Impact investing merges making money with making a social impact

As cities and counties move to address the diverse social problems faced by constituents in their communities, one long-standing and nearly universal hurdle stands in their way: financing. Governments are traditionally funded by taxation, which presents a challenge, especially for low-income communities. This makes it so either outside investment from the federal or state governments, or alternative solutions—like impact investing—are required to get the ball rolling on any number of projects. Given the flush state of public coffers these days, much focus has centered on federal funding—not as much on impact investing, or investments that draw a financial return and have a positive social influence.

Just as auto manufacturers spurred unprecedented suburban growth after the turn of the century, and the post-World War II real estate boom transformed America’s urban landscape (for better and worse), modern cities and counties again stand to benefit from impact investing.

“A lot of the tech companies, now, have a vested interest in having a more educated population and a wealthier population—and a lot of their projections are based on long term evaluations of wealth—can help move this just as the automotive industry and the real estate industry helped create incentives for infrastructure,” said Ron Homer, chief impact investing strategist at RBC Global Asset Management. “We just need to apply those same initiatives to make it a little bit more inclusive and equitable about the targeted constituents who are being reached out to.”

Homer, who has worked in the financial and banking industry for about five decades in various roles including COO and CEO, with a focus on equity.

In today’s information era, “many foundations are trying to align their investments with their overall mission, to be more effective,” Homer said, noting issues like climate change and affordable housing as particularly powerful conduits that can attract private funding. Local governments should take note.

And beyond private investment, governments can themselves engage in impact investing—for their fiscal health and the betterment of their constituents. Especially given the amount that’s coming down the federal pipeline, Homer said local governments can get more bang for their buck by using their American Rescue Plan Act or Bipartisan Infrastructure Plan allotment to qualify for much bigger initiatives. Another way is “in combination with other federal loan programs,” either alone or via public-private partnerships, Homer continued. For example communities could purchase bonds that are guaranteed by the federal or state government, or invest in “Multifamily projects that have FHA guarantees.”

In this effort, strong initiatives can be identified when short-term goals align with long-term concerns. As local governments stare down the possibility of rising inflation, for example, Homer said it’s important to address the root causes along with the symptoms.

“I would advocate for doing things that are building blocks for addressing some of those longer term structural issues,” Homer said. In response to inflation, administrators could, for example, offer tax credits to investors who invest in the weatherization of affordable housing, or back loans that potential small business owners could qualify for without a stellar credit score—which has historically prevented minorities from starting their own businesses.

“There’s a way to marry activities of state and local governments to investors who are interested in those specific areas,” Homer said. It starts with education on both sides of the public-private divide.

“Impact investors need to articulate, in an actionable form, what governments can do with the resources they currently have. There are financial intermediaries who recognize the opportunity,” Homer said. Combining making money with making an impact is a win for everyone.

And from the government’s perspective, it’s important to recognize that “Every asset owner has an interest in the environment in which it operates. Corporations and organizations literally spend millions and millions lobbying the government for their interests,” he said. 

If that’s the case, it’s on administrators to expand that interest to encompass “A broader view”—which includes social issues that impact quality of life, like the state of the natural environment and affordable housing.