December 3, 2023

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A real estate cooperative just made its fifth land acquisition in an effort to stave off gentrification and keep residents of Oakland, California, where they are. Or a solar system for a rural school in coal-rich Appalachia struggling with energy costs.

Both initiatives are projects backed by regional funds focused on small-scale impact investing. While players like BlackRock have more than $60 billion in assets in ESG-focused funds, smaller players are targeting the growing market of wealthy clients in hopes of creating more social-impact portfolios . The goal is to invest locally, keep funds within the community, and establish more immediate measures of impact.

Tiffany Brown, co-founder of Chordata Capital, said: “Once the investment capital is in the hands of the community, they work hard to repay it, and once the loan matures, it goes back into our client’s portfolio, doing the same again. things,” said a New York- and San Francisco-based firm that bills itself as “anti-capitalist wealth management.” “It’s really sustainable.”

Impact investing, part of the $2.5 trillion environmental, social and governance market, focuses on visible, demonstrable positive social and environmental outcomes by investing money in local communities.

Global investment in impact assets was $636 billion in 2020, up from $505 billion the previous year, according to a report Report By the International Finance Corporation, part of the World Bank. The increase was largely due to increased awareness of climate change and societal challenges during the COVID-19 pandemic, the report said.

Chordata Capital saw an increase in client numbers following the nationwide protests in 2020 over the murder of George Floyd. The firm manages about $130 million in assets, and its investments include funds that make loans to nonprofits that channel investments into the community, as well as direct investments in small businesses focused on racial justice. Its client base is Young millennials in their 20s and early 30s, who inherited wealth.

“They’ve decided they have more than enough money and they’re looking to make an impact and transfer wealth and power into the community,” said Chordata co-founder Kate Poole.

Andres Vinelli, chief economist at the CFA Institute, said there is a market for investors who want to keep their money in specific communities. “This can be an important role for funds and investments to ensure capital is retained and productive in a region,” he said.

But measuring the impact of impact investing is a challenge. As with ESG, there are no standard parameters that can assure investors that their investments are indeed doing as expected. Impact measurement takes longer than assessing the financial return of an investment; it also involves tracking job creation, business growth, and diversity, among other things.Statistician poll It was found that 48% of respondents considered developing rigorous and reliable impact benchmarks to be a challenge.

Created by the International Finance Corporation and the Global Impact Investing Network, the Joint Impact Indicator (JII) is a measure designed to provide a common basis for measuring and reporting impact around climate, gender and employment issues. In 2021, 50 global impact investors have committed to endorse and adopt the framework.

With impact investing, smaller companies and funds have the advantage that they can directly interact with portfolio companies and measure results.

Integrated Capital Investing, an Aptos, Calif.-based firm that works with funds and foundations to raise capital, found that the funds were primarily focused on technical assistance, professional development and grant support aimed at mitigating market and other risks.

These funds also reverse who decides where capital flows by involving community members in decision-making.Comprehensive published annually the list Twenty-five local funds focus on community investing, such as the Black Farmers Fund, which is dedicated to Black farmers and food entrepreneurs working in the Northeast.

The Invest Appalachia Fund works with local nonprofits and community associations in Appalachia to evaluate which organizations to invest in, providing loans ranging from a minimum of $10,000 to a maximum of $4 million.

“It’s going to be long-term,” said Andrew Crosson, the fund’s chief executive. “We’re also helping them (businesses and projects) make those adjustments over time.”

The regional fund recently raised $19 million and aims to raise $40 million by the end of the year.

According to the International Finance Corporation, 76 impact funds were launched globally in 2020, aiming to raise more than $21 billion. There were 1,001 privately managed impact funds in 2020, compared to 887 in 2019.

Impact investors have different financial return expectations. Most of Chordata Capital’s clients are interested in high-risk investments and are willing to accept returns at zero or below market rates.But in 2020 poll The Global Impact Investing Network found that most impact investors seek market-competitive rates of return.other poll Statista found that a lack of appropriate capital on a risk/reward scale is cited by more than half of respondents as a significant challenge facing the industry.

For the Invest Appalachia fund, even with below-market returns, the solution to attract investors is to diversify its portfolio across industries, from construction and real estate to local businesses and solar projects.

“It’s not for everyone,” Crosson said. “It’s for investors who have the ability to keep their investment for seven years over the life of the fund.”

Integrated Capital Investing selects funds that vary in structure and approach to financial return and raise capital from grant, recoverable grant, investment and equity evergreen funds. Some funds offer dividends or royalties, while others return 0% to 8%.

Overall, impact investors are seeing returns. According to the Global Impact Investing Network, portfolio performance overwhelmingly met or exceeded investors’ expectations for social and environmental impact, as well as financial returns.

“Today we talk about ESG and impact investing,” Vinelli said. “But importantly, it represents a trend in business sense and investment value that is here to stay.”