Shari Berenbach is executive director of Calvert Social Investment Foundation.
Many social investors today are torn between the need to help others and the desire to make a high return. Is it possible to do both? Shari Berenbach discovers that more and more investors are finding community investing to be the ideal middle ground
In the rush to prove that social investors can achieve double (financial and social) or even triple (financial, social and environmental) bottom lines, some have failed to question whether you really want to press for superior financial returns while achieving maximum social impact. Might such financial return expectations lock out worthwhile social objectives that earn a softer return?
For example – what about loan capital for a street vendor in Haiti or small farmer in Afghanistan? Both might feed a family and help the region recover from political strife, but could any yield adequately compensate for risk?
Financial professionals have long lived in a binary world that singularly embraces maximising financial return and instills a "Chinese Wall" between making money and giving it away. There is a growing body of experience, however, that shows a continuum is emerging that lives somewhere between "get rich quick" and "give it all away".
Community investing defined
Some of us call that space in the middle community investing. Simply put, community investing harnesses the rigour and discipline of investment and puts it in service of philanthropic goals. By using investment as a tool for social change, you forge a sustainable path that fosters entrepreneurial initiative in place of grant dependency.
Community investing in the developed world might be used to finance affordable housing, small business investments, charter schools and other non-profit providers of community service such as daycare or senior citizens homes.
In the developing world, community investment capital is sought for microfinance (tiny loans for the self-employed), Fair Trade cooperatives that pay farmers a fair wage, or organisations that provide basic products and services to those at the bottom of the pyramid who earn less than $2 per day.
All these sectors typically benefiting disadvantaged communities are underserved by the commercial banking sector in both the developed and developing world.
Many such initiatives are served by social enterprises, either non-profit or for-profit organisations driven by explicit social objectives.
Community investment was first embraced by the faith-based community and has been growing slowly by steadily over the past 40 years. The number of institutions and investment options has multiplied.
The Social Investment Forum in the US reports that in the last 10 years, community investment has grown at an annual rate of more than 38%, with international community investing initiatives growing at an even faster clip. What was once a small and under-recognised investing option is moving into the mainstream.
The financial case
The financial case for community investment is grounded in the recognition that by softening return expectations, it is possible to mobilise far more investment capital than would typically be given away by donors.
As the example below demonstrates, for the philanthropic "cost" of the gap between market rates of return and the modest return paid by a community investment, you are able to mobilise the full value of the investment, which is many times greater than the partial interest you give up when making a community investment.
There are many examples where community investment capital at softer returns or greater risk provides an important base layer of financing needed to encourage commercial capital to enter a transaction to benefit vulnerable populations. It is not uncommon for $1 of community investment capital to leverage $10 or $20 on commercial terms.
When you make a $20 donation:
- You give $20.
- Your $20 goes to work helping people.
When you invest $1,000 in a community investment at 3%:
- You may sacrifice $20 in interest.
- Your entire $1,000 goes to work helping people help themselves for the term of your investment.
The values case
Perhaps more compelling, however, are what we refer to as the core values of community investing. By investing (where the capital is returned with interest) as opposed to giving, there is a different power dynamic between the investor and the recipient. Investing encourages self-reliance and mutual respect. It prompts accountability and greater transparency of outcomes.
Ultimately, capital that is lent and returned creates a sustainable strategy with the potential to grow over time. It fosters dignity for vulnerable populations who are enlisted in working their way out of dire circumstances.
In community investing, you are likely to find two classes not dissimilar to what you might find in conventional financial markets. In both instances the risk-return value proposition is less than equivalent commercial yields.
The good news is that there is now substantial experience demonstrating that in the "fixed-income" bucket, investors can place capital, earn a modest return, significant social impact, and have considerable confidence that their capital will be returned. In the "equity" bucket, there is much greater risk being exchanged for potentially much greater potential social benefit.
The best option?
In the community investing world we don't consider one of these options better than another, it's really a matter of preference. While the average investor, who depends on savings, is best served by the fixed-income style community investments, others who are active in philanthropy may enthusiastically embrace such riskier investments because of their capacity to reach deeper into vulnerable communities or lever far more capital.
Philanthropists may be prepared to write-off a failed community investment as they might a grant, recognising that they have reached communities that they could not have otherwise, or that if the venture had succeeded, it might have achieved even more ambitious outcomes.
Of course, in the community investment arena there is a less developed market infrastructure, such as rating agencies, to allow investors to know for sure which class of community investment they are pursuing.
Just as community investment itself lives in the middle between investment and philanthropy, some community investment would fall between the fixed-income-like and equity-like buckets.
What's most important?
When considering community investment, like any other investment or philanthropic initiative, it is most important to walk into the transaction fully informed and with clear expectations.
If you are counting on getting your capital back, look for experienced names with substantial track-record and capital structures with adequate layers of protection built into the model.
Alternatively, if you are in a position to risk your philanthropic resources, there are many investment opportunities, particularly in emerging economies or troubled regions, where your capital could make a significant difference.
There are a growing number of intermediaries prepared to facilitate community investment transactions.
In the US, groups like ShoreBank, the Calvert Foundation, and Self-Help generate consistent positive results, while there remains plenty of opportunity for higher-risk investments into social enterprises seeking growth capital. Charity Bank and Shared Interests are two well respected UK intermediaries.
In the Netherlands, Triodos Bank has been investing for decades across a range of social investing areas ranging from environmental concerns to Fair Trade and microfinance, and Oikocredit is a leading intermediary for funding producer cooperatives and microfinance efforts around the globe. These are just a few of the many able partners available to attract community investment and to put it into action.
Community investing is becoming an increasingly attractive option for those investors seeking to use capital to create direct community action. With so much need, and so many good opportunities available, now is the time to consider community investment.