest) are subject
to some of the most rigorous nonfinancial reporting requirements in the sector. Similarly,
the impact investors that responded to the more detailed survey we discussed above have
two things in common: they report nonfinancial returns, and they do so in part because they
believe that they are accountable for the nonfinancial returns that they measure.

Other factors contribute to limited accountability. First, accountability is itself a function
of other variables. According to one interview subject, “accountability is a good framework
for discussing what metrics are needed, but having the right balance of metrics is important
because having too many, or a system that is too complicated, reduces accuracy and cooperation.” In other words, investors will be more accountable for nonfinancial performance if the
tools that they use to measure performance are well suited to the task. Second, accountability
differs significantly by investor type, particularly for those deploying their own capital (foundations and individuals) and those entrusted with investing the money of others (depository and nondepository institutions and government). Finally, many investors also consider
accountability to be a risk. For example, reactions to the possibility of linking CDFI Fund
data to individual entities have been mixed. As one interview subject confirmed, “Some see it
as an opportunity, others as a threat. How do we present the information objectively without
offending key stakeholders?”

Moving Forward

The community impact investing industry is substantial. It includes a large number of
investors making thousands of diverse investments, valued at tens of billions of dollars, for
both financial and nonfinancial return. Yet a surprising number of community impact investors either do not measure nonfinancial performance robustly or do not disclose their findings. In order to advance the field, the industry first needs to revisit why nonfinancial performance measurement is critical to scaling the sector. In order to make a case for nonfinancial
performance measurement, we need an understanding of investor preferences that addresses
the barriers we described above and considers ways to motivate industry-wide action.

Part IV: The Case for Nonfinancial Performance Measurement

Effective nonfinancial performance measurement is a key component of the impact
investing industry’s growth and, as such, an important part of unlocking an estimated $500
billion in potential capital.94 Tools and practices continue to surface, and because investors have very different preferences for nonfinancial return and nonfinancial performance
measurement, innovation will likely consist of a continued proliferation of approaches. No
matter how diffuse the way forward, however, it is essential to make a stronger and more
cohesive case for nonfinancial performance measurement in general.

Our research underscores four key questions that investors and industry stakeholders are
currently asking, and need to address, in order to advance the field.

  1. Does nonfinancial performance measurement really matter for investors?
  2. If it does matter, is nonfinancial performance measurement even possible?
  3. If nonfinancial performance is possible to measure, what form should it take?
  4. How will nonfinancial performance measurement increase community impact investing?

This section discusses each question in order, highlighting investor behavior as a determinant of the field’s development and discussing the role of two crucial means of effecting
change: innovation and accountability. The section also introduces a new method for characterizing investors, asserting that each has a willingness to pay for nonfinancial performance,
which is an indication of the value an investor assigns to nonfinancial return, and a willingness to disclose, which is an indication of the extent to which an investor is accountable for,
and reports, community impacts. Insight into these two characteristics provides a number of
important general observations about the role and future direction of nonfinancial performance measurement.

4.1 Does Nonfinancial Performance Measurement Really Matter for Investors?

A number of industry stakeholders remain agnostic about nonfinancial performance
measurement. Federal Reserve Chairman Ben Bernanke, however, is not one of them.
Speaking in 2006 about the importance of data and measurement in community finance,
Bernanke argued that “It is difficult to overstate the importance of adequate and accurate information for attracting capital.”95 Nancy Andrews, President and CEO of the Low
Income Investment Fund (LIIF), recently expressed a similar sentiment, writing that “impact
analysis is at least as important as financial performance.”96 However, for every Chairman
Bernanke and Nancy Andrews, there is an impact investor asking the questions: “What do
investors want? Is it really social return, or is social return just icing on the cake?”; and
“Do investors value data or measures of social impact, or just a seal of approval?”97 Even
as the prevalence of measurement as a subject of discourse underscores that nonfinancial
performance measurement does matter – together with some unprecedented investments
in innovation98 – we must ask the question: “but why?” The answer is that nonfinancial
performance measurement informs investor behavior and is instrumental to determining an
investor’s willingness to pay for nonfinancial return.

Willingness to Pay

Willingness to pay is a concept that provides additional insight into investors’ nonfinancial performance objectives. It describes the quantity of time, effort, investment earnings, or
other resources that investors are willing to exchange for a preferred value of nonfinancial
return. It is similar to the current method for describing investors as either financial-first or
impact-first, but it places them on a continuum instead of placing them in the two categories.99 By locating investors on a continuum, willingness to pay better accommodates the
tremendous diversity of investor nonfinancial objectives. It recognizes that an investor’s
preferences for nonfinancial return are discrete, and that no single investor is likely to have
the exact same objectives. The magnitude of an investor’s willingness to pay is informed by
a wide range of inputs including strategic, operational, and cultural priorities; outside stakeholders; and the availability of actionable data. Only the investor can truly know the “value”
that it places on nonfinancial return, or the “price” that it is willing to pay for that value.
Table 3 illustrates some examples of these values and prices.

Table 3
The “Value” and “Price” of Nonfinancial Return

The Value and Price of Nonfinancial Return

The idea of willingness to pay is born of current industry practices and is not intended
to be controversial. On the contrary, the values and prices in Table 3 are plainly visible.
A pension or investment fund must satisfy mandated client objectives and must provide
evidence that it has done so. The CRA requires banks to invest in low-income communities
and to demonstrate this compliance to regulators. CDFIs and other mission-driven investors
have an interest in explicit community impacts, and they typically carry higher operating
and transaction costs to meet these objectives.100 Private foundations are eager to “move the
needle,” influencing the behavior of markets, and will consider the costs of participating in
and leading industry dialogue as one component of the expense of doing so.

Investors that place the highest value on nonfinancial return will be willing to pay the
most for it. For example, a foundation interested in creating housing opportunities may
provide capital to an affordable property developer through a program-related loan with a
concessionary cost of borrowing. Conversely, a CRA-regulated bank investing in the same
affordable housing project is more likely to provide financing at a price closer to the market
rate of return. Although existing literature may refer to these investors as impact first and
financial first, respectively, we can also envision them at different points on the willingness
to pay continuum. The New York Acquisition Fund is an example of an investment that
used capital from investors with a high willingness to pay to secure financing from investors
with a low or no willingness to pay. The Fund leveraged an $8 million, 0 percent interest rate
loan from the public sector as a first loss fund, and $32 million in below-market foundation PRIs as a second loss fund, to attract more than $200 million in senior debt authority from
conventional lenders.101

For most community impact investors – including public agencies, foundations, and
CRA-motivated banks – some value of nonfinancial return supplants financial return. In
other words, the price these investors are willing to pay includes a tradeoff between financial
and nonfinancial return. However, for other investors required to maximize financial return
at all times, the value of nonfinancial return may be purely additive, creating a “total return”
that is more valuable than a market return. These investors will be unwilling to pay for
nonfinancial return in the form of below-market financial earnings. Such investors include
the public pension funds making economically-targeted investments under the auspices of a
fiduciary duty to current and future retirees.

Nonfinancial Performance Measurement and Willingness to Pay

Nonfinancial performance measurement is critical because, simply put, willingness to
pay is partly determined by the quality of the information that investors use to make decisions about financial and nonfinancial tradeoffs.102 In other words, investor behavior is
shaped by the very practice of nonfinancial performance measurement. For one community
development venture capital fund, CEI Ventures, nonfinancial performance measurement is
said to affect “fund formation, investment decision making, the provision and allocation of
resources, [and] messaging, and is vital to achieving goals.”103

To be sure, the question “does nonfinancial performance measurement really matter for
investors?” is somewhat extraneous. Investors must decide independently if nonfinancial
performance matters. To the extent that it does, high-quality data and information are essential.

4.2 Can Nonfinancial Performance Actually Be Measured?

There is still the problem of seemingly intractable barriers to measurement, including the
diversity and ambiguity of investor preferences, insufficient infrastructure, and poor data. In
practice, however, nonfinancial performance is already being measured, is already informing
investor behavior, and will continue to improve as a result of innovation.

Addressing the Barriers to Nonfinancial Performance Measurement through Innovation

Despite the challenges, there are steps that industry and government can take, and are
already taking, to ensure that the measurement of nonfinancial returns becomes more effective and widespread. The efforts of the recently created Global Impact Investing Network (GIIN) and the closely related Investment Reporting and Investment Standards (IRIS)
are especially notable. Founded in 2007 by the Rockefeller Foundation and a group of
other impact investors,104 the 40-member GIIN specifies its purpose as “identifying and
addressing the systemic barriers that hinder the impact investing industry’s efficiency and
effectiveness.”105 The IRIS project, which evolved out of original efforts begun by the Rockefeller Foundation, the Acumen Fund, and B Lab, and is now is administered by GIIN,
represents the network’s efforts to create a taxonomy for impact investing and a framework
for reporting and evaluating nonfinancial returns. IRIS hopes to provide a standard set of
metrics that can be compared and rated across the universe of impact investments.106

GIIN is also behind the development of the GIIRS rating system, which advocates
believe through its very existence will create more demand for nonfinancial performance
measurement. As a supporter of GIIRS, stated:

As we provide tools with more credibility, that are more cost effective and transparent, it will become more difficult for investors to willfully not use social performance tools. At the moment, with the industry more fragmented, it is easier to understand why investors do not measure social performance. But there will be fewer opportunities not to hold yourself accountable moving forward.107

A more targeted, discrete form of industry-driven innovation is the Center for Financial
Services Innovation’s (CFSI) work on a new scorecard measuring the “customer impact” of
financial services companies targeting the “underbanked.” CFSI will ultimately promote the
scorecard to other investors in need of similar nonfinancial performance information.108
Moreover, many of the tools we profile in this report are improving daily. PVC is a case
in point, working to expand its third-party impact evaluation services to a number of new
categories of socially oriented venture capital funds, as well as to other asset classes.

SVT Group, a widely used social evaluator, addresses diverse investor preferences by
approaching nonfinancial return as a management discipline. Rather than setting out to
measure specific units of return, SVT Group helps stakeholders evaluate the process by which
they achieve impact. In this vein, SVT Group sees nonfinancial performance not as the
endgame of, but rather the path to, community impact. SVT Group has developed the SROI
Toolkit to help investors and corporations manage impact rather than simply measure it.
Other industry actors address the barriers through policy innovation. For example, Opportunity Finance Network has advocated for the creation of an “innovation bank” within
the CDFI Fund, a research and development program that could serve as a logical source of
funding for improving nonfinancial performance measurement.109 B Lab’s ongoing work to
promote state laws accommodating B corporations is also likely to improve the nonfinancial
performance measurement practices of the investors that deploy capital to these new types of
companies, in so doing generating and incentivizing additional accountability.110

The federal government also plays a role in promoting more effective measurement
through innovation. The CDFI Fund regularly updates the CIIS system technology and user
accessibility.111 In addition, on May 14, 2010, the CDFI Fund invited public comment on
continuing reforms, including in the areas of minimizing the cost and burden of data collection and CDFI/CDE compliance, and the quality, utility, and clarity of the information
being collected.112 Further, the CRA has recently come under review by its regulators, which
include the Federal Reserve’s Board of Governors, the FDIC, the Office of the Comptroller
of the Currency, and the Office of Thrift Supervision, and could be subject to changes that
affect how depository agencies make community impact investments and how they measure
and report on those investments.113

Because of innovations like these, nonfinancial performance measurement is informing
investor behavior like never before. The NCIF Social Performance Metrics framework is
one tool that has helped drive investment to high-performing community impact investors.
According to NCIF, several community development banking institutions are already demonstrating their “willingness to report more impact information to investors since these institutions have received greater funding from the socially responsible investor community.”114
Bank of America Merrill Lynch, which measures the nonfinancial performance of its Capital
Access Funds (CAF), a private equity fund-of-funds investing in underserved markets for
clients including CalPERS, the California State Teachers’ Retirement System, and the New
York State Common Retirement Fund, states that “CAF reviews its efficiency in realizing
social impact on an ongoing basis to ensure that its investing efforts identify the impact
areas that are of most interest to CAF as it considers fund investments.” And Federal Reserve
Chairman Ben Bernanke recently highlighted the CARS rating system as potentially having
“the double benefit of attracting more funds into community development and helping to
ensure that those funds are effectively used.”115

Although barriers, including poor data and measurement infrastructure, will continue to
hamper the quality of nonfinancial performance measurement tools, they do not render the
practice altogether futile. On the contrary, investors are already leveraging business-relevant
insights from nonfinancial performance measurement, and will benefit from further innovation.

4.3 What Form Should Nonfinancial Performance Measurement Take?

Innovation occurs at all levels and comes from a wide range of stakeholders–from the
practices of a single community impact investor to the broad initiatives implemented voluntarily by industry or imposed by regulation. Not surprisingly, this diffuse form of innovation
reflects the diverse nature of the community impact investment industry and the variety of
investor preferences for nonfinancial return.

Put another way, there is a proliferation of nonfinancial performance measurement tools
and practices precisely because investors demand it. It is not surprising that existing tools are
insufficient, but this is not an insurmountable obstacle. For now, however, there is no silver
bullet for measuring nonfinancial performance – no single metric, tool, or practice that suits
every investor. Such a silver bullet is unlikely to emerge in the immediate future, but even
so, the way to pursue greater standardization is to accommodate the ways in which investors
express their preferences for community impact.

The Investor-Centered Perspective

Investors drive demand for nonfinancial performance measurement as both the
consumers and the producers of community impact data. Innovation in nonfinancial performance measurement is therefore likely to be more catalytic if it reflects and responds to
investors’ varied nonfinancial objectives, structures, and investment strategies. Innovation
that focuses first on the development of tools and practices, and expects investors to adjust
their behavior accordingly, is likely to see greater resistance.

Although an investor-centered perspective implies that innovation will be diffuse and
that the silver bullet is more likely to be an arsenal of measurement tools, in practice the
metrics that investors use and report on are often similar within a sector. Categories of
investors that invest in particular asset classes, that are subject to similar regulatory requirements, or that have similar nonfinancial objectives tend to coalesce around the same data.
For example, most banks subject to the CRA, including three-quarters of those we reviewed
for this project, report the volume of loans provided to low-income communities in annual
reports. CDFI loan fund disclosures highlight the type and quantity of community facilities
financed or constructed. And for investors working to create “quality jobs,” health and retirement benefits for the workers their investments support are important measures of success.
The development of IRIS demonstrates both the overall complexity of the community
impact investing sector and the progress toward a more consolidated system of nonfinancial performance evaluation. The first version of the IRIS taxonomy includes more than 170 operational, financial, and descriptor metrics applicable to all investors. Yet once IRIS
drills down to the investors’ area of interest, the number of metrics falls substantially – for
example, to 38 in community development finance, 43 in education, and 40 in healthcare.116

Shared investor preferences and a strong understanding of willingness to pay are important anchors for the future development of nonfinancial performance measurement.
However, the investor-centered approach is also tied directly to accountability. To the extent
that investors measure and report nonfinancial performance, they often do so because they
are required to. As one interview subject conjectured: “It is perfectly reasonable behavior of
organizations not to want to collect more information. If they collect it, what will they get?
What’s the upside?” And as another confirmed, “if the requirement to provide data is voluntary, the tool or practice will have limited value.”

Willingness to Disclose

Willingness to disclose is another concept that we can use to characterize investors, one
that relates directly to accountability. Willingness to disclose is a measure of the quantity
and quality of nonfinancial return reporting that investors are willing to provide to the stakeholders to which they are accountable. The magnitude of an investor’s willingness to disclose
is shaped both by internal preferences – the value that an investor places on information and
transparency – and by external forces, including the extent to which stakeholders request or
demand disclosure. A larger magnitude implies a higher quality of reporting that is likely to
be more akin to practices in the traditional investment management industry we discussed
earlier, where measurement is longitudinal, performance is benchmarked and independently
verified, and evaluation methodology is transparent.

Insights into Nonfinancial Performance Measurement Using Willingness to Disclose
and Willingness to Pay

As with willingness to pay, willingness to disclose falls on a continuum. By plotting the
willingness to pay and willingness to disclose continua simultaneously, our research provides
some important general insights into the drivers of innovation and accountability and, by
extension, the direction that nonfinancial performance measurement will likely take.

For the purposes of this research, we consider the locations on the two continua of seven
categories of community impact investors:

  • CDFI recipients of CDFI Fund assistance are mission-driven and created for the explicit
    purpose of investing in underserved communities. CDFIs have a high willingness to
    pay for nonfinancial return and, because they receive government funds and must
    report to the CIIS, they have a high willingness to disclose nonfinancial return to the
    stakeholders to which they are accountable.
  • Most other CDFIs also have a high willingness to pay but, without the requirement to
    report data to the CDFI Fund, lack the incentive to measure nonfinancial performance
    and have a lower willingness to disclose. Only one-fifth of CDFIs report to the CDFI
    fund and even fewer – 56 out of more than 1,000 – work with the industry-driven
    initiative providing the most attributable community impact information, CARS.117
  • Private foundations are also mission-driven and, like CDFIs, are mandated to invest
    in a way that advances that mission, at least through program-related investments,
    where they typically accept a concessionary rate of financial return. Thus they have a
    high willingness to pay. But as our review of annual reports revealed, private foundations are among the least likely to measure nonfinancial return or to report other than
    anecdotally. Most private foundations therefore have a low willingness to disclose.
  • Socially motivated individuals often have strong personal preferences for community
    impact and are accountable to no other third parties for any financial or other tradeoffs. At the same time, as with foundations, individuals have no stakeholders to
    whom they are required to report or disclose nonfinancial returns. Individuals therefore have a high willingness to pay but a low willingness to disclose.
  • Banks subject to the CRA have a regulatory incentive to invest in low-income communities but are increasingly reluctant to trade financial return for the social impact
    resulting from CRA-compliant investments.118 Banks have a low willingness to pay
    and, despite some reporting of anecdotal and demographic evidence, have demonstrated a relatively low willingness to disclose.
  • Most nondepository financial institutions have a fiduciary duty to prioritize financial
    return and thus little appetite for “paying” for nonfinancial return. They also have
    little accountability for nonfinancial return and rarely measure or disclose that return,
    unless they are especially self-motivated or are required to by mandate or regulation.
    These investors have both a low willingness to pay and a low willingness to disclose.
  • Mandate-driven nondepository financial institutions that are required to invest in
    community impacts share the same fiduciary duty to clients and the same reluctance
    to overtly sacrifice financial return for social return as ordinary nondepository institutions, demonstrating a low willingness to pay. Yet because they are accountable to
    the mandate, they are often obliged to evaluate and report performance, resulting in
    a higher willingness to disclose. Investors in this category include CalPERS and the
    BAML Capital Access Funds, which we discussed earlier.

Figure 4
Continua of Investor Preferences

Continua of Investor Preferences

Figure 4, which illustrates the position on the two continua of the seven investor categories, as characterized by willingness to pay and willingness to disclose, provides some valuable guidance. It is clear that very few investors that place a high value on nonfinancial
return are also willing to robustly measure and report that community impact. Moreover, the
relationship between willingness to pay and willingness to disclose is complicated. Although
willingness to disclose should and usually does increase with willingness to pay – as investors
become more accountable for the higher value of nonfinancial return they seek – this is not
always the case. Investors with a high willingness to pay, including most CDFIs, may believe
they have nothing to gain from disclosure. In other words, their social mission, required
by law, may be enough to satisfy client preferences for community impact. For investors
with a lower willingness to pay, but a surprisingly high willingness to disclose, the motivation to disclose is typically involuntary – resulting from regulations or mandates. Because
these investors are typically financially motivated, they are accustomed to providing a more
rigorous, benchmarked, and attributable form of reporting.

By considering where investors locate in Figure 4, and cross-referencing this with the
nonfinancial performance measurement tools that they currently use, our research also
confirms two interesting patterns. As willingness to pay increases, nonfinancial performance
measurement tends to become more widespread and more standardized. Meanwhile, as
willingness to disclose increases, nonfinancial performance measurement becomes more
robustly benchmarked, more independently verified, and more customized and costly. For
example, investors using Pacific Community Ventures tend to have a high willingness to
disclose but a low willingness to pay; investors using the CDFI Data Project generally have a
low willingness to disclose but a high willingness to pay.

The precise form that nonfinancial performance measurement should take is undoubtedly unknown. The research suggests only that investor demand for nonfinancial performance measurement and accountability will, and should, determine that form. With this in mind, Figure 4 provides some final, additional insights into the likely location of innovation among investors:

  • Investors with a high willingness to disclose but low willingness to pay, such as mandate-driven
    nondepository financial institutions, are primarily concerned with ensuring that they
    communicate with stakeholders about the real but modest nonfinancial returns they
    generate. These investors are likely to contribute to innovation by refining the method
    and the effectiveness of the presentation and reporting of nonfinancial returns,
    including by incorporating benchmarking and other best disclosure practices.
  • Investors with a high willingness to pay but low willingness to disclose, such as most investing
    foundations and CDFIs, are likely to drive innovation in the practices they need to
    more accurately quantify and evaluate opportunities with highly valued community
    impacts, particularly for the purpose of informing internal decisions.
  • Investors with both a high willingness to disclose and a high willingness to pay, such as CDFIs
    receiving government funding, are likely to drive widespread innovation. These investors are demonstrably accountable for the community impacts that they and their
    stakeholders value highly. This group’s incentive to invest in and support innovation
    is unambiguous.

There are as many opinions about the form that nonfinancial performance measurement
will take as there are tools, practices, and investors. According to the Monitor Institute, the
priority for impact investors is to “develop rigorous metrics for assessing the relative social
and environmental impact of investments and portfolios within and across the sectors and
geographies that matter to them.”119 This is a very different vision from that of one interview
subject, who hoped simply that “organizations see the value of collecting at least the basic
data” and that “anything beyond that is icing on the cake – it’s a luxury.” Whatever the end
game, the process is certain to be investor-centered.

4.4 How Does Nonfinancial Performance Measurement Increase Community Impact Investing?

As a final outcome of our new method for characterizing investors, it is instructive to
consider the special role of disclosure.120 Disclosure informs the relationship that an investor
has with its own stakeholders, but also produces a positive and important externality: it
provides latent sources of capital either “observing” or underinvested in the sector with access
to market-level data to assist in valuing and benchmarking their own nonfinancial objectives.
Turning to CalPERS again as an example, as a result of the high levels of disclosure in the
California Initiative, every other nondepository institution is free to take note of CalPERS’
performance and to benchmark their own nonfinancial return accordingly.

This positive externality sits at the heart of a virtuous cycle of market development driven
by innovation in nonfinancial performance measurement. This innovation allows investors
participating in the market to more accurately value willingness to pay and to provide and
demand more disclosure. More disclosure makes more information available to investors not
participating in the market. As sources of latent capital better understand the value of nonfinancial return, some may enter the market with a willingness to pay, bringing more resources
to the table and creating even more demand for innovation and accountability.

In summary, the very practice of nonfinancial performance measurement holds the
promise of building scale in community impact investing – a conclusion with which Federal
Reserve Chairman Ben Bernanke has concurred in relation to CDFIs, arguing in 2006 in a
speech at the Greenlining Institute’s Thirteenth Annual Economic Development Summit
in Los Angeles, that “to attract more return-oriented investors, including both conventional
investors and those with social as well as financial goals, CDFIs must demonstrate financial
viability as well as the ability to fulfill the broader development mission.”121

Part V: Conclusion

The community impact investing industry is made up of numerous investors, each with
different preferences for achieving nonfinancial return. Investors choose investments on the
basis of these preferences, which are informed by strategic, operational, and cultural priorities; outside stakeholders; and the availability of actionable data. The tools and practices they
use to measure performance also vary significantly. There are three major barriers to industrywide nonfinancial performance measurement: diverse and ambiguous investor preferences,
inadequate tools and practices, and lack of accountability for nonfinancial return.

Nonfinancial performance measurement provides the information investors need to
satisfy their community impact objectives. In other words, investor behavior is informed by
measurement tools and practices. This investor-centered perspective shifts the focus away
from particular metrics as the focal point of innovation and asserts instead that a more
complete understanding of investor preferences will lead to a more robust regime of measurement. To that end, the investor-centered framework provides an important perspective from
which to consider four key questions and their respective answers:

  1. Does nonfinancial performance measurement really matter for investors?
    Nonfinancial performance measurement informs investor preferences and allows
    them to better express their willingness to pay for nonfinancial return. Investors must
    decide independently whether nonfinancial performance matters. To the extent that
    it does matter, high-quality data and information are essential.
  2. If it does matter, is nonfinancial performance measurement even possible?
    Nonfinancial performance measurement is already occurring, is already informing
    investor behavior, and will continue to improve because of innovation.
  3. If nonfinancial performance is possible to measure, what form should measurement take?
    Innovation in nonfinancial performance measurement is likely to originate broadly,
    but driving it most strongly will be investors who are demonstrably accountable for
    the community impacts they and their stakeholders value highly. Accountability
    provides a critical incentive for innovation.
  4. How will nonfinancial performance measurement increase community impact investing?
    Nonfinancial performance measurement increases community impact investing by
    providing investors with the ability to better express their willingness to pay and,
    through disclosure, by providing latent sources of capital with the information they
    require to value their own preferences and enter the market.

Innovation and accountability are the primary forces advancing nonfinancial performance measurement. The key question for the field is therefore one of degree. Which of the
myriad current and prospective innovations, or efforts to increase accountability, is likely to
suit the largest number of investors or the most influential among them? Although we did
not evaluate any specific mechanisms for increasing innovation or accountability, salient
questions and opportunities for future research might include the following:

  • Is the industry capable of developing a standard set of voluntary principles and best
    practices, including a minimum level of measurement and disclosure, in order to
    mitigate differences and to guide investors?
  • Should CRA reform include more robust community impact measurement and
    reporting requirements?
  • Should the CDFI Fund, the largest single investor in the industry, require all CDFIs
    to report transaction-level data annually, and to make this information attributable
    and public?
  • Are there sources of additional federal government funding for innovation in nonfinancial performance measurement?

Our findings may disappoint those anxious to find the ever-elusive silver bullet to nonfinancial performance measurement, but in fact there is considerable hope. Our research does
not refute the possibility of ever discovering the silver bullet; rather, it demonstrates that the
industry is a long way from identifying it. Improvements in measurement will occur as investors, service providers, and government continue to innovate. Our research highlights particular steps that stakeholders can take to move the field rapidly forward. For example, investors
with similar preferences for nonfinancial return can converge around similar performance
measurement strategies, thereby increasing standardization within their particular structural categories and asset classes. Working groups can explore what different types of investors
are seeking and perhaps shed light on the data already being collected but not disclosed.
And public officials can investigate the significant impact government fiat could have on
measurement innovation and disclosure.

There are certainly more questions worth asking and investigating. However, the point
that bears repeating is that nonfinancial performance measurement, as it currently exists
and in its possible future iterations, is indeed an important factor in scaling the industry. As
industry actors better understand investors and their nonfinancial performance objectives,
innovative measurement tools and practices will emerge. As a result, those investors who are
observing but not yet participating in the industry will better understand both investment
opportunities and their own willingness to pay for nonfinancial return, ultimately providing
new capital for community impact.


1. The authors would like to acknowledge and thank all those who contributed to this article. We are grateful to David Erickson and Ian Galloway at the Federal Reserve Bank of San Francisco for their guidance and encouragement throughout the process, and for their support, without which the project would not have come
to fruition. Likewise, Beth Sirull and Penelope Douglas at Pacific Community Ventures and Annie Donovan,
Jim Gray and Rick Jacobus at NCB Capital Impact provided important insights as well as their blessing for our
efforts. We are also indebted to the many practitioners who gave their time and expertise through interviews,
survey responses and critical review, providing essential evidence and feedback, at the same time enlightening
us on their inspiring work in community development. Special thanks to our contributing editor, Sarah Sullivant,
University of California, Berkeley, Master of Public Policy candidate.

2. Jessica Freireich and Katherine Fulton, “Investing for Social and Environmental Impact.” (New York: Monitor
Institute, January 2009).

3. Ibid, 32.

4. Steven Godeke and Raúl Pomares, “Solutions for Impact Investors: From Strategy to Implementation.” (New
York: Rockefeller Philanthropy Advisors, November 2009), 11.

5. Ibid, 12.

6. Freireich and Fulton, “Investing.”

7. Ibid, 49.

8. Ben Bernanke, “By the Numbers: Data and Measurement in Community Economic Development,” Community
Development Investment Review 3 (2) (2007), 5.

9. CDFI Fund Award Database, www.cdfifund.gov. Financial assistance is just one of the forms of support provided
by The CDFI Fund, which also awards grants for technical assistance, native initiatives, bank enterprise awards,
and administers the New Markets Tax Credit program.

10. www.sba.gov. The SBA also has a Rural Business Investment Program, which catalyzed the creation of one
additional venture capital company.

11. CDFI Data Project, Community Development Financial Institutions: Providing Capital, Building Communities,
Creating Impact, 7th Ed. (Cleveland, OH: CDFI Data Project, 2007).

12. Ibid.

13. Ibid.

14. Community Reinvestment Act, 12 U.S.C. § 2901 et seq. (1977).

15. www.ffiec.gov.

16. www.cdfifund.org.

17. Government Accountability Office, “Tax Policy: New Markets Tax Credit Appears to Increase Investment
by Investors in Low-Income Communities, but Opportunities Exist to Better Monitor Compliance.” Report
no. GAO-07-296. (Washington, DC: GAO, January 2007). See also Lauren Lambie-Hanson, “Addressing
the Prevalence of Real Estate Investments in the New Markets Tax Credit Program.” (San Francisco: Federal
Reserve Bank of San Francisco, Working Paper 2008-04).

18. Julia Sass Rubin, Financing Organizations with Debt and Equity: The Role of Community Development Loan
and Venture Funds, Chapter 5. (New York: Russell Sage Foundation, 2007).

19. CDFI Data Project, Community Development Financial Institutions.

20. Kerwin Tesdell, “Community Development Venture Capital” (PowerPoint presentation, New School, New York,
NY, April 1, 2010).

21. Lisa Hagerman, Gordan L. Clark, and Tessa Hebb, “Investment Intermediaries in Economic Development:
Linking Public Pension Funds to Urban Revitalization,” Community Development Investment Review 3 (1)
(2007).

22. Information from www.impactcapital.net and www.insurance.ca.gov/0250-insurers/0700-coin/.

23. www.macfound.org. From the press release “CDFIs Receive Funding to Support Charter Schools,” 2010.

24. Foundation Center, The PRI Directory: Charitable Loans and Other Program-Related Investments by
Foundations (New York: Author, 2009). Based on PRI transactions of $10,000 or more. The share to community
impact investments is calculated from 2006–2007 data, using the investment categories of “economic/community development” and “housing and shelter.”

25. Trillium Asset Management, “Social Research & Advocacy: A Record of Accomplishment.” Press release
(Boston: Trillium, January 2007), available at http://trilliuminvest.com/pdf/tamc_2007_socialreport.pdf.

26. GAO, “Tax Policy.”

27. Community Development Financial Institutions Fund, Three Year Trend Analysis of Community Investment
Impact System Institutional Level Data, FY 2003-2005, Washington, DC, December 2007, in Paul Weech,
“Observations on the Effects of the Financial Crisis and Economic Downturn on the Community Development
Finance Sector.” In The Economic Crisis and Community Development Finance: An Industry Assessment.
Working Paper 2009-05 (San Francisco: Federal Reserve Bank of San Francisco, June 2009); 26-39.

28. Godeke and Pomares, “Solutions for Impact Investors.

29. “CDFIs and other special-purpose vehicles” is loosely defined to include CDFIs, CDEs, and any other entities
required by regulation and supported by subsidy to make community impact investments. Opportunity Finance
Network’s Mark Pinsky calls this broader definition Community Development Investors – ‘CDFIs, state housing
finance agencies, bank community development lending teams or activities, as well as community development
producers and asset managers such as CDCs, for-profit affordable housing developers, and others’(Pinsky 2009, 9)

30. CDFI Data Project, Community Development Financial Institutions.

31. Ibid.

32. Tesdell, “Community Development Venture Capital.”

33. CDFI Fund, www.cdfifund.gov.

34. Goldman Sachs, “Goldman Sachs Launches 10,000 Small Businesses Initiative.” Press Release (New York:
Goldman Sachs, November 17, 2009)

35. Weech, “Observations”, 28.

36. GAO, “Tax Policy.”

37. Ibid.

38. M. Swack and N. Giszpenc, eds., “Financial Innovations Roundtable: Developing Practical Solutions to Scale
up Integrated Community Development Strategies.” Report no. 8. (Durham: Carsey Institute, University of New
Hamphire, 2009), 13.

39. www.nycacquisitionfund.com.

40. Antony Bugg-Levine and John Goldstein, “Impact Investing: Harnessing Capital Markets to Solve Problems at
Scale,” Community Development Investment Review 5 (2) (2009), 37.

41. Calvert Community Note, Social impact report 2009.

42. Hagerman, Clark and Hebb, “Investment Intermediaries in Economic Development.”

43. www.investorscircle.net

44. Tracy Pun Palandijan, “Investing for Impact: Case Studies Across Asset Classes.” (Parthenon Group, Bridges
Ventures, and Global Impact Investing Network, March 5, 2010), 23.

45. Data from both the National Association of Investment Companies website, www.naicvc.com, and T. Bates
and W. Bradford, “Traits and Performance of the Minority Venture-Capital Industry.” Annals of the American
Academy of Political and Social Science 613 (1) (2007): 95–107.

46. Freireich and Fulton, “Investing.” 32.

47. www.blendedvalue.org.

48. Bates and Bradford, “Traits and Performance.”

49. From the Securities and Exchange Commission filing for DBL Equity Fund – BAEF II, available at: http://sec.gov/Archives/edgar/data/1453736/000095010310002078/xslFormDX01/primary_doc.xml.

50. Comments from New York Comptroller William Thompson Jr., the sole trustee of the New York City Employees
Retirement System, in Benjamin Sarlin, “Comptroller: Pension Funds Can be Social Change Engines.” Sun, June
11, 2008.

51. Lisa Hagerman, “More Than a Profit? Measuring the Social and Green Outcomes of Urban Investments,” 4.
(Cambridge, MA: Harvard Law School Labor & Worklife Program, July 2007)

52. Senator John Kerry, The American Community Renewal and New Markets Empowerment Act, S2779, 106th
Congress, Congressional Record 146 (2000): S5684.

53. www.Morningstar.com.

54. S. Rajan, “Measuring the Financial Soundness of CDFIs.” (Cambridge, MA: Kennedy School Policy Analysis, April 2001).

55. National Community Investment Fund, The CDFI Banking Sector: 2009 Annual Financial and Social
Performance. (Chicago: NCIF, 2009). 32

56. Hagerman, “More than a Profit?”, 11.

57. Bugg-Levine and Goldstein, “Impact Investing.”

58. Lisa Hagerman and Janneke Ratcliffe, “Increasing Access to Capital: Could Better Measurement of Social
and Environmental Outcomes Entice More Institutional Investment Capital into Underserved Communities?”
Community Development Investment Review 5 (2) (2009), 44.

59. Hagerman, “More than a Profit?,” 34.

60. CalPERS, 2010 Annual Report.

61. Wells Fargo 2009 Annual Report, available at https://www.wellsfargo.com/downloads/pdf/invest_relations/wf2009annualreport.pdf.

62. Calvert Foundation, 2008 Annual Report, available at www.calvertfoundation.org/downloads/annual_reports/2008%20Annual%20Report.pdf.

63. The GIPS standards are a set of standardized, industry-wide ethical principles that provide investment firms with
guidance on how to calculate and report their investment results to prospective clients, administered by the CFA
Institute (available at www.gipsstandards.org).

64. James Hawley and Andrew Williams, “Shifting Ground: Emerging Global Corporate-Governance Standards and
the Rise of Fiduciary Capitalism,” Environment and Planning A 37 (11) (2005): 1995-2013.

65. ICGN was created in 1995 as a global membership organization of primarily institutional investors to raise
corporate governance standards worldwide. ICGN’s members represent funds under management of around $9.5
trillion (www.icgn.org).

66. Sara Olsen and Brett Galimidi, “Catalog of Approaches to Impact Measurement – Assessing Social Impact in
Private Ventures.” (San Francisco: Social Venture Technology Group, May 2008).

67. http://www.bcorporation.net

68. Ibid.

69. Opportunity Finance Network website, http://www.opportunityfinance.net/.

70. Ibid.

71. CDFI Data Project, Community Development Financial Institutions.

72. Heidi Kaplan, “First Mover: The CDFI Fund’s CIIS Database Holds Promise to Create Substantial Data
Repository for Community Development Investments,” Community Development Investment Review 3 (2)
(2007), 51.

73. www.cdfifund.gov.

74. Founding GIIN members include the Acumen Fund, The Annie E. Casey Foundation, The Bill and Melinda
Gates Foundation, Calvert Foundation, Capricorn Investment Group, Citigroup, Deutsche Bank, Equilibrium
Capital, Generation Investment Management, Gray Ghost Ventures, IGNIA, J.P. Morgan, Lundin for Africa,
Lunt Family Office (Armonia), Omidyar Network, Prudential, The Rockefeller Foundation, Root Capital,
Shorebank/NCIF, Trans-Century, Triodos Investment Management, and Wolfensohn & Company (www.
globalimpactinvestingnetwork.org, Accessed May 1, 2010).

75. www.giirs.org, Accessed May 1, 2010.

76. Ibid.

77. Saurabh Narain and Joseph Schmidt, “NCIF Social Performance Metrics: Increasing the Flow of Investments in
Distressed Neighborhoods through Community Development Banking Institutions,” Community Development
Investment Review 5 (2) (2009), 65.

78. www.ncif.org.

79. www.carsratingsystem.net/ratings, accessed May 1, 2010.

80. CDVCA Measuring Impacts Toolkit v1.1, 2005.

81. Hagerman and Ratcliffe, “Increasing Access to Capital,” 48.

82. Kaplan, “First Mover,” 58.

83. Hagerman, “More than a Profit?,” 5

84. Hagerman and Ratcliffe, “Increasing Access to Capital,” 49.

85. Kaplan, “First Mover,” 56. See also, Ellen Seidman, “Bridging the Information Gap between Capital Markets
Investors and CDFIs,” Community Development Investment Review 2 (2) (2006).

86. Cynthia Gair, “SROI Act II: A Call to Action for Next Generation SROI.” (San Francisco: REDF, October
2009).

87. Freireich and Fulton, “Investing.” See also, Gair, “SROI Act II.”

88. Hagerman and Ratcliffe, “Increasing Access to Capital,” 57.

89. Ibid, 61.

90. Glenn Yago, Betsy Zeidman, and Jill Manning, “Hunting for Data Sources: How Improving Data Can Increase
Capital for Emerging Domestic Markets,” Community Development Investment Review 3 (2) (2007).

91. Hagerman, “More than a Profit?,” 5.

92. Kaplan, “First Mover, 58”; see also Hagerman, “More than a Profit,” 30; and Hagerman and Ratcliffe,
“Increasing Access to Capital,” 61.

93. Kaplan, “First Mover,” 53.

94. The Monitor Institute estimates that impact investing more broadly – the active deployment of capital for social
and environmental impact, domestically and internationally – could grow in the next 5–10 years to represent 1 percent of investment assets under management or $500 billion (Freireich and Fulton, “Investing”), 57.

95. Bernanke, “By the Numbers,” 3

96. Nancy Andrews and Christopher Kramer, “Coming Out as a Human Capitalist: Community Development at the
Nexus of People and Place,” Community Development Investment Review 5 (3) (2009), 63.

97. Two direct quotes from interview subjects.

98. The Rockefeller Foundation, the United States Agency for International Development, Prudential Financial, and
Deloitte have partnered with the nonprofit B Lab to provide $6.5 million to support the development and use
of GIIRS. B Lab, “Impact Investing Partnership with USAID, Rockefeller Foundation, Deloitte, and Prudential
Financial to Support Entrepreneurs in the Developing World.” Press release. (Berwyn, PA: B Lab, April 26,
2010).

99. Freireich and Fulton, “Investing.” 32

100. The efficiency ratio for CDFI banks ended 2008 at 83.58 percent compared to the “all bank” median efficiency
ratio of 70.91 percent. National Community Investment Fund, The CDFI Banking Sector: 2009 Annual Financial
and Social Performance. (Chicago: NCIF, 2009).

101. Lisa Richter, “California Community Development Finance Meeting: Strategies to Respond to the Economic
Crisis, Issues Backgrounder.” San Francisco: Federal Reserve Bank of San Francisco Working Paper, November
2009)

102. Hagerman, “More than a Profit?,” 33.

103. Dawn Marie Estlow Stillings, “Measuring the Social & Environmental Impacts of Community Based Investing
– More than Data Points: A Comprehensive Process and its Challenges.” (Presentation to Public Pension Funds
& Urban Revitalization Initiative, December 11, 2007.)

104. Founding GIIN members include the Acumen Fund, The Annie E. Casey Foundation, The Bill and Melinda
Gates Foundation, Calvert Foundation, Capricorn Investment Group, Citigroup, Deutsche Bank, Equilibrium
Capital, Generation Investment Management, Gray Ghost Ventures, IGNIA, J.P. Morgan, Lundin for Africa,
Lunt Family Office (Armonia), Omidyar Network, Prudential, The Rockefeller Foundation, Root Capital,
Shorebank/NCIF, Trans-Century, Triodos Investment Management, and Wolfensohn & Company (www.globalimpactinvestingnetwork.org)

105. www.globalimpactinvestingnetwork.org

106. www.iris-standards.org

107. Direct quote from interview

108. Interview with Arjan Shutte, CORE Innovation Capital, April 5, 2010.

109. Opportunity Finance Network, “Top Policy Recommendations for Opportunity Finance,” www.nextamericanopportunity.org/toprecommendations

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115. Bernanke, “By the Numbers,” 4.

116. www.iris-standards.org. The first version includes 105 operational metrics, 36 financial metrics, and 33 descriptor metrics.

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118. Weech, “Observations,” 31.

119. Freireich and Fulton, “Investing,” 47.

120. Hagerman and Ratcliffe, “Increasing Access to Capital,” 44.

121. Bernanke, “By the Numbers,” 4.


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Interview Subjects and Survey Respondents

Bank of America*

Edward Powers

Boston Community Ventures*

Andrew Chen

CDFI Fund

Greg Bishack

Center for Community Capital

Janneke Ratcliffe

Coastal Enterprises, Inc*

Carla Dickstein

Community Development Venture Capital Alliance

Kerwin Tesdell

CORE Innovation Capital

Arjan Shutte

Huntington Capital*

Tim Bubnack

Impact Reporting and Investment Standards

Sarah Gelfand

NCB Capital Impact

Annie Donovan

Opportunity Finance Network

Donna Fabiani

Pacific Community Management*

Jesse Brandl

Pacific Community Ventures

Penelope Douglas

Pacific Community Ventures

Beth Sirull

Portfolio 21*

Leslie Christian

PULSE at the Acumen Fund

Brad Presner

REDF

Cynthia Gair

Rockefeller Foundation

Margot Brandenburg

Rockefeller Foundation*

Brinda Ganguly

Sunrise Community Banks*

Nikki Foster

SVT Group

Sara Olsen

The Annie E. Casey Foundation*

Christa Velasquez

* indicates survey respondent


Ben Thornley is the Director of Insight, the thought leadership practice in high-impact investing at
Pacific Community Ventures (PCV). Ben is responsible for PCV’s policy research and social performance measurement initiatives, advising institutions including the California Public Employees Retirement System and The Rockefeller Foundation. Prior to joining PCV, Ben worked for over a decade
observing, and then advancing, the role of the financial services sector in economic development. This
included as a foreign correspondent in New York, reporting on the U.S. pension and mutual fund industries; as a policy associate with the United Nations Association of the U.S.A., responsible for coordinating Wall Street’s formal participation in the UN’s Financing for Development conference; and
as investment director in the Australian Consulate-General, New York, charged with positioning the
country as a regional financial services center. Ben holds a Master of Public Policy from the University
of California at Berkeley.

Colby Dailey manages and oversees the technical assistance program for the Cornerstone Partnership,
a program of NCB Capital Impact, and helps guide the company’s overall affordable homeownership
initiative strategy. She has over a decade of experience working in the philanthropy and community
development sectors providing strategic technical assistance to community based organizations, foundations, public agencies and corporations. Colby has a grantmaking and program evaluation background
and has advised on topics such as nonprofit governance and board leadership, program effectiveness and
cross-sector relationship building. She also conducts in-depth research, evaluation and analysis to help
organizations increase efficiency, equity, cost-effectiveness and social benefit across sectors. She holds a
Master of Public Policy from the University of California at Berkeley and currently serves on the Board
Finance Committee for the Northern California Community Loan Fund.