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Can Community Finance Advance Racial Equity? It Takes an Ecosystem

Image Credit: Brock Wegner on Unsplash

Last December, the Urban Institute, a prominent Washington DC-based thinktank, issued a short report, A New Era of Racial Equity in Community Development Finance: Leveraging Private and Philanthropic Commitments in the Post-George Floyd Period. Could a new era of racial equity in community development finance be upon us? The report’s title would seem to offer an optimistic answer to that question.

Written by Brett Theodos, Steven Brown, Michael Neil, Ellen Seidman, and Sheena Ashley, the report indicates that financial commitments to racial equity made by foundation and corporate donors between June 2020 and December 2021 totaled $215 billion, with more than half of that amount going to “community development activities and investments” (6). Community development financial institutions (CDFIs) stand to be leading recipients of these funds. The authors add to the optimism by writing that pledge fulfillment so far has been “either on time or ahead of schedule” (6).

But many questions remain, such as: will the money go where it is needed, and will the commitment be sustained? Or, as happened a few years ago after an initial push to fund racial equity in the wake of the police killing of Michael Brown, will racial equity philanthropy once again stall out when superseded by another crisis? After the election of Donald Trump as president in 2016, philanthropic adviser Will Cordery noted that many foundations cut funding to Black-led movement groups.

Will this time be different? As Theodos and his coauthors detail in their report, business and philanthropy don’t just need money; if a “new era in racial equity” is to truly occur, business and philanthropy need to make many changes to the way they function.

 

How Are Racial Equity Commitments Structured?

With corporate announcements, skepticism regarding big numbers is warranted. Last year, an article in NPQ about Community Reinvestment Act (CRA) commitments made by banks noted that announcements of commitments are routinely far greater—often by a factor of five—than the amount of new money committed. For example, Jesse Van Tol, CEO of the National Community Reinvestment Coalition (NCRC), explained that $384 billion in agreements with 14 banks that his organization helped negotiate with resulted in “$70-80 billion in net new activity.” Certainly, that is nothing to sneeze at, but it is also a lot less than $384 billion.

Is the same dynamic at work in the new round of racial equity commitments? The simple answer: yes, it is.

All told, out of $215 billion in announced commitments, over $200 billion came from the private sector, with banks and financial institutions responsible for over a fifth of that total (16). Foundation commitments totaled an estimated $12.6 billion. The corporate commitments are much larger but often come with repayment obligations. For example, of the $49.5 billion in corporate commitments made by the nation’s 50 largest public companies—the $200 billion figure is based on a larger set of a thousand companies—the Washington Post found that $45.2 billion (91.3 percent) were investments or loans, with only a little over $4.2 billion offered in the form of grants.

A further caution from the team at Urban Institute—as with CRA commitments, the racial equity commitments “represent a mix of some new funding and some repurposed or refined targeting, delivery, and execution of existing products and activities” (6).

In short, corporate press releases can be deceiving. Nonetheless, the grants combined with lending commitments, access to banking and credit, targeted procurement, growth capital, and impact investments could prove effective. The obvious question that remains is: how impactful will they be?

 

Using Racial Equity Funding to Retool Community Finance

In their report, the authors delve into what I like to call the paradox of community finance—namely that, even as CDFIs have grown rapidly, leading to very impressive-sounding numbers, they are but a sliver of the financial world. CDFI assets reached $266 billion by 2020, a remarkable rise from a baseline of $4 billion in the mid-1990s. But $266 billion is still less than one percent of an estimated $27.7 trillion in bank assets. Citing past research from lead author Theodos, the report emphasizes the remaining community finance gaps, noting that, “between 2011 and 2015, 27 percent of US counties saw no CDFI lending activity, and half of all counties saw annual CDFI lending activity that amounted to less than $7 for every person earning below 200 percent of the federal poverty level” (9).

Presumably, following record federal commitments to CDFIs in 2020, these gaps are smaller now. Nonetheless, the authors note that to effectively advance racial justice, more money alone is not enough. Theodos and his coauthors offer 11 areas where changes in practice—and not just increases in dollars—are required. To summarize, these changes include the following:

  • A greater percentage of support for CDFIs should come in the form of operational support (equity, grants), rather than low-interest loans.
  • Loans, when provided to CDFIs, should not only bear low interest rates, but should be extended over longer periods of time—with terms of at least 10 years.
  • Investment in finance technology—not just tech hardware, but technical assistance to train staff to use it—is required.
  • Anti-gentrification capacity must be increased—specifically, this means policy support for land banks and community land trusts that facilitate long-term community control over land use.
  • Nonprofit organizations that facilitate direct community ownership over land, both for commercial and residential use, need additional support.
  • It is important to elevate community voices in financial decisions.
  • Government-sponsored enterprises Fannie Mae and Freddie Mac, both of which hold trillions in real estate loans, can be leveraged “to better serve the parts of the market where they lag—small loans, manufactured housing, affordable housing preservation, and climate resiliency among them” (11).
  • CDFI dollars can go farther if Fannie and Freddie buy up CDFI debt for “non-housing, mission-based community development loans.”
  • New insurance products backed by “mission-financed insurance companies” are needed to enable BIPOC communities to develop land and expand community holdings. As NPQ has noted, the prevalence of heirs’ property—land owned in common by heirs—has often impeded access to capital; Black land justice advocates and allies have called on the federal government to offer a mix of grants, insurance, technical assistance, and loans to remedy this.
  • Subsidies to promote home and small business ownership in BIPOC communities should be re-targeted, in particular by using down-payment assistance and small business grants to unlock larger commercial loans.
  • CRA rules, as Dedrick Asante-Muhammad of NCRC has advised, need to be rewritten to specifically measure “how these regulations affect communities and people of color” (12).

 

The Road Ahead

As Theodos and his coauthors acknowledge, to achieve community economic development, it is important to work simultaneously on both the finance and business development sides. Neglect either, and the overall system will fail to change. As they point out, “a lack of demand for capital does not indicate a lack of need; it signals a lack of capacity to absorb the investments these communities have missed out on. This capacity must be built” (7).

In the last section of their report, Theodos and team offer some additional cautions. One is to avoid the temptation of supporting large but easy projects that meet numerical “racial equity commitment” targets, but which fail to prioritize higher-risk, more impactful investments. A second is to revise metrics to ensure that equity impact measures correspond with the extended time horizons demanded by the work. A third is to not shy away from recognizing the scale of investment needed, which the authors estimate to cost between $500 million and $1 billion per neighborhood: “comparable in scale to the Marshall Plan that provided US aid for economic redevelopment in Western Europe following World War II” (14). Lastly, the authors call for new norms within business and philanthropy, including “transforming workplace culture, shifting power dynamics, and diversifying staff, especially leadership, and supplier composition.” Absent internal change, they caution, “external commitments to equity will likely falter” (15).

In their conclusion, the authors acknowledge that these are early days; while a paradigm shift is possible, many obstacles remain to realizing it. Last year, Lisa Mensah, CEO of Opportunity Finance Network, a trade association of CDFIs, told NPQ that CDFIs must “go deep” to meet their mission. Her argument to CDFI funders was that community finance will go deep “if they have the funds to go deep,” a point on which Theodos and his coauthors concur. The authors write that the commitments of 2020 and 2021 offer “a chance to reimagine how the private sector can and should invest in communities as a vehicle for greater racial equity” (15). Whether that chance is seized, they concede, remains to be seen.

 

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