Community Investing

Community investing is an initiative to drive retail and institutional investments toward developing the means for providing social and environmental advantages to low-income groups and communities. Such investments are often mediated by financial intermediaries like Community Development Financial Institutions (CDFIs), including Community Development Credit Unions (CDCUs) and Community Development Banks (CDBs). They are governed by organizations like the United Nations-based Principles for Responsible Investment (PRI). Citi's community investing and development initiatives are a good example, as its constant efforts aim to empower US communities.

The key players in such investment practices are as follows:

1. Community Development Financial Institutions (CDFIs): The CDFI comprises CDBs, venture capital funds, loan funds, and CDCUs, which are specialized organizations providing financial and capital solutions to deprived communities.
2. Socially Responsible Investment Firms: These companies develop investment strategies in the socially responsible investment regime, ESG criteria, and impact investing sector.
3. Individual Investors: Retail investors often include community investment during the composition of their overall investment portfolio by allocating funds to such socially responsible mutual funds, community building loan funds, credit unions, etc.
4. Government Agencies: The government often makes favorable policies and regulations to support community investing alternatives, including the provision of tax credits, incentives, and grants to such investors.

Both retail and institutional investors can pool funds into community investment through financial intermediaries. Some of the primary strategies for community investing include:

1. Socially Responsible Investment (SRI): The SRI approach aims to emphasize the social and environmental consequences of an investment decision, together with the assessment of its financial returns.
2. Impact Investing: Such a strategy focuses primarily on creating a social or environmental impact as the agenda of any investment while achieving the desired financial goals.
3. Environmental, Social, and Governance (ESG) Criteria: The ESG investing strategy purely considers the non-financial aspects, including the ethical and sustainable outcomes. Thus, it aims to achieve social, environmental, and governance benefits from investments.
4. Triple Bottom Line (TBL) Approach: Under this strategy, investors consider the three factors, namely, the social, environmental, and financial returns of the investment, equally.

Community investing is a new but prevalent trend among investing communities. Some of its examples are as follows:

Example #1

Nexamp, a leading provider of community solar, recently announced a significant capital raise of $520 million. This funding round was spearheaded by Manulife Investment Management, alongside existing investors Diamond Generating Corporation and Generate Capital. The capital allocation aimed to expedite the deployment of Nexamp's national community solar project pipeline and to foster developer partnerships in both new and established markets.

The company currently boasts a customer base of nearly 80,000, with over 1.5 gigawatts (G.W.) of operational or construction projects. With several gigawatts of projects in its pipeline across more than 20 markets, the company has the potential to cater to over one million customers in the foreseeable future. In a landmark move in August 2023, Nexamp placed the most significant procurement order in the history of the U.S. community solar sector, committing to purchase 1.5 GW of solar modules from Heliene. These modules, manufactured in North America, originate from Heliene's facilities in Ontario, Canada, Florida, and Minnesota.

Favorable legislation, such as the Inflation Reduction Act, has further bolstered the company's growth trajectory. This act provides significant incentives for projects catering to low-income customers and those situated on brownfields. Nexamp's commitment to innovation and sustainability is echoed by investor Scott Jacobs, CEO and co-founder of Generate Capital, who views Nexamp as a trailblazer in the distributed energy revolution in the US

Example #2

Zolve, a neobank startup that provides financial services to US immigrants, was incepted in August 2021. It secured a $100 million investment through warehouse financing from the Community Investment Management (CIM) in October 2023. The funds are intended to be used to extend credit to U.S. migrants from different geographical regions and demographic backgrounds, thus empowering them financially. These immigrants from the UK, Australia, Canada, and India can get bank accounts, debit cards, and high-limit credit cards through Zolve in the US.

Example #3

Suppose a retail investor, Mrs. Morris, wants to diversify her portfolio by including community investing as a product. She took the help of her investment advisor, who suggested she buy the debt fund from ABC Bank Ltd., which is extending credit to XYZ Hospitals for developing and constructing hospitals in Texas to provide low-cost healthcare services to low-income communities.

Investing in communities makes the world better; it has the following advantages for investors, communities, and society:

• Social and Environmental Sustainability: The primary goal of such investments is to create social and environmental impact by contributing funds for the benefit of the underprivileged.
• Upliftment of Low-Income Communities: It aims to support and develop means for the growth of low-income or deprived communities.
• Growth of Local Businesses: Such initiatives also ensure capital allocation to foster the progress of local businesses.
• Job Creation: When businesses grow, they create multiple job opportunities in various sectors like education, healthcare, housing, finance, etc.
• Diversification: Such investments diversify the portfolio by including funds that aim at social and environmental impact.
• Competitive Financial Returns: Some community investments offer highly competitive returns compared to traditional investments when the project becomes successful.
• Building a Better Tomorrow: When the investors put money into the upliftment of the people, society, and communities by investing in infrastructure and services that help them grow, they take the initiative toward building a promising future for the nation.

While many institutions and retail investors find community investment options fascinating, they need to be careful of its various risks and challenges, as discussed below:

• Lack of Transparency and Standardization: Many of these investment vehicles fail to maintain sufficient transparency or disclosure of financial benefits to facilitate risk and return comparison of different options and the social impact of these decisions.
• Low Financial Returns: While such investments primarily aim to serve social and environmental causes, they fail to provide fair returns to the investors.
• Inadequate Social Impact: Some funds that may offer high returns fail to create the desired social or environmental impact as promised, leading to non-fulfillment of the investors' social service goals.
• Difficult To Measure Performance: Again, due to limited standardization and transparency, it becomes difficult for investors and analysts to evaluate and track the performance of the community investments.
• High Investment Risk: These funds involve considerable risk related to liquidity, credit, market, and currency, emphasizing the need for proper due diligence before investing.
• Regulatory and Compliance Problems: The government provides various benefits to investors for community investing; however, they need to comply with the applicable regulations to avail of these benefits.
• Time-Consuming: Such decisions are time-consuming since they require consideration of the social goals or impact, along with other factors, like risk and return of the funds, before investing.