What Is Community Investing?
In finance, the term “community investing” refers to institutions and investment products that are intended to support economically disadvantaged communities.
In the United States, for example, there are several types of Community Development Financial Institutions (CDFIs), such as community development banks (CDBs) and community development credit unions (CDCUs). These institutions provide capital to underserved communities through personal credit, real estate development financing, business loans, and other financial products.
Key Takeaways
- Community investing is the practice of allocating capital to low-income communities.
- It is typically achieved through various financial intermediaries and investment products.
- The practice has become increasingly popular throughout the world, driven in part by coordinating institutions such as the United Nations Principles for Responsible Investment (PRI).
How Community Investing Works
Today, community investing forms part of a larger trend in the investing community. Increasingly, both retail and institutional investors have come to view social and environmental impacts as a central consideration in their investment decision-making process.
Under the framework of the United Nations-based Principles for Responsible Investment (PRI), for example, over 3,500 participating financial institutions have pledged to steer their portfolios toward investments with high environmental, social, and governance (ESG) factors. As of March 2020, those institutions collectively represent assets under management (AUM) of over $103.4 trillion.
Yet while community investing is part of this global shift toward responsible investment practices, it also has a specific meaning in the United States. In 1994, the United States Congress passed the Riegle Community Development and Regulatory Improvement Act, giving rise to the Community Development Financial Institutions Fund (CDFI Fund). Through this new institution, financial service companies could apply for tax credits and other incentives in order to help fund investments in economically disadvantaged communities throughout the United States.
Real World Example of Community Investing
As of July 2020, there were nearly 1,030 financial institutions delivering various services to underserved communities that received certification from the CDFI Fund. Of these, roughly half consisted of loan funds, which are institutions that pool capital from investors in order to lend money to entrepreneurs in relatively impoverished communities; while about 40% consisted of CDFI-affiliated banks and credit unions that use depositors’ funds to support the communities in which they reside. Altogether, there was roughly $141.2 billion invested in CDFI-certified institutions as of 2019.
Increasingly, there are also some fixed income and alternative investment vehicles that specialize in community investing. For example, the Community Investment Note—offered by the non-profit financial firm Calvert Impact Capital—is a fixed income security that allocates capital to various community investment initiatives. Since its inception in 1995, roughly $2 billion had been distributed through these notes as of December 2020.
