Progressive Investor Sample Article

Special Report: Investing in Community

Issue 6: March, 2003

Introduction to Community Investing

Community investing is a growing trend and a very attractive one during this difficult investment climate. Every investor should have a diversified portfolio to minimize risk and achieve a variety of investment objectives. Community investing can be a healthy part of a diversified portfolio. Instead of negative returns in the stock market, depending on the investing vehicle you choose, you can earn a guaranteed market rate return.

The Social Investment Forum's 2001 Trends Report on Socially Responsible Investing reports that community investments grew by over 40% between 1999 and 2001. As of mid-2001, assets in community investment vehicles stood at $7.6 billion.

What is Community Investing?
When you put your money in a bank, it doesn't just sit there waiting for you to take it out. Banks make money by loaning and investing your money; seldom do they ask you what projects you want your funds to support. Your conventional checking account funds could be financing construction of a natural gas pipeline in the rainforest. They could be loaned to a company embroiled in sweatshop labor in China. Your CD might support construction of a big box store in your hometown; forcing small locally owned businesses to close.

Community investing provides financing for economically disadvantaged people in the U.S. and abroad that are traditionally underserved by financial institutions. It can help people normally deemed "unbankable" - a group of black farmers in South Africa, low-income housing developers in Kentucky, or the owners of a small food co-op in Oregon. They are too poor, too inexperienced or too high-risk to receive a loan from a traditional financial institution, but with loans from community development institutions, they can reach their goals.

That's why the Social Investment Forum Foundation and Co-op America have launched the 1% in community campaign. If every socially responsible investor moves 1% of his or her assets into community investing, it will add $10 billion to rebuilding low-income areas around the world by 2005. The Calvert Foundation calculates this can finance 10 million U.S. micro-enterprises (45 million worldwide) or almost 2 million small businesses. Quite an impact!

Many institutions and investment professionals participate in the 1% campaign. Investing in them is another way to contribute to community investments. Large institutions like the General Board of Pensions of the United Methodist Church and Fannie Mae Foundation, for example, participate. Many SRI advisors participate, among them Progressive Asset Management, Progressive Investment Management and Trillium Asset Management. And many SRI mutual funds participate including Domini Social Investments, Portfolio 21, and Walden Asset Management.

California Public Employees' Retirement System (CalPERS), the nation's largest pension fund with $132 billion in assets, reports its Single Family Housing Program is single highest returning investment category for the past 10 years. The program has returned over 20% a year since inception ($500 million) while building 32,000 homes in 200 California communities. Over the last three years, the strong performance of these community investments has cushioned against the poor performance of equity investments.

How Community Investing Got Started
Race riots during the 1960s shook the foundation of America's urban core but it also planted the seeds for community investing - a new economic movement dedicated to rebuilding and supporting impoverished communities. It started largely from the efforts of religious groups.

"We were concerned about racist policies and how they kept people poor. We realized there was a need for social justice beyond charity," explains Sister Corrine Florek, of the Adrian Dominican Sisters, one of the pioneers of community investing. Instead of giving grants they started calling community groups asking them if they could use a loan. This group of fewer than 10 nuns began loaning their retirement money, charging minimal interest, with no assurance they would ever get it back.

"It was a total risk. Collateral was not a word in our vocabulary," Florek recalls. "We just had a promissory note that said the amount loaned and the date it would be due. We learned by doing."

The Sisters first issued loans of $5000 - $10,000 to borrowers who generally couldn't qualify for or afford a loan from a traditional financial institution. 100% of the early lendees paid them back, with interest. Today, 200 loans later, their loans average $35,000 and their loan fund stands at $3 million!

In 1977 The Community Reinvestment Act passed, which requires federally insured banks to shift part of their funds toward community investment. In the mid-80s, the Interfaith Center on Corporate Responsibility (ICCR) connected a wide range of congregations through the Clearinghouse on Alternative Investment, a network that encourages community investment in low income and minority communities around the world.

Today, there are about 40 community banks, 200 community credit unions, 200 community loan funds and about 70 community venture capital funds. The most recent National Community Capital survey finds that this money has financed 125,000 housing units, 16,000 businesses, and 2300 Community service organizations, while creating 150,000 jobs.

Frequently Asked Questions

How can I get involved today?
You can achieve the 1% goal just by opening a bank account with a community development bank or credit union. Community development banks offer competitive interest rates and are federally insured up to $100,000 - just like any other bank. Thanks to electronic banking you can deposit with any bank, anywhere. Your paychecks can be deposited automatically and you can move funds around electronically. Keep the minimum amount necessary for a free checking or savings account at a conventional bank that has lots of ATM machines. Or write a check from your community bank to the conventional bank once a month to cover your cash needs.

Choose a bank based on what you what your money to support. If you want your money to be invested locally, choose a bank in your geographic area. Or choose a bank that specializes in your area of concern whether it's supporting conservation initiatives, green businesses or affordable housing.

What other options are available?
Community Investment Funds. These are generally longer-term investments (one to five years), offer market or below-market returns (0-4%), and are not insured. These vehicles have the highest impact of all the options because investor money is tied up for a longer period of time and the money can reach the highest risk borrowers who need it the most.

* Community Development Loan Funds (CDLFs) provide affordable financing for housing and economic development projects, cooperatives, and community- based nonprofits. Although they are not insured, they use grants and loss reserves to help protect investors. Most CDLFs have a minimum investment, averaging around $1000. Investors generally receive interest payments quarterly or annually; once the allotted time is up, the CDLF repays your money. Most set a minimum loan period of at least one year. If you can't afford the minimum, most funds accept deductable charitable donations in any amount.

* Microenterprise Loan Funds provide small loans and training to entrepreneurs in the US and overseas.

* Community Development Venture Capital Funds (CDVCs) provide loans to businesses that create jobs in low-income communities. Like traditional venture capital funds, CDVC funds invest in companies with strong management, impressive growth potential, and the prospect of high financial returns. Unlike traditional funds, they also consider the number and quality of jobs that will be created and the business's impact on the community. CDVC funds also provide extensive management assistance. They may sit on a company's board of directors, help win contracts, assist in designing budgets, and help line up more financing. Minimum investments range from $50,000-$500,000 and typically run for 10 years. Loans to nonprofit CDVCs may have lower minimums. The CDVC industry is young and funds typically haven't completed full investment cycles, so there are no definitive statistics on returns. More mature funds indicate they expect returns in the 8-12% range.

* Pooled Investment Portfolios are a great option if you want to diversify your community investments. You invest through one facility, which spreads the money out within a pool of institutions that serve many low-income areas in a variety of ways. By purchasing a Community Investment Note through the Calvert Foundation, for example, you can even specify a geographic region or international program for your money.

* Mutual Funds. Some SRI funds devote up to 10% of their assets to community investing, and two even put 100% of their assets into underserved communities.

Why not just give the money to charity?
Community investments can have a much higher impact.

Example: New Forest Vegetable Project
In South Africa, A U.S. community loan fund gave 16 black women in South Africa the start they needed. As you can imagine, bank after bank turned the women away when they found they had little farming experience, hardly any resources, and barren land to work with!

What they did have was persistence and a local community development institution called the Bushbuckridge Local Business Service Center (BLBSC) agreed to help them. BLBSC secured a commercial bank loan on their behalf by turning to a U.S.-based international guarantee fund established specifically for that purpose, Shared Interest.

Shared Interest helped BLBSC get a $709,000 loan for the women, and they launched the New Forest Vegetable Project. The project quickly became successful, growing 175 tons of top-grade tomatoes in their first harvest.

Today, three years later, each woman owns her own greenhouse and employs four other women - 80 women in total. Their tomatoes and peppers are sold throughout the country via a farming network.

Investors who are willing to loan their money for 5 years, with 2% interest, fund Shared Interest. The fund started in 1994 and currently manages $6.2 million from 140 individual and institutional investors. Though the fund is not insured, Shared Interest has repaid every loan.

++++

Further Resources:

Community Investment Guide: lists community investment banks/ credit unions, loan & venture funds, mutual funds.

http://www.communityinvest.org: see the streaming video!

Social Investment Forum: database of social investment advisors and mutual funds.

Association for Enterprise Opportunity: www.microenterpriseworks.org

National Community Capital Association: www.communitycapital.org

Community Development Venture Capital Alliance: www.cdvca.org