This piece is from Justin Fier, Managing Director of InSight, our in-house impact investing consulting practice.
Last month, multiple PCV colleagues of mine and I attended the CDFI industry’s premiere annual event, the Opportunity Finance Network (OFN) Conference, held this year in Atlanta. As a newcomer to PCV — as well as the CDFI industry — I was excited to meet industry peers and learn more.
The conference was attended by over 1,200 individuals, most of whom work for the 1,000+ CDFIs that are scattered across the U.S. As many of our blog readers know, Community Development Financial Institutions, or CDFIs, are not new to the financial world. First introduced by the U.S. government in the early 1990s, the new structure was considered innovative, even though some of these entities had been in operation for decades. In general, a CDFI is a financial institution that provides financial services to low-income people and communities. There are four primary types of CDFIs: banks, credit unions, nonprofit loan funds, and venture capital (VC) funds. PCV, for those wondering, started in the 1990s as a VC fund, but evolved in more recent years to manage a loan fund in addition to the organization’s business advising, research, and consulting programs.
I found my first OFN conference worthwhile for multiple reasons. Seasoned veterans of the industry and their individual organizations were indeed the majority of attendees, and all were open to sharing experienced wisdom with a newbie. The plenary sessions delivered on expectations, covering broad industry themes and updates. Along with this was a hefty dose of inspiration, including passionate remarks from Atlanta Mayor Kasim Reed, Atlanta Fed President Dennis Lockhart, and (former) White House cabinet members. The 60+ breakout sessions were also productive, offering deeper dives on specific topics from expert perspectives.
Prior to joining PCV, I spent over 15 years working for one of the larger institutional investment consulting firms, helping manage the endowments of various large foundations and nonprofit organizations across the U.S. In this capacity, I created and led a sizable responsible investment research team, maintaining coverage of the broader impact investing space on behalf of our firm’s $120+ billion in advisory assets. It’s from this perspective I was eager to join the CDFI industry, a seemingly obvious intersection of some of the most seasoned practitioners of impact investing — or as the Global Impact Investing Network defines: “investing with the intention to generate social and environmental impact alongside a financial return.”
[custom_headline type=”left” level=”h2″ looks_like=”h3″]CDFIs as Impact Investors[/custom_headline]
You can imagine my surprise when I heard someone at OFN remark that this year’s conference, the 32nd annual OFN conference, was the first time she’d heard CDFIs truly embrace the term “impact investor.” Seriously? Why in the world would one of the true pioneers of intentional investing for social impact not have jumped at the opportunity to rightfully own this mantle? While I am sure there were examples of individual CDFIs making such references before now, I was told the industry as a whole did not previously spend any effort referring to itself in such a way. I was amazed. Impact investing has gained incredible momentum in recent years, meanwhile most CDFIs are almost exclusively focused on achieving much greater scale. According to a recent U.S. SIF report, sustainable, responsible and impact investing (SRI) now represents $8.7 trillion in the U.S. alone.
Throughout the conference, it was clear the CDFI community was now definitely onboard with the concept of impact investing, as I heard it referenced regularly. I believe CDFIs are uniquely positioned to really own this term, given their long and successful history of doing just that: delivering social impact along with financial return. Having a track record like that to showcase is actually not that common in the impact investment industry. The vast majority of impact investment managers currently attracting millions of dollars are doing so for first-time funds. Their stories include social impact concepts and targets and offer little proof of having ever achieved such results—yet they are receiving vast amounts of capital from the impact investor community.
[custom_headline type=”left” level=”h2″ looks_like=”h3″]Speaking With CDFI Veterans[/custom_headline]
During the conference, I had the opportunity to meet with industry veterans and better understand internal operations and strategic thinking at various CDFIs. Recent research including a paper by GIIN and the Carsey School of Public Policy entitled “Scaling U.S. Community Investing” notes the prominence of CDFIs as a high-impact opportunity for U.S. impact investors. The Atlanta Fed President, Dennis Lockhart, during his keynote, highlighted a similar message. I agree CDFIs do have the potential to present an incredible opportunity for impact investors. With that said, it was apparent impact investor money was not finding its way to many CDFIs.
While I did hear some CDFIs complaining about being ignored by impact investors, more often I heard a growing realization that the onus is on CDFIs to be a more proactive in attracting the attention and the ultimate confidence of impact investors. For example, various conversations touched upon the need to reframe the CDFI value propositions in terms that resonated with impact investor ears.
During these conversations, I asked about current investment strategy and external messaging to potential investors. I was heartened to learn many CDFIs were actively having conversations with the impact investor community and sharing their learnings with other CDFIs.
Over my career, I’ve honed my ability to conduct investment due diligence, dissecting investment manager’s investment strategy. It was through a similar lens in which I was viewing CDFI strategy in how capital was being deployed. While the financial acumen and actual strategy for deploying capital seemed solid across many organizations, I was a bit surprised to hear less of a refined process for how social impact was evaluated before investments were made. Many organizations could articulate impressive commitment to such impact and even quantify impressive results after the fact, but it was interesting to hear how this impact was formally assessed and ultimately integrated into their decision-making process before investments were made.
[custom_headline type=”left” level=”h2″ looks_like=”h3″]PCV’s Contribution[/custom_headline]
As a CDFI ourselves, PCV has nearly two decades of experience deploying investment capital (both equity and debt) in an impactful way across low-income communities. We know first-hand what goes into doing this and it is from this experienced perspective we have more recently collaborated with the Northern California Capital Loan Fund (NCCLF) to develop a loan ratings system to measure social impact. We profiled this new system during the OFN Conference. Our plan is to further refine this work in order to incorporate more of PCV’s recent research on quality job measurement. We hope to be able to share this new work with the industry soon.
In the words of Annie Donovan, Director of the CDFI Fund during OFN, “…goal number one [for the CDFI Fund] is to increase the impact of the CDFI Fund network by supporting the growth, reach, and performance of CDFI Fund awardees. If [she] had to boil this plan down to three words those words would be: Increase our impact. To do so, our industry must grow. For some CDFIs that means going deeper into distressed communities, for others it may mean expanding your reach, or it could mean both. Over the next five years, the CDFI Fund is going to get better at measuring and rewarding how deep you are going in your markets, how far you are expanding your reach, and how well you are executing on the strategies that we fund you to pursue.”
PCV is committed to responding to Annie’s rallying cry for the CDFI community. We do indeed need to “Rethink” as this year’s OFN Conference was so aptly named. Our way forward needs some intentional steps as an industry, to achieve the growth we are so uniquely positioned to create. Here’s to meeting that challenge.