Artist John Zerbe patiently takes the time to build trusting relationships with residents in Philadelphia’s Kensington neighborhood, engaging them throughout his process and incorporating them in his works. Zerbe is pictured here before one of his works, a mural at the Kensington Corridor Trust Community Garden. (Photo by Jasmin Velez)
The simple physics equation, momentum = mass x velocity, tells us that momentum is a value we can control. In the realm of social change, community-based leaders are skilled at influencing and using momentum to advance local solutions but often lack all the financial resources they need to push those solutions to their full potential.
What would be possible if investors and funders of all types boldly supported local leaders’ abilities and solutions in new ways? What if leaders could access significantly more and better-suited impact investment and grant capital for their communities? With community-based leaders as a full part of the equation, is it possible to generate enough mass and velocity to equal the momentum needed to solve entrenched social and economic problems?
Tools that can fuel solutions to inequity, exclusion, and extreme concentration of wealth, and push toward inclusive, equity-building impact investing and its intersection with grant funding, are at hand. By embracing new strategies and mindsets, asset owners can deploy more innovative catalytic capital to local, regional, and national contexts.
Showing Up
In the United States, the public murder of George Floyd by Minneapolis police in 2020 sparked a national moment of reckoning with institutional racism, income inequality, and related failures inherent in US social and economic systems. In its wake, momentum for change seemed to build. Corporations and institutional philanthropy began issuing passionate statements about “meeting the moment” and “showing up” in communities in ways that they hadn’t done before, making financial commitments that now total $340 billion.
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Today, however, the delivery of these commitments is falling short of local community expectations, and not much has changed regarding who has access to capital. Foundations and corporations are still giving to large, established entities, because they know them and because they work at a scale that is efficient for institutional giving (as defined by the number of people or geography served). They also believe that larger organizations have a higher probability of impact at scale because of their size. But while the thought of giving out $340 billion in smaller amounts across thousands of communities may be daunting, reinforcing the same strategic approaches to the exclusion of others is extremely problematic. Why? Because it sidelines community-based leaders, their solutions, and as a result, undercapitalized communities.
As with so many things, funders can’t keep doing what they’ve always done and expect significantly different results at the community level. And you can’t build a movement around one approach. The only way to achieve sustained momentum that builds a movement is to leverage old channels and invent new ones that deploy large amounts of capital to smaller, less recognized, proximate leaders and organizations. This is what showing up differently in communities looks like.
The good news is thousands of undercapitalized community-based leaders could quickly gain significant momentum if impact investors and funders change strategy. What’s more, the basic tools to support them already exist, and funders can use them in ways that leverage local community assets while addressing needs and moving money out the door quickly. As long as the tools (including talent, money, and solutions) work in tandem with supportive mechanisms (including processes, systems, and operational infrastructure), they can create scalable and sustainable change. Of course, both require long-term funding and investment since they lay the foundation for new approaches.
The reality is that impact investment and philanthropy can’t advance racial and economic equity and justice without taking risks and making bets on people they don’t know, and investing in localized strategies, solutions, and leaders. This speaks directly to the central paradox: While the traditional approach to money management is part of the problem in philanthropy and impact investing, chosen strategies have also played an outsized role in where we are.
New Strategies
The five what-if scenarios below focus on designing new channels for deploying capital that could elevate and fund localized strategies while leveraging existing tools and channels.
What if the $234 billion in donor-advised funds (DAFs) and $1.157 trillion in foundation assets (as of 2022) integrated impact investing, rather than just giving away 5 percent-plus in grants? This could extend to investment in earlier-stage private companies and funds, as well as loans to nonprofit small businesses and affordable housing development. What if DAFs and foundations relied on fund allocators and managers who are proximate to communities and their issues? What if they tracked and transparently reported the impacts of their investments at a national level? Designed with intention, these commitments could provide longer-term, blended, and strategic investments in local communities and community-based leaders that both meet the moment and are accountable to communities, not just investors and funders. Heron Foundation offers an example of 100 percent impact endowment alignment. It also passes some decision-making to local communities via local investment committees that deploy the capital from the endowment.
What if more communities of faith exercised an ethic that steeps money in systemic and local economic justice, and thousands of religious endowments invested those assets in local and regional economic development? What if millions of congregants followed suit? What if the tens of thousands of churches currently projected to close in the next few years put their assets into trusts deeply aligned with community development, versus stranding those assets and real estate as they shutter? InvestedFaith is an example of a multi-funder, nonprofit initiative that works with local congregations to support community development by redirecting assets to social enterprises sourced from a practitioner advisory committee.
What if $152 billion in community development financial institution (CDFI) capital across 1,271 institutions, as well as thousands of community development corporations across the United States, were capitalized to take on more risk in financing communities? What if the CDFI industry, the Treasury Department, impact investors, and philanthropists designed and funded a massive new risk capital tranche that also increased operational capacity? Increased risk capital and operational support at the system level would yield greater responsiveness to community context and deeper economic impact. For example, Calvert Impact, an intermediate CDFI, has constructed equity-like risk capital to allow it to grow using a $15 million long-term, first-loss commitment from the donor-advised funds at ImpactAssets.
What if corporations adopted commitments to maximize value for workers and communities, in addition to generating wealth for shareholders? Recognizing that all company activity and investment capital involves risk, return, and impact allows corporations to advance any number of initiatives and policies. It could mean leveraging more than $5 trillion in corporate cash to guarantee or invest in CDFI risk capital, for example, or providing truly additive capital to support economic development in historically excluded communities.
What if local governments had sufficient organizational infrastructure to engage cross-sector community members? What if it could work across agencies to focus on innovation, and proactively leverage billions of dollars in public assets to make investments in new and existing solutions? When we fully embrace the need for local government to actively contribute and support the design of solutions, public sector research and development can become best optimized in cities across the United States. This can create opportunities for public-private investment to better identify, elevate, and financially support projects. New Urban Mechanics, a government-led initiative that originated in Boston, is a good example of how research and development can be operationalized in local governments.
New Mindsets
These scenarios are feasible, but they and other courses of action that people working on these issues might imagine require thinking about capital in new ways and shifting perspectives.
The first mindset shift is flipping the script on risk and considering the risk of inaction. Every story about transformation begins with someone taking a risk. Without minimizing the risk that investors and funders take on, it’s important to recognize that community-based leaders regularly take risks too, and have a unique and important perspective about these risks. Just as a bank has underwriting criteria, they ask: What’s the risk of inaction? What’s the risk to my community if I fail? How likely is it that my funders/investors will lose interest in my solutions before they reach maturity? And what’s the reputational and political risk of what I do and don’t do? Community-based leaders shop in the grocery store, attend the neighborhood block party, and sit in the barber chair every day next to someone in their community. They and their communities are the ones who are managing the lived risk in these transactions, both when they are successful and when they fail. Importantly, being on the front lines can decrease the risk of failure for community-based leaders, contrary to the belief that they and their solutions are risky investments.
The second mindset shift is confronting the use of power. Funders must acknowledge and interrogate the way they develop investment pipelines, undertake diligence, make decisions, and allocate capital. We must acknowledge and question how traditional money managers and philanthropic institutions structure power. This is about who has power and how they use it. Funders should work to create new risk-taking capabilities, capacities, terms, and definitions of success that are realigned with communities. Seeking out greater diversity in thought, experience, and racial and ethnic backgrounds in decision-making will help the field ensure that it isn’t just rearranging the landscape under the same power dynamics.
Investors and funders need to not just know better but do better. Nothing will change if they are fundamentally unable to take risks on managers, social entrepreneurs, and community-based leaders who do not fit the traditional institutional box and if they don’t consider the risk of inaction as equal to the risk of action.
New Momentum
Put simply, to get momentum, the movement to deploy more innovative, catalytic capital to leaders and local solutions requires greater financial depth and scale (mass), and agility and speed (velocity). What if capital got to leaders and solutions that have been historically overlooked and excluded, at scale and in a form that is designed and structured to build on community assets and address local needs? Local communities and community-based leaders are calling for this—and the appeal pre-dates 2020. They’re waiting to be seen and invested in.
Principal investors and capital intermediaries need to step up and fill these longstanding funding gaps through shifts in mindsets and by using existing tools in new ways—things that are completely in their control. The design, integration, and proliferation of deeper, audacious and just investing is a creative leadership response to the challenge at hand and should be a focus throughout the US financial system.
What’s next and how the field builds a movement that transcends the moment depends on the people working in these areas. It’s up to investors and funders of all types to contemplate and seriously grapple with what a change in approach would look like, for their institutions and their positions of power. These times demand it, and our world deserves leadership that responds creatively and humbly to the biggest challenges upon us.
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Read more stories by Lisa Nutter & Tim Freundlich.