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Pension Funds Are Key to Growing Impact Investing

Capital Markets | Thursday March 24th, 2011 | 0 Comments

The following open letter is a part of the Presidio Graduate School’s Capital Markets course. For one of the course assignments, students write a letter to an oversight body, government entity or other appropriate institution. The topic: changing the sector of capital markets that relates to their chosen topic so it reinforces principles of sustainability. Follow along here.

An open letter to The Honorable Jim Langevin (D-RI)

Dear Representative Langevin:

First, thank you for introducing the Federal Employees Responsible Investment Act (HR 6183) in September 2010. Your findings show that investors are increasingly demanding socially responsible investment (SRI) options, and that SRI investing meets the fiduciary responsibility presented in the Employee Retirement Income Security Act. We are writing to request the introduction of a similar bill focuses on SRI investment through Community Development Financial Institutions (CDFIs). Community investing is the fastest growing sector within SRI, and CDFIs are uniquely positioned to meet investor demands while providing opportunities for small businesses. Currently, the federal government is the largest source of CDFI debt capital; it provides 28-44% of business lending debt and 3-23% of housing lending debt to CDFIs. If pension funds include impact investing options through CDFI loan programs, funding for CDFIs will increase in scale, become more diversified, and help unlock opportunities for the retail investor.

We’d like to outline for you the reasons behind our request for action around CDFIs…

CDFIs are uniquely positioned to meet investor demands.

CDFIs provide underserved communities access to credit, capital and financial services. Addressing a wide variety of issues like microenterprise services and affordable housing, CDFIs number more than 1,200 and provide innovative financial products to the communities they serve. A Calvert Foundation report aptly states, “Now more than ever, in the context of economic downturn and post-financial crisis, Americans are looking for ways to allocate their assets safely and responsibly while also having a positive impact on their struggling communities.”

A growing number CDFI investment options do provide competitive returns and have proven to be less risky than traditional investment options. Furthermore, they make a positive impact. The U.S. CDFI Program noted that in 2010 the Program resulted in the creation of 80,000 jobs, 12,000 businesses being financed, 6,000 units of affordable housing, and $1.9 Billion in private investments.

Pension fund investments in CDFIs help overcome retail investment barriers.

Access to particular assets for funding CDFIs are currently constrained by federal and state regulations which set investment limits according to an investor’s worth, geography, and whether the CDFI is registered as a nonprofit or a for profit organization. There are several regulatory barriers that CDFIs must overcome to scale the industry and tap into the non-accredited investor market, an opportunity that Hope Consulting estimates at $60 Billion. Offering long-term investments options through CDFIs using pension plans overcomes the accredited investor threshold while aligning retail investor interests to opportunities that generate financial returns and positive social and environmental impact.

Federal actions set an important precedent.

Although 17 States have made SRI pension fund options available, adoption by the federal government will ensure other governmental bodies follow and it will shift current community investment reliance on traditional funding sources. CDFI services are needed now more than ever in an uncertain economic climate. With CDFIs’ reliance on government funding, critical services to low-income communities are subject to budget approvals and constraints. According to the U.S. CDFI Fund Director, Donna J. Gambrell, the 2011 proposed federal budget cut would impact CDFIs around the country. In a keynote address March 1, 2011 Gambrell stated:

  • The number of jobs CDFIs created in low-income communities would fall by more than 19,248;
  • The number of loans made to small businesses would fall by 3,193;
  • The number of affordable housing units financed would fall by more than 14,173; and
  • The amount of private sector dollars leveraged would fall by at least $1.627 billion (U. S. Department of the Treasury – Community Development Financial Institutions Fund, 2011).

Representative Langevin, as MBA candidates at Presidio Graduate School, we are aware that it requires courage to take action for more economically, socially, and environmentally sustainable communities. We appreciate your work in introducing the Federal Employees Responsible Investment Act and ask that you consider reintroducing it with information about how CDFI investment can benefit federal employees who are interested in SRI investing. Thank you for the time you have taken to consider this matter.

Sincerely,

Katie Dunn
Chelsea Souter
Jill Stoneberg


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