A small, but growing, number of community foundations are starting to embrace impact investing in a big way.
That’s one of the conclusions of A New Anchor Mission for a New Century, a recent report produced by Takoma Park, Md-based Democracy Collaborative. The authors studied 30 foundations that are focused on two often-overlapping areas: impact investing and economic development.
There are about 760 of these place-based foundations with combined endowments of $65 billion and annual grant-making of about $5 billion, according to the report. But since 2000 or so, they’ve been facing competition for donors from commercial banks and investment firms managing donor advised funds, as well as crowdfunding platforms and giving circles. At the same time, according to the report, these foundations have begun paying more attention to what the report calls structural poverty, thanks to the stagnation of real wages over the last 30 years, and what they can do about it.
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In response, some community foundations, which traditionally have focused on a passive approach to making grants, have started experimenting with a new, active style, including impact investing.
For community foundations, it’s a strategy that plays to their strengths and differentiates them in a crowded field. “Local impact investing and economic development are ways for community foundations to call on the unique expertise that they possess, which commercial holders of charitable funds do not: intimate knowledge of their communities,” the authors write.
The report identifies four noteworthy strategies:
Working with community development financial institutions (CDFIs). Foundations leverage CDFIs expertise in everything from sourcing deals to underwriting. In some cases, foundations have created their own CDFIs. A notable pioneer is New Hampshire Charitable Foundation, which started the New Hampshire Community Loan Fund in the 1980s.
One such loan pool was launched in 2008 by the city of Edmonton, in Alberta, Canada, and the Edmonton Community Foundation. Each committed $2.5 million to what was called the Social Enterprise Fund, aimed at making loans to affordable housing organizations and nonprofits. In 2013, the Edmonton Foundation formed the Alberta Social Enterprise Venture Fund to invest in for-profits, as well as non-profits.
Giving loan guarantees. Through these credit enhancements, foundations can reduce risk for other investors and, as a result, get more bang for their buck.
Engaging in direct local investing. In these cases, foundations make investments directly, instead of using intermediaries.
Take the Greater Cincinnati Foundation. It invests in a lot of sectors, such as community development, health care and workforce development. That’s included, for example, $500,000 to a business accelerator aimed at minorities and $430,000 to help buy distressed mortgages.
Incourage Community Foundation, a Wisconsin Rapids, WI-based foundation with $34.6 million in assets, recently took the ultimate leap, pledging to commit all of its resources, including grants and investments, to impact investing. Stay tuned, as more community foundations make similar commitments.
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A version of this article originally ran on Forbes.com.