Arabella Philanthropic Investment Advisors

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Mission Investing: Leveraging Additional Assets for Community Development

By investing in community initiatives while maintaining grant support, donors can help meet increasing demand for crucial development projects—and maximize the impact of their own limited resources.

The Strategy

Mission investing has emerged as a powerful strategy for aligning philanthropic and financial goals. As the practice of making financial investments to produce positive social or environmental returns, mission investing complements traditional grant making and enables donors to further their impact. With grant budgets down, donors now have more reason to leverage a greater portion of their assets in pursuit of their missions.

FACT: While mission-driven organizations have more than doubled their investments in community development since 2001 to $25 billion, the credit squeeze threatens to undo valuable gains in the sector.²

Mission investments are possible whenever an organization promoting a social or environmental cause has a need for capital which is coupled with the prospect of repayment or return. They can cover the full spectrum of asset classes and address a wide variety of issues. A mission investor can choose to target financial returns ranging from market rate to below market rate, depending on the desired risk, financial return, and social return profile.

A microloan to a small-scale entrepreneur, an equity investment in clean energy technology, or a guarantee that secures a loan for a grantee to construct a new building could all qualify as mission investments. The common element in all such investments is the mission component—such as the pursuit of community development.

CDFIs Experiencing Increasing Demand¹

Source: CDFI Market Conditions Report, First Quarter 2009

The Problem

Low-income communities have historically been underserved by financial institutions, making it difficult for people and organizations in such communities to access capital that could be used to grow businesses, construct community facilities and improve neighborhoods. The challenge has only worsened recently, as traditional banks have further restricted the flow of capital due to their own financial pressures.

This additional strain comes at a time when low-income communities need more financial services. Stimulating employment through small business growth, redeveloping foreclosed homes, and increasing the stock of affordable housing all require capital.

Without reducing their grant support, mission investors can play a critical role in meeting this demand. They can use their investable assets to provide financing directly to the local organizations and individuals in need, or through community development financial institutions (CDFIs), mission-driven institutions that provide financial services in underserved areas. By demonstrating the continued viability of these investments, donors can also help attract traditional financial institutions back into this space.

Mission Investing Continuum

Source: The F.B. Heron Foundation

The Opportunity

Provide access to affordable financial services. Make a deposit with a community development bank or credit union that extends affordable savings and credit options to low-income individuals. Such banks can provide alternatives to predatory lenders while offering market-rate returns on your account.
Stabilize communities struck by the foreclosure crisis. Extend a low-interest loan to a nonprofit housing agency that is acquiring foreclosed homes and turning them into affordable housing. This process addresses neighborhood blight even as it increases the supply of affordable housing.
Support job creation. Stimulate job growth in low-income communities by investing in a community development venture capital fund. These funds invest in small- to medium-sized businesses with high growth potential in economically distressed areas. Of course, you can also make direct equity investments in individual businesses.
Enable cash-strapped grantees to continue serving the community. Talk to your grantees about their short-term financial needs. With many public and private funders delaying grant disbursements due to financial pressures, some of your grantees may be facing cash-flow challenges. By working with a commercial lender to guarantee a loan for a grantee, you can ensure that it has enough cash on hand to continue its valuable work until the grants arrive.

Additional Resources

The Community Investing Center contains resources and information about investing in community development, including a searchable database of past investments.
More for Mission is an association of foundations engaged in mission investing that provides resources on the topic including a regular newsletter, original research, press coverage and information about upcoming events.

1. As measured by the change in the number of new financing applications.
2. CDFI Data Project, “Community Development Financial Institutions: Providing Capital, Building Community, Creating Impact: Fiscal Year 2001,” http://cdfi.org/uploads/news/CDP20030701.pdf. CDFI Data Project, “Community Development Financial Institutions: Providing Capital, Building Community, Creating Impact: Fiscal Year 2007,” http://www.opportunityfinance.net/store/downloads/cdp_fy2007.pdf.