Community Investing

Most socially responsible investors want to get the greatest financial returns from their investments, while encouraging corporations along the road toward corporate responsibility on social and environmental issues. But a growing number are looking for an even more tangible "social" return, in the form of direct positive impact on communities. Community investing, the least well-known sector of socially responsible investing, provides high impact social returns. These returns can be measured in the hope and well-being of neighborhoods in your city, or on the other side of the world.

Community investing directly addresses many of the most vexing problems facing humankind today: urban decay, rural poverty, economic disenfranchisement, declining public health, and hopelessness, both here and abroad in more than a hundred developing countries. While investing in corporations that act responsibly can help deal with many of the same issues, community investing is the most direct impact an investor can have on community well being. It is the primary venue for investing with your heart.

While not necessarily the first investment that social investors think of, community investments are extremely accessible, usually requiring a minimum of $1,000 commitment for as little as one year. Returns are generally vary from 0 to 5 percent and are selected by the investor. Community investments are usually made through a checking account, CD, or a promissory note (loan). Community investments are a valuable way to diversify a portfolio. But most importantly, community investing gives dividends in social returns measured in affordable housing, health clinics, day-care facilities, jobs, and other vital signs of community renewal.

The organizations that put community investment capital to work are known collectively as Community Development Financial Institutions (CDFIs). This grouping belies the diversity of programs that are represented, from small local non-profit funds to large banks and credit unions lending hundreds of millions of dollars. The range of CDFIs provides various investment opportunities, diverging in terms from where investment capital is applied to what degree of risk is involved. But they share in common putting your investment directly into the hands of those that need it most, people that cannot get access to capital through other conventional channels.

Community development loan funds, community development corporations, and micro-finance institutions, are all non-profit CDFIs, an important component of the sector. These institutions lend money where most banks will not - where it can have the most impact. There are more than 300 community development loan funds (CDLFs) in the U.S., providing loans to the most underserved communities at below market rates for affordable housing, small businesses, and community facilities. Borrowers pay below-market rates for the funds loaned to them, generally between 0 and 5 percent.

CDLFs use a variety of mechanisms to help protect your investment. These include technical assistance, careful selection of borrowers, and loan loss reserves. Loan funds provide loan recipients with the advice and guidance to make the loan work for them and repay it according to schedule. Careful selection of borrowers also helps identify those that will readily be able to repay the loan. These mechanisms work together to protect the funds of community investors, resulting in a 99 percent repayment rate by borrowers on over $700 million loaned out.

CDLFs also retain loan loss reserves, including grants from outside sources, which help absorb any loan defaults by borrowers. Other safety nets include investors that elect to take the "first hit," or the first loss of their principal should the CDLF experience losses beyond the loan loss reserves, and programs of "shared" loss so that any financial loss is spread evenly across investors.

Community development corporations (CDCs) are similar to CDLFs, and may include community loan funds within their programs, but the difference is that they are owned by members of the community. There are more than 2,000 CDCs, mostly concerned with improving housing and neighborhood revitalization. Some CDCs also accept investments by individuals, offering similar rates as those offered by CDLFs.

Although loans made by CDLF's of $50,000 or more may be necessary to improve low-income housing, or start a business, or open a day care center, $50 can make the difference between abject poverty and a sustainable income for individuals in some developing countries. Micro Finance Institutions (MFIs) provide these kinds of loans, often to the poorest of the poor. They usually include the technical assistance required to launch a sustainable enterprise, and may employ a "peer-lending" model that binds borrowers together in a support group to ensure their mutual success. MFIs are gaining more recognition in U.S. communities as well, although micro-loan amounts are considerably higher, reaching the thousands of dollars.

Community development banks and credit unions are the only CDFIs that are regulated and insured. They offer accounts and CDs with market-rate returns, but instead of investing their depositors' money wherever they can get the greatest financial return, these banks and credit unions dedicate their funds to local disadvantaged communities. They provide loans and other banking services to these communities, and promote community revitalization programs.

The biggest difference between community development banks and credit unions is that the former are for-profit institutions, while the latter are non-profits. There are only a handful of community development banks in the U.S., led by South Shore Bank, which more than 25 years ago revitalized a failed bank to directly serve Chicago's beleaguered inner city. Community development credit unions are more numerous, ranging from small local operations to the largest, Self-Help Credit Union in South Carolina, with $425 million in assets.

Many of these CDFIs allow direct investment for individual investors, and if your object is to make the most difference with a portion of your investments, this is your best bet. Another option for a community investment portfolio is to use an intermediary that offers notes that are part of a larger pool of CDFI investments. Calvert Foundation has pioneered this approach, acting as an umbrella group for hundreds of programs that improve people's lives and communities across the country. In addition to the safety nets provided by the individual CDFIs, this approach offers the advantage of active monitoring and diversification.

The community investment options listed here provide a direct link to the solutions to economic and social problems facing communities in the U.S. and around the world. Affordable housing lending programs allow low-income communities to break from the vicious cycle of poverty and impoverished environment, providing pivotal support on the road to homeownership. Small business development lending promotes business growth in disadvantaged communities, with emergent benefits in terms of jobs, education, neighborhood pride, and economic independence. Community development supports facilities that benefit these same communities, including key social resources such as health clinics and daycare centers.

A small number of mutual funds are now exploring community investing as a way to diversify their own portfolios and improve their social impact. These funds are allocating a small portion of fund to variety of community investments so that the overall impact on the total return of the fund is small. This is a positive development, and one more important variable to use in choosing mutual funds.

Community investing is an important way to bring the human element fully into the realm of socially responsible investing, and another way to diversify any portfolio. And remember, every dollar of your investment can be used to promote affordable housing, business opportunities, and social infrastructure that all communities thrive on.