Interest in impact investing concepts that combine financial returns with a positive social or environmental impact have been growing in appeal.   What seems to be lacking is a model to encourage broad-based place-based impact investing across all asset classes.  For fiduciaries of place-based organizations’ funds, like those at community foundations, pension plans, endowments and many family wealth pools, the HOW of regional impact investing is challenging:  The due diligence requirements for what would be a small portion of a portfolio are as stringent as in global investing, but resources are often too constrained to allocate the necessary time and effort to seeking these smaller investments and finding enough of them for diversification, as well as measuring the impact and outcomes of these investments.

A central, regional virtual and physical intermediary could perform these due diligence duties, act as a clearinghouse for regional impact investments and be the platform for a broad array of local investment options, connecting capital seekers with capital providers.  Picture a family of five separate multi-manager funds, as proposed for the Bay Area Impact Investing Initiative (BAIII)[1]: public equity, fixed income, real estate, infrastructure and private equity.  Each fund is designed to offer benchmark- or market- like returns for each asset class and a positive local impact in the San Francisco Bay Area.

Place-based public equities:  Designed to be a small part of a globally diversified portfolio, this place-based public equity strategy  was a case study for the United Way of the Bay Area[2] that developed an investment process and model portfolio for the small endowment fund at the UWBA, whose mission is to “reduce poverty in the Bay Area”. The model portfolio has these characteristics:

  • overweights Bay Area headquartered companies — the model portfolio has a 4X overweighting of Bay Area headquartered companies (75% of this custom universe is based in the Bay Area vs. 19% for the S&P 500);
  • optimizes the construction of the portfolio to maintain market weights for each sector similar to the Russell 3000 or S&P 500, not the cap-weighted Bloomberg Bay Area Index, BBACAX, which is tech heavy;
  • incorporates ESG criteria that emphasize strong corporate governance, employee policies and environmental stewardship;
  • predicted a tracking error to the Russell 3000 of less than 2%;
  • 5-year model performance (2011-2015) is 13.95% vs. the Russell 3000 of 12.14% vs. the BBACAX at 12.64%; and
  • would also include active corporate engagement and proxy voting.

Place-based fixed income investments are another financial tool that has impact.  Investing in a diversified portfolio of local corporate bonds, direct lending pools for local businesses, local SBA loans, and federal agency housing securities can provide market -like returns and be tracked to local impact.  The recent study for the Urban Sustainability Directors Network[3]  provides dozens of examples of traditional financing tools, like municipal bonds, industrial revenue bonds, and partnerships that can be used by our cities to finance sustainability and climate action plans that reduce GHG emissions.   Intentionally investing in our cities is another way to invest locally for impact and new platforms are being developed for local fixed income investing, like Neighborly.com.

Real Estate is clearly place-based (location, location, location), and if your mission includes place, then real estate as an asset class offers investment opportunities ranging from single- and multi-family homes, office spaces, and industrial spaces to community space and open space.  Sustainable and mixed-use neighborhoods can develop with the tools of finance we have today and generate the multiplier effect of the positive impacts across the region.

Long-term financing for infrastructure investment and public private partnerships is needed to address regional issues like congestion and transit-oriented development, access to the internet, education, health, and food security.  Building cross-disciplinary partnerships can leverage our investments in sustainable infrastructure.

Private equity and venture capital have been the impact investment of choice for mission investors seeking job creation or specific ‘bottom of the pyramid’ solutions globally.  Private equity investments, particularly when located in local low- to moderate-income neighborhoods provide much-needed jobs, skills training and a positive community impact.   We are seeing innovation in financing these opportunities through incubators and crowdfunding platforms as well.   As the business model itself evolves to include themes like ‘profits with purpose’ and ‘doing good while doing well’, social entrepreneurs will need access to capital and private capital needs and wants to find these impactful solutions to our community challenges.

When place-based fiduciaries in the Bay Area allocate a small portion (1-10%) of assets to some or all of these local portfolios, the intermediary would manage those portfolios and build deal flow, investment opportunities and partnerships across the capital stack. Delegating the due diligence and management of the funds to a central intermediary and collaborating with other investors for collective impact reduces the costs of managing and monitoring these impact and location-specific portfolios and compounds the impact.

For community development  investments that are dependent on philanthropic and public grants, private capital could be included in the ‘below-market-return’ portion of the capital stack through tools like loan loss reserves and guarantees, social impact bonds, flexible lines of credit, or low interest rate loans through CDFIs.  A collaborative, flexible, collective neighborhood impact pool could aid neighborhood organizations that rely on grants to serve their missions.  San Francisco’s Tenderloin neighborhood is home to over 30,000 residents in a ten-block area and has the help of 150 non-profit service providers who work to improve the lives of the residents.  Access to capital could leverage the work being done in the Tenderloin for more impact.

Understanding and connecting capital providers (fiduciary/market rate return funds, MRIs and PRIs, grants, subsidies, tax credits, etc.) with capital seekers across thematic regional challenges, like housing, can make that capital more productive and diversified.  Further research into housing will reveal the continuum we see through a wide impact investing lens:

  • non-profit organizations like Mercy Housing
  • the social impact bond for housing blight offered by the Richmond Community Foundation
  • sustainable, affordable multi-family buildings like Healthy Buildings in Napa
  • homeownership options like Verbhouse, a private fund that offers an alternative path to homeownership for renters who want to be homeowners
  • the Mayor’s office for down payment assistance,
  • public policy on building and developer requirements, and
  • the multi-year partnerships for the renovation and renewal of entire neighborhoods like Bay Meadows in San Mateo or “Candlestick Village”, where private and public companies like Stockbridge and Lennar partner with public and philanthropic resources to build new communities in a more sustainable fashion.

The San Francisco Bay Area has the talent, wealth pools and robust economy to offer a wide variety of attractive impact investing opportunities to promote sustainability in our region.  Collaborating across the financial continuum, across themes like housing, water, jobs, and transportation, and with a focus on our own regional backyard could provide the resources to move the needle on the sustainability and resilience of the Bay Area.  Other regions and missions could adapt this BAIII model of financial collaboration and collective impact by developing portfolios and a regional/local platform based on their unique resources and needs.  It makes sense that regional resources collaborating to address regional challenges can speed the development of the solutions we need to become and remain a sustainable, prosperous, and resilient community.

Lauryn Agnew is Founder of the Bay Area Impact Investing Initiative (www.baiii.org), which develops customized model portfolios across all asset classes for mission alignment under fiduciary standards of due diligence and performance expectations.

[1] The research paper describing the BAIII was published in the Routledge Handbook of Sustainable and Social Finance with Oxford University: “Regional Impact Investing for Institutional Investors: The Bay Area Impact Investing Initiative,” July 2016

[2] The Federal Reserve Bank of San Francisco encouraged and published the research working paper:  “Impact Investing for Small Place-Based Fiduciaries: The Case Study of the United Way of the Bay Area”.  http://www.frbsf.org/community-development/files/wp2012-05.pdf

[3] Financing Sustainable Cities Scan and Toolkit, October 2016, in partnership with HIP Investor: to download the paper:   http://usdn.org/public/page/32/Government-Operations