Impact Investing 101: Faith-Based Organizations and Impact Investing

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Original post on PacificCommunityVentures.org

By Jane Ren, Pacific Community Ventures

Faith-Based Organizations Are Long-Time Socially Responsible Investors

As some of the oldest institutions in the world, faith-based organizations (“FBOs”) have long invested their capital with consideration to social causes. Over 200 years ago, Quaker and Methodist immigrants to the U.S. avoided investing in businesses tied to war, slavery, tobacco, gambling, and other activities inconsistent with their faith-based values. Today’s FBOs commonly engage in Socially Responsible Investing (“SRI”) using tools such as portfolio screens, divestment, and shareholder activism. Their strong commitment to the SRI movement has spurred the financial services industry to createmutual funds, ETFs, and other investment vehicles tailored to their beliefs.

FBOs And Impact Investing: Fits And Starts, But Renewed Engagement

Despite their leadership in SRI and engagement with the financial sector, FBOs have had a more complicated relationship with impact investing. FBOs pioneered some of the first community investments in the 1960’s in the form of credit unions and microcredit programs that sought to reach underserved communities.  The late 1990’s and early 2000’s saw increasing numbers of FBOs form community development corporations in the U.S. to more effectively invest in affordable housing and economic development projects.

Like other early impact investors, however, FBOs found that making community investments was not easy. Early community investing efforts included a myriad of issues – unrealistic expectations about risk, lack of strategic planning and discipline in the investment process, and a general belief that these investments were not core to the mission. One 1989 study of church-run community investing programs found that 70% of the programs in the study were defunct or on their way to being dismantled.

Despite these historical difficulties, the faith-based community has renewed its interest and are emerging participants in the field of impact investing. Though the size of commitments by faith-based impact investors is unknown, FBOs are definitely active players in the market. In 2010, the International Interfaith Investment Group and its partners published a study of 103 faith-based institutional investors which indicated that 77 percent practice impact investing, most commonly in the community development, microfinance, and affordable housing sectors. Climate change is also becoming a significant issue for FBOs, as demonstrated in the Interfaith Center on Corporate Responsibility’s recent white paper on the topic.

Examples of Faith-Based Organizations Engaged in Impact Investing

Mennonite Economic Development Associates (MEDA) – Founded in 1953 by a group of Mennonite business professionals, MEDA works to alleviate poverty through supporting small and medium-sized businesses in developing regions around the world. MEDA provides early stage funding to growing companies through its Sarona Risk Capital Fund, which currently has $19 million in assets under management.

Bend the Arc – Bend the Arc is a Jewish advocacy group that seeks to create economic opportunity and promote social justice in the U.S. Bend the Arc pursues justice as a core expression of Jewish tradition. They run two loan funds focused on community and economic development, the Tzedec Economic Development Fund and Tzedec Community Ventures, LLC. Bend the Arc has also partnered with the Calvert Foundation on the Community Investment Initiative, which allows individuals to invest as little as $20 in various communities across the U.S. Finally, Bend the Arc hosts and manages the Disaster Response Fund U.S., Inc., a CDFI supported by a coalition of faith-based investors with a mission to help rebuild communities affected by major natural or human-made disasters throughout the U.S.

Oblate International Pastoral Investment Trust – The OIP Investment Trust manages about $400 million of assets from more than 230 Roman Catholic congregations. The OIP Investment Trust’s investing guidelines are consistent with the Gospel and the Catholic tradition. The Trust recently committed $7 million to FIRST Brazil Impact Investing Fund, which aims to become Brazil’s largest impact investing fund and will specialize in providing growth capital to companies that deliver essential products and services to the working poor in Brazil.

Notably, while the Islamic finance market is estimated to be over $1 trillion globally and the tenets within Islam that govern financial transactions are quite similar to SRI concepts, Islamic investors have not widely adopted SRI or impact investing. In recent years, researchers and commentators have begun to urge Islamic investors, particularly sovereign wealth funds, to explore impact investing. One example of development in this area is Islamic Relief’s Waqf program fund, which invests donated funds according to Islamic principles, SRI principles, and with consideration for social impact (though the top priority is protecting the funds and minimizing risks). The returns from the fund are channeled into grants that fund humanitarian projects for Muslim populations around the world.

FBOs’ Unique Advantages and Challenges

FBOs are uniquely positioned to generate high impact through their investments. They are mission-driven investors and often have long-term outlooks. As such they are able to undertake projects where social impact may take many years to realize.  Through their members, they have grassroots networks of relationships that can surface potential social issues and injustices to be addressed. In addition, members can engage in dialogue that increases public awareness of and support for impactful projects in their communities. Finally, given their unique moral and cultural power, FBOs pursuing social and economic justice can influence the behavior of the organizations in which they’ve invested as well as other groups of investors.

However, like other current or would-be impact investors, FBOs face significant challenges.  These include lack of resources or technical and financial knowledge to manage impact investments, lack of experience in effectively measuring and reporting impact, internal dissent on impact investing’s alignment with mission, and a lack of financial partners who understand their motivations for investing.

Final Thoughts

Along with the impact investing community at large, faith-based investors are in the middle of a decades-long learning process to more effectively deploy their capital for social good. They bring to the table their moral convictions as well as significant resources that will help further the impact investing field. As Pope Francis noted in his address to the participants of the Vatican’s Impact Investing for the Poor conference in June 2014, “It is important that ethics once again play its due part in the world of finance and that markets serve the interests of peoples and the common good of humanity.”

Below are some additional resources on faith-based organizations’ participation in impact investing:

 

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