What is community investing?
Nearly 40 million Americans live in poverty, and 39 million lack such bare essentials as access to healthy food stores. Seventy-three million Americans rely on Medicaid, and nearly half of college students struggle to pay for food, while more than half of low-income Americans age 50 and older say they want a healthy diet but can’t afford it. If America is a land of plenty, there is a large majority of individuals who would say the flip side of prosperity is scarcity.
If you want your investment decisions to make a positive difference in your community while improving the lives of those around you, while your good works help endear others to your company’s brand, community investing may be the perfect option for you.
Community investing (CI) is a part of a growing effort to encourage people towards socially responsible investing. It aims to earn good returns for investors while contributing to causes that everyone in the community benefits from. Specifically, CI puts people’s investment dollars into local resources to provide safe and affordable housing, education, job opportunities, child care, financial counseling and healthcare, and other essential community services. CI even allows the investor to direct investment dollars toward a specific community, often their own. CI also enables investment in underserved communities that need an economic boost if there isn’t a particular area the investor wants to focus on.
Financial institutions that provide community investing opportunities specialize in helping individuals, groups, and businesses who otherwise couldn’t quickly obtain financing. These banks of money allow people the hand up to help themselves. According to experts at the Forum for Sustainable and Responsible Investment, community investing is one of the fastest-growing areas of socially responsible investing.
What are the advantages of community investing?
Community investing can be very rewarding when everything goes according to the financial strategy and goals investors set for themselves. Investors create wealth from the return on the investment while creating wealth for others and their communities by enabling them to take economic risks to get businesses started, projects begun, and community infrastructure improved. At its best, CI is charitable giving, but with the potential for investors to make an excellent monetary return on their investment. Additionally advantageous, if the CI investment loses money, it is often possible to deduct losses on an investor’s tax return. As long as the financial investment was in budgetary parameters, the investor will not be financially worse off than if they had donated the same sum.
Perhaps the greatest reward from a successful community investment plan is highly personal. Investors achieve results, and they can firsthand experience the joy that comes from improving the lives of individuals in their communities. Many investors even enhance their own living experience in their community if the investing is close to home.
Community investing, like all investment strategies, can also have its drawbacks. CI can entail higher risk as the money you’re often investing is in people and businesses that traditional financial institutions and lenders believe are too risky to lend to. Also, even though the investor is shouldering additional risk, it isn’t necessarily compensated with higher returns the way it would be in traditional investments.
An additional drawback is that CI restricts investment options, and many community investments are made in areas that provide low returns, including savings accounts and government bonds. CI investors often need to broaden their exposure beyond traditional CI low-return investments to earn a high enough return to meet long-term financial needs.
A good way to compensate for this drawback is to invest in the stocks of companies with a strong community focus or expand parameters to include the broader realm of socially responsible investments. Many investors find it makes the most financial sense to focus on community investing in only a portion of their portfolios. However, higher yields don’t mean an investor much check their moral compass at the door. Investing in companies should always be done with research into the business practices of the entity. Suppose an investor takes issue with specific business practices. In that case, they should not dedicate funds to the company, no matter how profitable, and this can be more time-consuming than traditional investing. Instead of just looking at risk, potential returns, and fees, you also have to take a hard look at whether the investment meets your standards for serving the community.
What are the different types of community investments?
Real estate and agency bonds
Investing in agency bonds is a highly recommended and lucrative form of community investing. Government agencies like Ginnie Mae issue agency bonds, and government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac help provide housing to people who otherwise couldn’t afford it.
GSE bonds, which help fund Fannie Mae and Freddie Mac, are not government bonds, so they are not backed by the full faith and credit of the U.S. government like Treasury bonds are. These GSEs are shareholder-owned corporations and must always be researched should research their bonds and evaluate their credit risk as you would other corporate bonds.
Agency and GSE bonds do have inflation risk, like all bonds, and some have call risk, but they have relatively low credit risk. An investor will earn slightly better returns with these bonds than with Treasuries because of the additional risk, but the interest is not tax-deductible unlike Treasuries.
Investments in Ginnie Mae because it is a government agency do carry the government guarantee and theoretically don’t have any default risk. However, if investors want to invest in Ginnie Mae, they won’t be investing in bonds; they will be investing in mortgage-backed securities, which should be approached with extreme caution because of the 2008 financial crisis. To invest in these entities, investors purchase their securities through a brokerage. Often $25,000 will be needed to start investing in agency bonds.
Development loan pool and funds
Community Development Loan Funds (CDLF) are private loan funds designed to deliver affordable, responsible lending to help disadvantaged people experiencing difficulty economically and otherwise and their communities. Over 90% of CDLF’s are nonprofit organizations governed by a board of directors.
CDLF lending and related services increase job creation and retention in low-income communities; boost growth in women- and minority-owned businesses; support the development of charter schools, affordable housing, and community facilities such as child care centers and public health clinics in disadvantaged markets.
CDLFs are generally unregulated and are unlike federally regulated community development banks and credit unions.
Investments in CDLFs are typically made either directly or through an investment consortium that shares risk among the investors. Usual debt investments in a CDLF carry a fixed interest rate between 1% to 4.5% with a term of three to ten years.
Socially responsible mutual funds
Socially responsible mutual funds endeavor to hold securities in companies that adhere to social, moral, religious, or environmental beliefs. To make sure the stocks chosen have values that dovetail with the fund’s views, companies must undergo a careful screening process. A socially responsible mutual fund that identified with a certain set of values will only hold securities in companies that adhere to high standards of good corporate citizenship.
Because so many people hold a wide variety of values and beliefs, fund managers struggle to determine stocks that reflect the optimal combination of values for attracting investors. A specific criteria is used for each fund when screening for stocks all depend on the values and goals of the fund.
Many socially responsible mutual funds also partition a portion of their portfolios for important community investments. Many people think of these investments as donations, this is not the case. These hard money investments allow investors to give to a community in need while making a return on their investment. Community development banks receive investments toward affordable housing and venture capital in developing countries or in lower-income areas in the U. S.
A municipal bond fund is a fund that invests in municipal bonds, which are debt securities commonly issued by a state, municipality, county, or special purpose district (such as a public school or airport) to finance capital expenditures like roads, schools, bridges and other projects.
How do I invest in my community?
Follow some of the suggestions above, or if you are looking for other avenues, talk to a stockbroker and share the moral values you believe in to have them screen funds, companies, bonds, and projects that can help you reach your financial goals.
Why is it important for big companies to invest in their communities?
Community and social investing are not strategies to use for quick results for your business. Community investing in both revenues and time are long-term tactics to boost the image, brand, and name identity of your company within the community, they cannot be used to see immediate financial gain.
Visibility in the community through social and community investing are important parts of any business strategy, regardless of how large or small it may be. When a business first opens its doors, it may have more time than money to give to the community. However, the relationships that begin to be formed through a business’s affiliation with a community project are endlessly beneficial. Strategic partnerships can really pay off in the long and short run. Time is just as valuable as contributions in many cases and, in some situations, often needed more than actual funds.
As a business grows, it may have less time to devote to the community while it may be able to contribute more financially. The important thing to remember is that when a business becomes a part of the community, everyone wins.