Climate+Community Development: Emerging Investment Frameworks Fuel Transformative Impact
Above: HopeWorks Station in Everett, WA, a housing and jobs training development project. Enterprise provided a suite of support including a loan, LIHTC, NMTC, grant funding and technical assistance.
This article includes excerpts from What’s Possible: Investing Now for Prosperous, Sustainable Neighborhoods, a collaboration of Enterprise Community Partners, LISC and the New York Fed. What’s Possible offers practical solutions for clean energy, resilience and equity. It’s intended as a playbook for taking collective action to build a stronger, more inclusive future.
In the early 1950s, predominately white neighbors in Bedford, NY, worked to protect a 60-acre hemlock forest in the Mianus River Gorge, a “wild and free river running through a primeval forest,” that was at risk of being turned into a housing development.1 They formed a new conservation group, pledged their life insurance policies, and gained financing from The Nature Conservancy to preserve the land. In the following decade, Rachel Carson published Silent Spring, a book largely seen as launching the modern environmental movement that also became a rallying point for social activists in the 1960s.2
At the same time, in another Bedford not so far away, real estate agents and speculators employed “blockbusting” to stoke and profit from middle class white flight in the Bedford-Stuyvesant neighborhood of Brooklyn.3
Economic investment declined, with more than 50 percent of its housing stock being classified as dilapidated and insufficient.4 By 1967, recognizing something had to change, the first community development corporations (CDCs) were formed—including the Bedford-Stuyvesant Restoration Corporation—to design, implement, and secure financing to reduce poverty and spur economic growth. This was paired with other positive changes driven by the civil rights movement, righting some of the wrongs of decades of discrimination, redlining, and economic disinvestment.
Over the years, both the environmental and community development movements have grown and evolved, and both have had numerous successes. But until recently, they have rarely intersected.
We can no longer afford to work like this. Communities with a history of economic disinvestment bear the greatest costs of environmental disasters and face the greatest risks from climate change. If we are to comprehensively address the challenges facing people and the planet in the twenty-first century, leaders from both the environmental and community development movements need to integrate their approaches.
Climate issues are community development issues and vice versa. Those in community development finance must address the impacts of climate change in order to meet impact goals for economic opportunity and growth. Likewise, those in climate finance need to adopt an equity lens to focus investments in areas grappling with significant pollution and heat challenges, making sure that low-income communities and communities of color are not left behind. What do investors need to replicate and expand innovative funds and strategies that account for climate and community? How should they evaluate their existing portfolios for risks, and what frameworks do they need to effectively deploy capital in the future?
The tools already exist. Tools include data and reporting frameworks that can help investors analyze projects and investments and standardize impact measurement and discussion. From that vantage point, we can see the challenges in aligning climate and community development work, better understand the missteps of the past, and develop strategies that can help us work more equitably and holistically going forward.
Integrated Investment Solutions: Using Green, Social, Sustainability, and Sustainability-Linked Bonds
In 2007, research from the Intergovernmental Panel for Climate Change strongly linked human action to climate change5 It spurred a group of Swedish pension funds to think about how their role as fiduciaries could finance projects that would create climate benefits while reducing risk for their investors. Without a ready-made investment opportunity, they turned to the World Bank, which issued the world’s first green bond in 2008. That effort formed the basis for the Green Bond Principles coordinated by the International Capital Market Association (ICMA).6
The principles apply a framework for issuers to raise capital for projects with environmental and climate impacts. Green bonds are evaluated based on use of proceeds, process for project evaluation and selection, management of proceeds, and reporting. These four components create a clear disclosure process for issuers, which investors, banks, underwriters, arrangers, placement agents, and others can use to understand the characteristics of any given green bond.
Once the green bond market took off, issuers noticed that bonds could address persistent market gaps in ways that go beyond pure environmental projects. That recognition gave rise to the Social Bond Principles, sustainability-linked bonds, transition bonds, and the Sustainability Bond Guidelines—all of which incorporate a focus on both green and social projects or activities. Over time, the influence of these designations has grown. In 2017, LISC became the first CDFI issuer to align with the Sustainability Bond Guidelines in a rated bond offering. In 2019, the Low Income Investment Fund (LIIF) became the first CDFI issuer to receive a second-party opinion confirming that its bond was aligned with the Sustainability Bond Guidelines. With these precedents, CDFI issuers increasingly aligned their offerings with the ICMA Sustainability Bond Guidelines, with six out of ten rated bond offerings aligning with the guidelines and four receiving a second party opinion.7
While social and sustainability bonds that incorporate target populations have grown, the green bond subset of the market still holds the majority market share by dollar volume. There is great potential to integrate the target population definitions in the social bond designation further with green use of proceeds bonds to educate stakeholders on how climate finance impacts communities. In 2020, ICMA introduced its Climate Transition Handbook to help investors craft approaches to climate risk that mitigate both environmental and social externalities and contribute to progress on the UN Sustainable Development Goals.8
Looking Ahead: Climate and Community First-Approaches to Capital Allocation
In order to equitably drive capital into communities and to support their climate resilience, it is imperative that community and climate investors coalesce around frameworks that send a clear market signal. Like green, social, sustainability and sustainability-linked bonds, these tools should be:
- Standardized – The market needs to be able to measure and report the same types of metrics in order to easily compare one investment to another. An impact measurement tool can reflect the priorities and mission of an organization while also aligning to an industry-wide standard.
- Accessible – Navigating the ecosystem for sustainable and impact investing data and reporting requires time, staff, and financial resources—making it inaccessible for smaller organizations, especially those serving low-income communities. For them to participate, and to promote widespread adoption, those organizations need access to free or, at the very least, tiered pricing.
- Scalable – Investors need to work together to invest in and leverage technology platforms, as well as to build the requisite capacity to educate the market on what platforms exist. The resulting standardized data can be aggregated and reported to stakeholders, driving scalable solutions.
While we recognize there is not a one-size-fits-all approach, finding shared tools and a common language can help organizations be explicit about their climate and community impacts. In doing so, organizations can learn best practices from one another and create a community of practice.
Partnering with Enterprise and LISC puts climate and community frameworks into action and can help drive capital into projects and investments that build a resilient, just, and equitable future for all American communities. Visit Enterprise at www.enterprisecommunity.org and LISC at www.lisc.org to learn more.
Article by Anna Smukowski of Enterprise Community Partners and Laura Mixter of LISC.
Anna Smukowski is responsible for ECLF’s Impact Note program in addition to supporting capital raising, fund structuring and impact measurement and management efforts for on- and off-balance sheet lending. Prior to joining ECLF in 2022, she led LISC’s $200 million retail note offering, coordinated investor relations and positioned LISC’s capital raising within ESG, impact and social bond frameworks. She also managed $50 million in LISC’s Paycheck Protection Program (PPP) deployment and has structured and managed affordable housing and economic development funds, as well as pay for success work through a Social Innovation Fund grant award. Anna started her career as a strategy and operations consultant at Deloitte, where she was seconded to the UN Global Compact to examine corporate trends in carbon disclosure. She serves on the EPA’s Environmental Financial Advisory Board. She received her B.S. from NYU Stern and her M.B.A. from Columbia Business School.
As LISC’s first ESG & Impact Reporting lead, Laura Mixter oversees LISC’s impact measurement and management work, including the implementation of the LISC Impact Matrix, for all loans financed through LISC’s loan fund. Laura joined LISC in December 2021 after spending six years at our affiliate New Markets Support Company (NMSC). At NMSC, she held a number of different roles on the Asset Management, Advisory Services, and Impact teams. Laura has a BA in Public Policy from Duke University and an MBA from Duke’s Fuqua School of Business. While at Fuqua, Laura performed research on successful impact investing firms as a CASE i3 Associate.
Footnotes:
[1] Mianus River Gorge, The Early Years, available at- https://mianus.org/the-early-years/
[2] Katharine Rooney, “This is how climate science went mainstream,” International Institute for Sustainable Development, November 5, 2019. Available at- https://www.iisd.org/articles/insight/how-climate-science-went-mainstream
[3] Blockbusting is an illegal practice used to convince homeowners to cheaply sell their property by appealing to fears of a new minority group moving in, then reselling at a higher price.
[4] Jack Newfield, “Bedford-Stuyvesant: Giving a Damn About Hell.” In Robert Kennedy: a memoir, (New York: New American Library, 1988).
[5] Rajendra K. Pachauri and Andy Reisinger, “Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change.” (Geneva, Switzerland: Intergovernmental Panel on Climate Change, 2008). Available at- www.ipcc.ch/report/ar4/syr/
[6] “10 Years of Green Bonds: Creating the Blueprint for Sustainability Across Capital Markets,” The World Bank, March 18, 2019. Available at- https://www.worldbank.org/en/news/immersive-story/2019/03/18/10-years-of-green-bonds-creating-the-blueprint-for-sustainability-across-capital-markets
[7] Elise Balboni, Kathleen Keefe, and Anna Smukowski, “CDFIs and the Capital Markets: Trends in Investment & Impact Measurement.” (Enterprise and LISC, May 2023). Available at- www.enterprisecommunity.org/sites/default/files/2023-05/CDFIs-and-the-Capital-Markets-May2023.pdf
[8] ICMA, Climate Transition Finance Handbook, available at- https://www.icmagroup.org/sustainable-finance/the-principles-guidelines-and-handbooks/climate-transition-finance-handbook
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