Sacrificing returns? These community investors ask if they’re sacrificing impact.

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Jun 16, 2022 Sandhya Nakhasi, Ryan Glasgo, Eric Horvath

The time is now for the impact investing sector to reflect on how it does business, how it frames success, and begin to take action that is informed and aligned with the communities it seeks to support. This reflection should begin with an interrogation of traditional investment approaches and terminology, especially the concepts of “market rate” and “concessionary” that too often segment evaluation of impact investments in the first place.

At what point do we recognize that a relentless focus on financial returns may not be what our society, our environment, and our collective healing demands? At what point do 67% of impact investors currently focused on market rate returns per the GIIN’s 2020 Annual Impact Investor survey pause, reflect, and respond by investing in social or environmental outcomes over income?

We know that chasing “market rates” continues to create immense negative social and environmental externalities on a global scale. Why should impact investment returns be compared to traditional investment benchmarks when we are meant to be prioritizing social and environmental outcomes? What priorities are we centering when we use the terms “market rate” and “concessionary”? More importantly, whose priorities?

In conversation with impact investors and their financial advisors, we rarely hear the question, “am I (or is my client) sacrificing impact in favor of an increased financial return?” However, the opposite question “am I sacrificing financial returns?” dominates, which leaves power and privilege embedded in capital allocation decisions unchallenged and unchanged. What’s concessionary about designing to maximize impact? Isn’t that why we’re in this sector?

Our ability to live and “stand” in solidarity with others that have been excluded and extracted from by systems that are predicated on keeping us apart depends on letting go of the concept of concessionary returns.

At Community Credit Lab (CCL), we are practicing this through lending programs led by community partners and designed to get capital to people on their terms. At Common Future (CF), we co-create capital products by and for communities. In our collective work at CCL and CF aggregating and deploying capital, we start with determining the goals of our partners, baking that into terms that maximize impact as determined by them, and then seek investment that will support those goals effectively. In other words, we begin by centering and designing for impact as our north star, not financial returns.

As we continue our collective work, we look to examples from Kataly Foundation, including their Restorative Economies Fund and the Restorative Economics Framework developed by their CEO, Nwamaka Agbo. We also look to the Candide Group and their Olamina Fund as an example of how to bridge the gap between investors and community organizers. Other groups we take notes from across the U.S. include Mission Driven FinanceNative Women LeadSocial Impact Strategies GroupMortar, and Denkyem Coop.

Equitable terms

If we can accept that ESG public equities and public debt aren’t moving the needle much and that an ESG Reckoning is Coming since ESG “efforts have yielded scarce results,” let’s focus on private impact investments and use a concrete example of how we can go even further in community investing if we prioritize impact over financial returns:

If an accredited impact investor lends capital from their discretionary impact investment allocation to indigenous-owned businesses at 0% interest, rather than more traditional rates of 8% – 15% interest per year, who is that concessionary for? Who should be capturing the greatest benefit?

From the perspective of an entrepreneur that has less of a personal financial cushion and limited access to affordable capital, this is far from concessionary – it is catalytic. Not only that, when the average business value for Black owned businesses in the United States is just over $58,000 according to Prosperity Now’s research and the average business value for white owned businesses is almost 10X that at just over $500,000, we have to question every dollar that is extracted from Black owned businesses that could have been used to grow business value instead. The same can be said for Native owned, Latinx owned, or Asian owned businesses – on average, all of these ownership demographics result in substantially less business value due to market dynamics predicated upon racialized systems. We must reverse course if we want to acknowledge our collective history and the resulting present day financial systems that exist.

Unfortunately, since impact investments are currently negotiated primarily based on their financial return potential to asset owners, the outsized benefit of a reduction in the cost of capital to the recipient continues to be sacrificed (what power do borrowers have to negotiate?). In the example of the Indigenous entrepreneur, instead of returning 8% – 15% interest per year back into her company to employ others and be an anchor in her local community, too often the majority accrues to financial intermediaries and wealthy investors instead. Not only that, with uncertainty due to COVID-19 and rising rents due to gentrification in many communities, a “market rate” loan may ultimately shutter her business, not support it effectively.

There is a growing recognition that if we truly want to build towards an equitable society, we need to center equitable terms, power structures, and rules of the game in that process. At Community Credit Lab, we described in our recent research Examining the Financial System to Build Community Wealth, the concept of “concessionary” in community investments is in fact a common misnomer when it comes to comparing investments made to transfer wealth vs. build wealth in our society. Under the IRS’ current regulations, intergenerational wealth is often transferred to kin using intra-family loans that are regulated with minimum required interest rates. These rates are known as the Applicable Federal Rates (AFRs) calculated using the average of government treasury bills. AFRs are essentially pegged to T-bills and have historically been extremely low (as of January 2021, the short term AFR was only 0.14%). There’s nothing concessionary about supporting your family more, right?

Without question, the above rate would be considered “concessionary” under current “market-rate” definitions, however, when it comes to transferring wealth within wealthy families, we not only accept lending at favorable rates, but also treat the approach as best practice when it comes to estate planning. This is a clear, intentional, and unacceptable double standard that exists in our financial system and the impact investing ecosystem. Accredited impact investors price loans to kin at concessionary rates of .14%, meanwhile loans are priced “to community” at 50X that pricing – how can we build towards an equitable society this way?

New benchmarks

The good news is that we can change this dynamic if we are capable of envisioning a society that is dependent upon each other – if we are capable of considering our neighbors in the ways we consider our kin and our capital as a tool for collective healing and change. We can let go of the concept of concessionary. Impact investors do not need to extract from others, rather, we can start from the place of understanding what it takes to support others and build a sustainable planet where we all can thrive. We can make these decisions just like decisions we make about our family members who want to invest in themselves and their communities.

When it comes to impact investing and, specifically, building wealth within communities, we must find allocation strategies on preferential terms not only palatable, but also essential if our goal is to truly build towards an equitable society in a sustainable environment. What would it look like for impact investors to benchmark their community investment portfolios against the Applicable Federal Rates? What would it look like for ESG investors, especially philanthropic institutions, to carve out significant allocations to impact-first strategies and focus less on a target investment hurdle rate that keeps institutions (and advisors) operating in perpetuity?

If our goal is to build towards an equitable society in the United States and, ultimately, an equitable society globally, we cannot continue to transfer and grow wealth under one set of rules and attempt to build wealth using another set of rules. We cannot continue to invest solely using ESG frameworks and sleep well at night thinking we’re doing our part without sacrificing financial returns in our impact investing. We must equal the playing field for all – and it starts with approaching impact investments with the question “concessionary for whom”?


Sandhya Nakhasi is chief investment officer and Ryan Glasgo is chief operating officer at Community Credit Lab. Eric Horvath is director of capital Strategies at Common Future.

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