Community investing is not new, but it has started to attract a growing number of socially conscious investors as more opportunities open up. Here is a look at this area of impact investing and how investors use it to make a difference at the local level.
What Is Community Investing?
Also known as place-based investing, this approach focuses on supporting local or regional communities and appeals to investors who want to target issues close to home.
Community investment strategies direct public and private investments to address local problems including everything from childcare, affordable housing, and job creation to renewable energy, infrastructure development, and access to public transportation.
How Does Community Investing Work?
Investors who want to focus on local needs have a growing array of methods and strategies available to them, including Qualified Opportunity Zones, which were created as part of the 2017 Tax Cuts and Jobs Act. Opportunity Zones give tax-free capital gains benefits to investors who invest in economically distressed communities via Qualified Opportunity Funds.
Community Development Financial Institutions (CDFIs) are another alternative which have existed longer. These private-sector financial intermediaries help local businesses and nonprofits in economically distressed areas borrow money. Most CDFI investment capital comes from federal funding and banks that seek to fulfill the requirements of the Community Reinvestment Act of 1977. For context, this legislation mandates that banking institutions receiving Federal Deposit Insurance Corporation (FDIC) insurance make loans to all communities they are chartered to do business in, including low-income areas.
More recently, tax-exempt sustainable impact bonds have gained traction. In 2016, the Massachusetts Bay Transportation Authority pioneered the space in the US when it issued $370 million in sustainable bonds to fund capital projects with social or environmental focuses.
As interest in community investing grows, more opportunities for a wide range of investors are likely to become available.