Essays on People, Place & Purpose

Investing in What Works for America's Communities

Future of Community Development: How CDFIs Can Best Ride the Impact Investing Wave

by Antony Bugg-Levine

Think of the community development finance industry as a small boat with an outboard motor. For four decades, pioneering leaders have helped to build this boat, take it out of port, and chart new waters. This boat has served as a lifeline, bringing essential resources to previously cut-off communities. But you don’t have to be a soothsayer to see that this boating life is unlikely to continue. Even if the economy and the capital markets stabilize, three fundamental forces will prevent us continuing with business as usual:

  • Our boat may still be solid, but we are running out of fuel: With the 30-year wave of retail bank consolidation largely behind us, there are fewer institutions remaining for which Community Reinvestment Act (CRA) credit represent a major driver of institutional community development investments.1 Looking ahead, as regulators remain focused on the safety and soundness of the banking system, CRA will likely diminish in importance there as well.
  • Our investees are running out of fuel too: Many of our borrowers have relied on direct or indirect government reimbursements and subsidies to repay our investments. These government reimbursements are eroding and unlikely to recover soon. Therefore, even if we can mobilize capital to lend, it’s not clear that our traditional borrowers will be in a solid position to pay us back.
  • We have not been building everything the communities need: Crucially, safe housing and adequate facilities are increasingly recognized as insufficient to create the just and vibrant communities we aspire to support. These communities also need health care, educational opportunities, viable social service agencies, and decent job opportunities. Many community development finance institutions have worked on these issues, but our individual successes have not combined effectively to support neighborhoods with sufficient durability to withstand the current “perfect storm” of high unemployment, frozen credit, and declining real estate values.

None of these realities threaten to sink our sector in the short term. But they will become increasingly undeniable and problematic in the next decade. We should work together to find more fuel that works in our current engines. We should also look to the horizon for other boats out there, and entirely new ways to navigate these waters.

The emerging impact investing industry looms on the horizon and has been coming into clearer view in the past few years. Is it a lifeline, bringing the promise of new supplies to allow us to continue our current operations? Is it an oceangoing vessel that we can climb aboard to sail more deeply into the multitrillion dollar mainstream capital markets? Or is it a Spanish galleon on the sixteenth-century South American shore, poised to disrupt the world we have so carefully cultivated?

Leaving these metaphorical waters behind, this essay considers sources of impact investing capital and what it will take to tap them. But even if impact investing flourishes, it may not prove a lifeline to all existing community finance intermediaries. The organizations that flourish in an impact investing world must provide value in new ways to new partners, and they must create new disciplines and practices. Ultimately, impact investing’s greatest contribution may not be what it does or does not bring to community finance, but rather that it could prompt us to reexamine why we do what we do and to reaffirm “community development” as the organizing force of community development finance.


Impact investments seek to generate a “blended value” of both financial and social return. This concept is not new. In Europe, seventeenth-century Quaker communities aligned investments with spiritual practice, capitalizing worker-owned communities and community housing schemes. In the United States, private companies were the original “community development” investors, building housing and facilities for workers, and taking stewardship in the cultural development of their towns. And certainly any American reading a book like this one on community development finance has likely made or supported impact investments through a community development finance institution (CDFI) or socially responsible investment account.

But the rather simple idea that for-profit investment is both a morally legitimate and economically effective way to address social and environmental challenges is making its way out of the niche in which it has grown up. Its emergence is fomenting demand for private capital and talent to be put to work. Increasingly, influential capital owners and capital markets participants are developing creative mechanisms to tap this demand.

The stakes are enormous. Even with the successes of the CDFI sector, we still leave $999 in the U.S. capital markets untapped for every $1 we have mobilized directly for socially motivated finance. Impact investing offers potential to unlock a portion of the other 99.9 percent. Obviously, most of that money is locked away in vaults unlikely to be opened for impact investments. It will remain beyond our reach. But even a small share of that treasure could transform the capital available to community development finance.

CDFIs are poised to be an important partner for impact investors, bringing their decades of knowledge in financing the organizations that tackle social issues. We bring to the table structuring expertise, as well as a pipeline of high-quality, high-social-impact investments. And the “complete capital” approach we will explain later in this article outlines a structure by which we can bring together these players and their capital, which to-date have approached social problem-solving separately.


Today the U.S. capital market is valued in the tens of trillions of dollars. This is an eye-catching number, but it is still more of an abstraction than a concrete market. Instead of one “market,” this capital sits in discrete pools with varying relevance for community finance investors. Most of this capital is not poised to flow into impact investments. But four areas are particularly interesting to explore.

Private Foundations

Given that they are formally constituted (and tax privileged) to contribute to social good, private foundations are an obvious place to start. Pioneers such as the John D. and Catherine T. MacArthur and Ford Foundations helped fund some of the early models of community development finance. But historically the private foundation sector as a whole has focused only a tiny portion of its grant-making budgets on program-related investments (PRIs).2

The impact investing movement is spurring rapid growth of PRIs from this tiny base. More important, perhaps, it is galvanizing attention on the approximately $590 billion in total endowment assets these foundations currently hold.3 The twin forces of wealth concentration and the aging baby boom generation are set to precipitate a second great era of private foundation capitalization in the coming decade. If we are able to unlock even 5 percent for impact investment, this could provide nearly $30 billion, an amount equal to the balance sheets of all CDFIs today.

Private Banks and Family Offices

Private banks and family offices represent a potential sweet spot for impact investing. Their clients typically hold tens of millions of dollars in their accounts and can influence directly where their money goes. Various private banks are beginning to build impact investing products. These are funds-of-funds channeling money into emerging market impact fund managers and even platforms for direct investment into CDFIs such as the Calvert Foundation. Family offices are also making direct investments in deals as well as through intermediaries.

Donor-Advised Funds

Donor-advised funds—another opportunity for impact investing—are investment vehicles that give their owners immediate tax write-offs for future charitable donations. While they await donation placement, funds reside in profit-seeking investments. Major investment firms have mobilized billions of dollars into this increasingly popular product. With the capital pre-allocated to charity, these tools could be particularly well poised for impact investing. In one pioneering example, the Schwab Charitable Fund used donor-advised fund assets as a guarantee to secure a cheaper loan for the Grameen Foundation. This approach could be replicated widely for community development finance. Community foundations are also waking up to the opportunity to enhance impact and marketing by putting their clients’ donor-advised assets to work in the local community.

The Person on the Street

So where does that leave the “regular investor?” Impact investing has until now largely been inaccessible to them. But that is starting to change. The economic crisis and backlash against large banks have led many to explore community banks and credit unions. Internet-enabled peer-to-peer lending platforms are also emerging and challenging regulatory practice. With, a website that enables the public to make very small loans globally for socially valuable purposes, now making investments in the United States, and Calvert Foundation working through MicroPlace, which offers a similar way to make small, online investments to help alleviate poverty, retail investors can make U.S. impact investments over the internet for as little as $20.


Together, these are not the largest pools of the capital markets (those are assets managed by pension funds and insurance companies). However, they add up to a capital pool far deeper than we have mobilized to date for community finance. As businesses begin to develop products and services for impact investors, and more deals demonstrate the viability of this approach, impact investing could take off.

Yet impact investors operate in an inhospitable set of systems. Chief among them is a regulatory and policy system built on the twin assumptions that only charity and government can address social issues and that the only purpose of investment is to make money. Relatively small changes to existing policy mandates and structures could make a significant positive difference. The Treasury Department’s ongoing review of decades-old guidance for PRIs could stimulate more private foundation impact investments. The Small Business Administration’s creation of a $500 million impact investing mandate for Small Business Investment Corporations is yet another promising development.

Government can also build on impact investing momentum with bolder action. As the premise of impact investing is to unlock private capital for social purpose, it would be self-defeating to demand substantial public money to make this work. Government, however, can seed the industry with risk-taking capital and by offering coordination to a highly fragmented market. The United Kingdom’s launch last year of a $1 billion impact investment wholesale bank, Big Society Capital, with investment from major banks, is one model. Government can also play a coordinating and legitimizing role, as the White House has done in bringing together states, cities, and potential investors in Social Impact Bonds.


CDFIs were making impact investments long before the current buzz about them surfaced. As such, they should be well poised to reap the benefits of these increased private capital flows. Yet there is a real danger that CDFIs will be left on the sideline as impact investing takes off. To understand why, and what we can do about it, we first must recognize that the new wave of impact investing creates fundamentally different strategic dynamics for intermediaries. To navigate successfully, CDFIs must orient themselves to new clients with new demands, using new practices.

The fundamental differences between the new approach and the old are the source of capital and its motivation. CDFIs have largely been capitalized by government and by retail banks seeking to fulfill CRA mandates. Impact investors are increasingly mobilized through private capital pools seeking to meet private social motivations. The CRA bankers sought intermediaries that could provide the most efficient conversion of capital into reliable CRA credit. The private impact investors are seeking intermediaries that can most effectively convert capital into compelling social solutions. These motivations may seem similar but have important, distinct implications. Successful intermediaries in this new world will offer their lenders and investors:

  • Sector diversification: Although the efficiency imperative of CRA bankers has led most CRA capital to flow to capital-intensive real estate deals (the easiest way to put the most capital to work), the social imperative of impact investors will require greater diversification. Impact investors want to affect health care, education, social services, and the arts, not just housing.
  • National capacity to invest locally: To serve private investors with strong local ties, intermediaries will need to put capital to work in local communities. The aggregators of impact investing assets in private banks and national donor-advised funds, however, will seek the efficiency gains from working with national-scale partners. They will look to work with intermediaries who can offer local investment expertise and capabilities across a national or at least regional footprint. Few existing intermediaries have the products, practices, and presence to pull this off.
  • Off-balance-sheet capabilities (and beyond): The new client will focus on connecting capital to specific projects. Growing the balance sheet of an intermediary to make general investments will not be as compelling. Therefore, successful intermediaries will be nimble in setting up off-balance-sheet vehicles to pool capital for specific projects with tailored underwriting standards. Going one step further, some impact investors will keep their assets on book and seek advisors and deal brokers who can advise on direct transactions. Depending on how we respond, this is either a disintermediation threat or a new business opportunity.
  • Enhanced capabilities to measure and report our impact: The new impact investor will want to know how CDFIs manage our social impact beyond our ability to comply with government mandates. Especially as we move toward the retail investor, communicating our social impact in ways that resonate with laypeople rather than insiders will be crucial. We will need to come to terms with “marketing” and find an appropriate balance between simplicity and substance in our impact measurement.

Some CDFIs are already quite innovative and are working with these new capital sources to provide these capabilities. But few of us have strategically reoriented our work to thrive in this new world. Other innovators are not waiting for CDFIs to move. New firms are springing up to offer off-balance-sheet structuring and advice. Mainstream financial services institutions like JPMorgan Chase and MorganStanley have set up impact investing units, and new investment firms are offering donor-advised funds and other more widely available products. Many of the new entrants, however, lack the experience and skills required to make the best impact investments. The CDFI sector’s decades of experience and community links enable us to provide powerful solutions for communities; we need to become the partner of choice for the new impact investors. Beyond these institutional-level responses, as a sector CDFIs must engage more fully in expanding the political and social acceptance of impact investing. Rather than narrowly lobbying government for subsidies and regulatory mandates, we need to advocate widely for the legitimacy and effectiveness of for-profit approaches. Recent history shows how failure to proactively address the skepticism most people have about investors can torpedo otherwise thriving industries. The Indian microfinance industry’s inattention to proving its social value set it up for a disastrous backlash in 2010.

Comments to these pages are moderated and will be posted as soon as possible.

Leave a Reply


Privacy Policy  |  Terms of Use  |  Content Copyright & Permission

About The Project

Investing in What Works for America’s Communities is a joint project of the Federal Reserve Bank of San Francisco and the Low Income Investment Fund.

To request a copy of the book and join our email list, Contact Us.

The views expressed in this book and on this website do not necessarily reflect the views of the Federal Reserve Bank of San Francisco, the Federal Reserve System, or the Low Income Investment Fund.

Tell Us What Works

The ideas in Investing in What Works for America’s Communities are just a start. We want to hear about what’s working in your community. Tell us about innovative ideas for addressing poverty and share examples of people and places that inspire you. We want to share these ideas and spark conversation about how to create opportunity and prosperity for all Americans. Tell Us What Works

Funding for this project was generously provided to the Low Income Investment Fund by the Citi Foundation.