By now, you’ve certainly heard of ESG investing — selecting investment vehicles not only for their potential market return, but taking into consideration how your investments can advance environmental (“E”), social (“S”) and governance (“G”) goals.
According to Bloomberg, in 2021 ESG-themed exchange-traded funds saw an inflow of $120 billion of new investment. In the investment community, there’s a very active and healthy debate about what constitutes a “true” ESG fund.
As well, there is a robust ongoing discussion about the effectiveness of ESG investing — whether or not allocating resources to ESG “compliant” companies (or denying capital to others) actually influences their behavior.
Regardless, it’s clear that many investors today are looking for ways to align their investment decisions with their values.
Using money for Social good
The “S” part of the acronym can cover a lot of ground from human rights in the countries where a company does business or sources inputs, to internal company labor practices such as support for unionization.
The Forum for Sustainable and Responsible Investment (US SIF) includes “community investing” as part of ESG, defined as “channel[ing] public and private investment to low income and other underserved communities in order to provide capital, credit, and training that these communities would otherwise lack.”
And this is where Community Development Financial Institutions (CDFIs) come in.
The US Department of the Treasury defines a CDFI as a financial institution that “share[s] a common goal of expanding economic opportunity in low-income communities by providing access to financial products and services for local residents and businesses.”
What is a CDFI?
A CDFI can be a bank or credit union or even a venture capital fund. That is, it’s an existing financial institution that’s become certified as a CDFI by the CDFI Fund, which was established by an act of Congress in 1994.
There are over 1,000 such institutions currently, spread over all 50 states (and the District of Columbia). Some Black-owned CDFIs have recently attracted investment from large companies such as Google and US Bank.
The money you keep on deposit at a CDFI bank or credit union is lent out to individuals and small business owners in your local community. Many of whom would not be able to access funds elsewhere.
A 2017 analysis found that 40% of CDFI loan and investment activity happens in majority-minority communities.
Many CDFIs complement their mortgage lending with financial education services to support potential homeowners and take a more hands-on approach afterward to help ensure that borrowers are able to stay in their homes if they face adversity.
CDFI banks and credit unions frequently offer low cost account services to underbanked members of the community who may otherwise rely on high cost financial services.
CDFIs also support larger scale investments in their community.
For example, City First (a Washington DC based bank with offices in Los Angeles) reports that in 2020, their enterprise investment portfolio supported the creation of 216 affordable housing units.
As part of the US government’s response to the pandemic, CDFI lenders were an important conduit for PPP (Paycheck Protection Program) loans and other assistance to small and minority-owned businesses.
Support your community through a CDFI
You can support your community (and realize your “S” investment objectives) through a CDFI in several ways:
- Use a CDFI as your primary bank for your checking account.
- If moving your everyday transaction account to a new institution is more of a chore than you are willing to take on, consider opening a savings account at a CDFI for your emergency fund. The interest rate will be quite low of course, but little different from a mainstream bank. And as an emergency fund is a pot of money that you typically hold in cash, the interest rate should not be an important factor in this decision.
- Use a CDFI bank or credit union for one or more of your personal borrowing needs: home mortgage, auto loan, credit card or personal loan. The interest rate you’ll pay helps to support the work of the CDFI in your community.
- Establish a business banking account for your “side hustle” with a CDFI.
Because a CDFI is a bank or credit union, your funds enjoy the same federal depository insurance as they would in a “regular” bank account.
You can find a lending CDFI bank or credit union in your area here.
While it may be one of the smaller players on your team, including an account with a CDFI as part of your ESG portfolio can be an effective way to tangibly realize a goal of deploying your personal capital in a progressive, socially conscious way.