What Exactly Does It Mean to Invest in the Community?
When used in the financial sector, the term “community investing” refers to companies and investment products established to assist economically disadvantaged communities.
In the United States of America, there are many different kinds of Community Development Financial Institutions (CDFIs), some of which include Community Development Credit Unions (CDCUs) and Community Development Banks (CDBs).
These are just two examples of the community development financial institutions.
A wide range of financial products and services, such as commercial loans, personal credit, financing for real estate development, and other financial goods, are among the ways in which these organizations supply underserved communities with capital.
KEY POINTS
- Community investing refers to the process of providing financial assistance to communities that are located in economically disadvantaged areas.
- The majority of the time, this is accomplished through the utilization of a wide variety of investment products and financial intermediaries.
- In part, the work that is being done to coordinate organizations such as the United Nations Principles for Responsible Investment (PRI) is contributing to the practice’s growing popularity all over the world.
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Internal Workings of Community Investing and How They Function
The investing community is currently experiencing a larger movement that includes investing in the community.
This movement is currently taking place.
A growing number of institutional and retail investors are beginning to take into account the social and environmental effects of the investments they are considering making as a significant factor in their decision-making process.
For instance, more than 3,500 participating financial institutions have committed to allocating their portfolios to investments that have strong environmental, social, and governance (ESG) characteristics.
This commitment was made within the framework of the Principles for Responsible Investment (PRI), which is based on the United Nations.
As of the month of March in the year 2020, these institutions collectively have more than $103.4 trillion in total assets under management (AUM).
Community investing, on the other hand, has a distinct meaning in the United States, despite the fact that it is a component of the worldwide movement toward engaging in ethical investment practices.
It was the Riegle Community Development and Regulatory Improvement Act that was passed by the United States Congress in 1994 that resulted in the establishment of the Community Development Financial Institutions Fund, also known as the CDFI Fund.
Through this new organization, businesses that provide financial services will have the opportunity to submit applications for tax credits and other incentives, which will assist in financing investments in economically disadvantaged communities located all over the United States.
Putting Community Investment into Practice in the Real World as an Example
When July 2020 rolled around, there were nearly 1,030 financial institutions that had obtained certification from the CDFI Fund and were providing a variety of services to communities that were not being adequately served.
Approximately forty percent of these were credit unions and banks that are affiliated with CDFIs and use the funds from their depositors to support the communities in which they are located.
There were approximately fifty percent of these that were loan funds, which are organizations that pool the capital of investors in order to provide loans to business owners in regions that are relatively underdeveloped.
As of the year 2019, a total of approximately $141.2 billion had been invested in institutions that had been awarded the CDFI certification.
In addition, an increasing number of alternative and fixed income investment products are being developed specifically for the purpose of providing financial support to regional organizations.
As an illustration, the non-profit financial institution known as Calvert Impact cash provides a fixed income security that is known as the Community Investment Note.
The proceeds from this security are distributed to a number of different community investment projects.
The initial issuance of these notes occurred in 1995, and between that time and the end of the year 2020, approximately two billion dollars were distributed using these notes.
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