The blog of the Urban Institute
January 14, 2022

Four Ways to Pursue Racial Equity and Community Development Finance as a Moral and Economic Imperative

When it comes to addressing racial inequity, a national crisis can inspire public and private investment like nothing else. At the recent Freedman’s Bank Forum in Washington, DC, Vice President Kamala Harris and Treasury Secretary Janet Yellen announced the injection of $8.7 billion into the Emergency Capital Investment Program (ECIP), to be deployed to more than 175 community lenders across the country, from urban communities in California to low-communities in the Mississippi Delta to tribal communities in the Great Plains of South Dakota.

The community development finance institutions and minority development institutions that will receive the emergency capital “serve communities the financial sector historically has not served well,” Yellen said. “And most of the time, these are communities of color.” The funds will be used to address inequities in wealth, homeownership, entrepreneurship, and community access to capital.

At the forum, administration officials explained that the emergency funding was in response to the COVID-19 crisis, which has exacerbated systemic inequities that existed long before the crisis. The administration has also asserted that “advancing racial equity is not just a moral priority for our country—it is also critical to our economic success.”

The administration’s moral and economic lens on racial inequities seems to echo key ideas put forth by Dr. Martin Luther King Jr. more than a half century earlier. On March 31, 1968, less than a week before his assassination, Dr. King reminded us that “the arc of the moral universe is long but it bends toward justice.” Dr. King envisioned a beloved community for all people and saw economic and social justice as the twin pillars of that beloved community.

The US Department of the Treasury’s new deployment of $8.7 billion to community development finance is an important economic and moral initiative, and it is consistent with President Biden’s executive order on racial equity. But the centuries-old reality of structural racism, segregation, and racial inequality call into question the notion of framing the policy matter as an “emergency.” The entrenched inequities and capital access challenges facing Black communities are surely not unanticipated nor accidental. They are the predictable outcomes of the system’s design.

There are 40 million poor people here, and one day we must ask the question, “Why are there 40 million poor people in America?” And when you begin to ask that question, you are raising a question about the economic system, about a broader distribution of wealth.

—Martin Luther King Jr.

11th Annual SCLC Convention

Atlanta, Georgia

August 16, 1967

A new system-change, equity-centered approach to community development finance

A recent Urban Institute report, assessing racial equity commitments to community development finance by the private and philanthropic sector, highlights the importance of interrogating the systems and structures through which these commitments are made. The report tallied racial equity commitments that arrived on the heels of nationwide protests that followed George Floyd’s murder in 2020. Our findings show that, between June 2020 and May 2021, the private and philanthropic sectors have made at least $215 billion in racial equity commitments, with likely more than half going to community development activities and investments.

Four insights from the study highlight how the private and philanthropic sector could move beyond the “moment of crisis,” bake racial equity into community development finance systems, and reimagine the infrastructure needed to propel racial equity commitments as a moral and economic imperative.

  1. To sustain momentum beyond the moment, maximize existing resources and strengthen processes for targeting and delivering finances 
     
    Funders have made and are delivering on sizable racial equity commitments. They are applying lessons learned to improve impact as they go. Stronger transparency of process and accountability can help funders and other stakeholders determine whether recent investments in racial equity are truly performing as intended and reaching communities in need. Reviewing the composition of the current pool of investees can help funders extend beyond traditional partners and pathways for investment. 
      
    Similarly, boosting funding for community development capacity to absorb and more broadly distribute the new funding flows will allow more investees to develop the high-touch engagement, innovation, and risk tolerance required to serve the most underserved markets, rather than just pursuing larger transactions.
  2. Implement flexible, long-term financing
     
    Community development financing is about the long haul. Under the most favorable circumstances, results can be felt in two years, but it is more likely to take at least five years to observe positive racial equity outcomes. 
     
    Flexible and sustained funds are crucial. Meeting current needs is important, but systemic change will require a new paradigm of patience and more flexible capital to allow for course corrections and improvements along the way.
  3. Respond to great need with even bolder commitments
     
    Racial disparities in wealth, housing, health, and other social and economic measurements are severe, enduring, and, in some cases, worsening. We estimate between $500 million and $1 billion over the course of 20 or more years will be needed to create sustainable change each underserved community. 
     
    This investment would be comparable with the Marshall Plan that provided US aid for economic redevelopment in Western Europe following World War II. Though the government’s recent $8.7 billion investment in the ECIP is significant, it will be a drop in the bucket of the national landscape.
  4. Make system change a business imperative
     
    The unprecedented surge in private and philanthropic racial equity commitments made during nation’s racial reckoning was motivated by a public emergency. But sustaining long-term change requires organizations to engrain racial equity into their business models.
     
    To advance systems change, private institutions could adopt tailored versions of the federal mandate for racial equity by assessing diversity, equity, inclusion, and accessibility within all their policies and practices and implementing changes where needed.

The COVID-19 pandemic and nationwide racial protests that followed George Floyd’s murder showed that the public and private sectors have the capacity to substantially boost financial commitments to racial equity—and will do so when faced with a public crisis. But new commitments to racial equity should not wait for national emergencies. The “arc of the moral universe”—and the pillars of social and economic justice for all people—can lead to transformed systems and a sustained national commitment to racial equity that transcends our national moments of crisis.


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(Tanya Constantine/Getty Images)
 

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