Relatively speaking, cash does not get much attention from impact investors. Among the numerous asset classes in a typical impact portfolio, deposits and cash equivalents accounted for just 4% of investments and 0.5% of capital invested in 2018, according to the Global Impact Investing Network. In contrast, nearly 70% of impact investments were in private debt. It may be a surprising trend, since investors are likely to make a more immediate difference by providing cash to an investee.
New Support for Community Banks
With that in mind, independent wealth manager Tiedemann Advisors and fintech company StoneCastle Cash Management recently introduced the Federally Insured Cash Account (FICA) Impact program. The program allows clients to invest in more than 700 US community banks, helping boost those institutions’ lending power and their support for community reinvestment programs that do everything from building schools to creating jobs.
The FICA Impact program screens for small banks based outside of the wealthiest metro areas. “Cash has traditionally been held at large financial institutions, which don’t necessarily have socially responsible lending criteria that align to core values of our clients,” Tiedemann managing director Brad Harrison told Barron’s. He added that advancements in financial technology have made it possible to build a system that spreads client cash across a large network of community banks.
Benefits of Cash in an Impact Portfolio
Tiedemann is not the only investor deploying cash to create a positive impact in communities. Many foundations, funds, and other impact investors are also trying to strengthen the power of community banks, credit unions, and community development financial institutions (CDFIs, which are for-profit and nonprofit institutions that devote most of their lending to community benefit via cash). For example, ImpactAlpha reports that to support the Native American National Bank, impact investors including RSF Social Finance, Candide Group’s Olamina Fund, and others have established accounts and certificates of deposit at the bank.
Innovative enterprises are also introducing ways for CDFIs and credit unions to attract more customers and address such issues as limits on the amount of deposits protected by federal deposit insurance. Through CNote’s Promise Account, accredited investors can deposit up to $3 million into insured accounts across multiple institutions.
A focus on cash in an impact portfolio can have unique benefits for both beneficiaries and investors alike. Community banks and other lenders direct more resources to socially responsible projects that generally garner less interest from larger conventional financial institutions. The Native American National Bank targets the 3% of US land populated by low-income tribal and Alaskan natives. Over the past five years, it has lent $128 million to affordable housing and other projects, according to ImpactAlpha. Initiatives like these typically require longer loan payback schedules, which traditional banks are reluctant to underwrite.
For investors, these developments offer a productive use for what might otherwise be “idle” cash—and perhaps a refreshed view of where impact can be made. “Impact investing should begin with your cash,” said Joshua Siegel, chairman and CEO of StoneCastle.