Think it’s a myth that you can make a societal impact while generating a financial return? Impact investing doesn’t have to be about trading a financial loss for a social gain.
In fact, it can be an effective strategy to improve the stability of your portfolio while supporting local communities across the country.
For example, investing in Community Development Financial Institutions (CDFIs) allows investors to inject capital into financially underserved communities, providing loans and other financial resources to underrepresented borrowers while diversifying the investor’s portfolio.
CDFIs are federally-certified credit unions, banks, bank holding companies and loan funds that are committed to serving low-income communities that don’t have equal access to loans and other financial services.
Although CDFIs are currently not well known by mainstream investors, they have received consistent investment over the last two decades from large organizations such as banks and foundations.
Today, CDFI investing has never been more accessible thanks to technology platforms like CNote and the increasing availability of note programs issued by CDFIs.
Overall, this means more investors are getting involved with CDFIs and more investment is flowing into communities that CDFIs serve.
How investing in Community Development Financial Institutions benefits Main Street America
CDFIs are helping to keep the American promise alive: that everyone should have an equal opportunity to achieve prosperity and success through their own talent and hard work.
CDFIs play a critical role in funding minority- and women-owned businesses in communities across the nation.
Investing in the CDFI industry is resonating with an increasing amount of investors, especially as the wealth gap continues to grow, leaving many low-income communities behind.
McKinsey forecasts the impact investing industry to grow to more than $300 billion in 2020.
And the CDFI industry has grown from fewer than 200 organizations with total assets of $4 billion in 1997 to approximately 1,130 CDFIs with over $136 billion total assets today.
Understanding the history of Community Development Financial Institutions
So why is the interest in CDFI investing growing so much? To fully understand the future of CDFIs, you have to look back to the roots of the industry.
In the 1960s and 1970s, community advocates fought to end redlining practices and redirect capital back into low-income rural and urban areas by forming community-controlled banks.
In the 1990s, after the U.S. Department of the Treasury’s Community Development Financial Institutions Fund (CDFI Fund) was established, credit unions expanded significantly through government funding.
Traditional lenders were encouraged to support these activities and communities through revised CRA regulations.
The CDFI Fund’s mission “is to expand economic opportunity for underserved people and communities by supporting the growth and capacity of a national network of community development lenders, investors, and financial service providers.”
By investing in CDFIs, investors help fund “Main Street America” by providing small business loans, mortgage lending for first-time homebuyers, affordable housing projects, opportunities to build credit, and social service facilities.
CDFIs also provide financial education and technical assistance, credit counseling, and small business planning. This allows the entire society to benefit from the increased prosperity of underserved communities.
What Community Development Financial Institutions unlock for individual and institutional investors
Investing in CDFIs works for both individual and institutional investors who are looking to invest in equal opportunity and long-term community growth while generating a financial return.
Whether you’re an individual or institutional investor, adding CDFIs to your portfolio allows you to align your investments with your values, increase your portfolio stability, and contribute to financially underserved communities throughout the country.
Institutional investors: Community Development Financial Institutions and community foundations
Given the local nature of CDFIs and the diverse projects they fund, they can readily match the thematic and place-based objectives of investors community foundations, who care deeply about a specific geographic region and/or cause.
Investing in CDFIs can complement social and environmental grantmaking programs while still offering the foundation a financial return in the investment phase.
What’s even better is CDFIs give foundations a way to reduce risk by spreading the foundation’s investment over a diversified portfolio of loans.
Meanwhile, foundations can directly invest in local businesses without delivering loans and managing risk on an individualized level.
Individual investors: Community Development Financial Institutions note programs
CDFIs have an enormously positive effect on the communities they serve. CDFIs promote responsible first-time homeowners, locally-owned businesses, better neighborhood facilities, and many other critical improvements.
CDFI investing allows individual investors to support the causes they care about while putting their capital to work.
Investing in CDFI note programs or platforms like CNote that pool investor funds and lend them to a diverse group of CDFIs that are working to improve community development is a great way to truly make an impact.
Final thoughts
The future of CDFI investing and the impact investing industry in general looks bright as more and more investors seek to give their money more meaning.
Many CDFI loan funds are now registered to offer their note programs in multiple states. And as investors demand easier access to impact investments and CDFIs more financial products and fintech platforms like are rising up to fill that gap.
Overall, the aim is to build a more inclusive economy where everyone has equal access to capital and the opportunity that brings.
CDFIs have a proven history of delivering on that promise and being great stewards of investor capital along the way.
