Social impact investing can enlist companies, philanthropic institutions, and residents in a shared sense of destiny.
In his book Glass House: The 1% Economy and the Shattering of the All-American Town, Brian Alexander chronicles the rise and fall of his hometown of Lancaster, Ohio. The factory town was the headquarters of the glassware company Anchor Hocking, once the world’s largest glassware manufacturer. But the firm was acquired by the first of a series of out-of-town corporations in 1987, and the Lancaster’s fortunes swiftly declined with it.
It’s an often-repeated story: Global economic forces lay waste to a hometown company whose corporate identity was intimately tied to its host community. It’s big challenge for local leaders trying to create a unity of purpose within a city. As locally owned and controlled companies become the exception rather than the rule, how can a city restore the local benefits such firms once bestowed, spark investments in the region, and unite residents with the business and philanthropic sectors under a shared sense of destiny?
Social impact investing may well be part of the answer. The idea is to invest money in companies that deliver social returns as well as financial ones—and it’s really taking off. New financial tools are available and investors are seeing profitable returns in developing social good.
It’s estimated that $1 in $5 of assets under management falls into the broad category of responsible investing. Most of this involves screening investments for renewables over fossil fuels, for example. Within this category are mission-related or social impact funds, which are targeted toward certain objectives, like affordable housing or microfinance, and most of this investment is international. In line with standard practice, these funds are broadly diversified and include a host of projects with a range of risk. And the returns for these funds so far have been good. Looking at investment funds made in the 1990s, we’ve seen promising returns of 6.9 percent compared to 8.1 percent for similar non-social impact funds. There is a real opportunity to wed financial and social impacts with good economic value.
The environment for mission investing is also improving. Millennials are embracing social entrepreneurship. The regulatory environment has changed, allowing fiduciaries to consider social as well as financial returns in their investment calculus. New metrics are being constructed to lend credibility and trust to social impact investing—like measuring impact returns or giving credit ratings to such funds. Gigantic swaths of capital could soon be redirected with a double bottom-line: one for profits and one for social impact.
Mission-driven philanthropic foundations are leading the way. To understand how much money is theoretically available, one must understand how these funds work. A sort of prime directive for charitable institutions requires that they pay out 5 percent of a fund each year, investing and maximizing value for the remaining 95 percent. Attitudes are changing about the deployment of that remainder. In fact, the investment of the 95 percent can be closely linked to program priorities. The Heron Foundation deserves praise for aligning all 95 percent of its endowment to mission objectives. Other nonprofits, such as the MacArthur and Ford foundations, among others, have committed to doing more, but at lower percentages. A survey of all foundations shows that a vast majority are at least interested in doing more social impact investing. Add up all the foundation assets in the United States—nearly $1 trillion—and we’re talking serious money for mission-related investing.
Cities should encourage these funds to target their hometowns for investment. Place-based funds struggle with the age-old assumption that one must diversify broadly on a global, or at least national scale. There’s also the risk of local public officials abusing a place-based platform. But there is a way to balance risk. Regional investment funds, for example, could include investments in affluent and poorer neighborhoods. Existing institutional investors, university endowments, community foundations, and residents could contribute just 1 percent of their available assets to regional funds. This is exactly what the Bay Area Impact Investing Initiative is trying to do—create a Bay Area fund with diversified investments across the region where anyone, including Google or the Zuckerbergs, could put a small portion of their savings.
This is no easy task. Work remains in constructing portfolios, doing due diligence, and connecting funding to local community interests and funding capacity. There also needs to be a hefty chunk of cash at the onset, perhaps from some deep-pocketed local visionary, to fund the risky first-go at it to take the hit if some investments go under.
But communities are moving. Benefit Chicago, a place-based fund seeded with MacArthur Foundation money, is setting up its first deals. The Calvert Foundation created a program called Ours to Own where anyone can invest as little as $20 into local funds in Baltimore, Denver, or Minneapolis. Each fund supports a handful of local small businesses, NGOs, or affordable housing projects. The startup Neighborly allows you to buy into bonds at small denominations for projects of your choice like your local neighborhood elementary school or hospital. Compare this to how municipal bond markets usually work—where each sale comes in denominations of tens of thousands of dollars, so only the wealthy or institutional investors participate.
City leaders could certainly do more to help. They could, of course, take the lead in setting up city-based investment portfolio intermediaries or set up online portals for local capital to find local deals. They could do an education campaign letting local residents know how to use their savings or pension to help their community. Cities could build on the steps of Tucson and Phoenix and move their daily banking operations to financial institutions already heavily invested in that community. Or they could create a tax break for investing stocks in local businesses or the local place-based fund. This is common practice in Canadian provinces, where investing locally gets you as much as a 50 percent tax credit. To my knowledge, nothing like this exists in the United States.
Place-based investing has never been easy, but attitudes are changing and financial instruments are being developed. If cities can deploy a local community’s total financial firepower to critical, mission-related activities, the overall impact will be transformative.
CORRECTION: This article originally misstated the name of the Bay Area Impact Investing Initiative.