Federal Reserve Bank of Philadelphia
Amanda Sheldon Roberts
Federal Reserve Board of Governors
The field of impact investing is growing in both size and sophistication, and it is important to consider how this activity might add value to the field of U.S. community development. Abundant opportunities exist for investors to channel their investments abroad through entities such as sophisticated microfinance institutions or fair trade groups. Additionally, many environmentally-focused funds have strong track records of performance and are easily accessible to a wide array of investors. But as impact investing activities increase, why is more of this mission-oriented capital not flowing to low-income cities and communities in the United States? Although domestic community investment has been around for decades, it is increasingly apparent that the necessary infrastructure to channel capital from traditional capital markets to community development organizations is lacking.
On October 2, the Federal Reserve Banks of New York and Philadelphia and the Federal Reserve Board of Governors convened a group of stakeholders in New York to hear insights from a new report by the Global Impact Investing Network (GIIN) and the Carsey School of Public Policy at the University of New Hampshire. The report, “Scaling U.S. Community Investing: The Investor-Product Interface,” provides a comprehensive overview of the existing U.S. Community Investing (USCI) landscape, including the types of intermediary organizations raising investments, the range of available investment products and the types of investors active in the space. The report also offers recommendations on how to scale the field.
Several key themes from the report were discussed by attendees at the event:
- While mismatch between investor demands and product realities is a fundamental barrier to scaling USCI, investors show appetite for a substantial range of USCI products.
- One of the greatest weaknesses of USCI products appears to be their lack of liquidity, causing many investors—and in turn product managers—to focus on short-term products.
- Many of the most sophisticated USCI funds tend to be constrained by their balance sheets and need equity to continue to scale investment. In turn, liquidity limitations have greatly increased the challenge to raising equity.
- The USCI field has struggled to benchmark investment performance on risk and return, although some leading practitioners have been able to obtain investment ratings.
- Individual investors are a potential game-changer in the space, but reaching them involves solving unique challenges.
One organization that has been able to overcome some of those unique challenges is the Calvert Foundation. Justin Conway, Vice President of Investment Partnerships, spoke about the organization’s Community Investment Note, a fixed income security designed as an intermediary product to channel investment capital from traditional capital markets to sophisticated community development practitioners working in low-income communities throughout the country. Investors can invest as little as $20 through an online platform or can electronically purchase more sizable investments that are held within managed portfolios similar to more traditional fixed-income products. Justin discussed the challenges of accessing mainstream capital markets, including regulatory hurdles such as securities registration requirements, risk-management, capitalization requirements, access to distribution channels, and compliance issues. Liz Sessler, Vice President of Client Engagement at ImpactUS, introduced a new platform, which will launch in early 2016. ImpactUS will provide another form of intermediation to channel more capital from traditional sources to practitioners working on the ground in communities.
The GIIN USCI report contains two major recommendations which were explored through breakout conversations at the October 2nd meeting.
Further initiatives to develop investment platforms. The first conversation sought to answer the question, “How can we encourage more standardization of USCI investment products/platforms to reduce inefficiencies in the capital raising process?” Though Calvert Foundation’s note and the forthcoming platform from ImpactUS are promising examples of overcoming some of the inefficiencies presented, the group discussed additional barriers and opportunities. For example, with limited liquidity in the USCI market, most investors are short-term oriented. Community development efforts need patient, flexible capital, but most investors do not have an appetite for providing this type of capital. The group explored whether a mechanism to create a secondary market could lead to the attraction of much needed longer-term capital in the USCI space. Ratings were also discussed. While Aeris (formerly CARS) is currently the industry standard, with a deep understanding of the unique nature of Community Development Financial Institutions (CDFIs), some participants felt that mainstream investors will prefer more traditional ratings such as S&P, which recently rated three CDFIs. Ratings could be one way to overcome the need for more standardization of CDFI financials and provide performance track-records that would allow for benchmarking.
A coordinated marketing and investor engagement effort. The second conversation sought to answer, “How can we promote comprehensive efforts for marketing, communications and investor engagement for USCI?” This conversation acknowledged that even with strong, accessible products, platforms, and intermediation, the USCI field would still be lacking the investor and financial advisor education necessary to drive more capital to domestic community development. Strategies to engage investors and advisors would need very different approaches, and the group felt that focusing on investors would be more effective since this would be a “pull” rather than a “push” strategy that would play to the values of the individual investor. As more wealth is being transferred to women and millennials, demand for impact investing products is projected to increase, which means that it will be important to make these new investors aware of USCI opportunities.
The conversations at this event just scratched the surface of the issues, challenges, and opportunities currently facing the USCI industry. In order to further the conversation, and invite increased participation, a national webinar will be held November 19, 2015, to continue exploring strategies for scaling USCI. Join us for Bringing Community Investing to Scale to learn about the growing field of U.S. Community Investing (USCI) and discuss key recommendations. Learn more and register at the Federal Reserve’s Connecting Communities® website.