The blog of the Urban Institute
April 6, 2020

To Support Vulnerable Communities, Foundations and Donors Should Consider Impact Investments

April 6, 2020

Communities all across the country are trying to access the new government response and recovery programs recently signed into law. Some will be successful, but others will struggle to determine eligibility or won’t have the resources to apply. This gives foundations and donors an opportunity to support the vulnerable communities most affected by COVID-19 by making impact investments from their institutional or individual assets, including donor-advised funds. These impact investments could bridge the funding gap until public funds arrive, or they could target nonprofits and small businesses that won’t be able to access these stimulus resources.

Around the time of the 2008 economic crisis, I worked at a community foundation where I helped make grants and provided technical assistance to frontline nonprofits and community leaders. A couple years later, I entered the impact investing field and saw how the capital needs and low rate of returns following the economic crisis served as a catalyst for the field’s growth. Although some sectors, like community development, and a few foundations had been making impact investments for decades, the practice hadn’t gained the attention it holds today.

Many variables have contributed to the increase in popularity and practice. While at the White House Office of Social Innovation and Civic Participation, I worked with colleagues who wanted to remove perceived policy obstacles to impact investing. The regulations and guidance we released demonstrated how foundations can make program-related investments, clarified that foundations can make mission-related investments (PDF) from their endowments, and addressed the permissibility of environmental, social, and governance investing (PDF) for private pension plans.

More than a decade after the last major economic crisis and with these policy measures, foundations and donors should have more clarity and experience using impact investing tools to meet today’s challenges. And it’s essential they do so equitably. After all, there couldn’t be a more critical moment to support the most vulnerable small businesses and nonprofits by using impact investments to bridge the gap until government grant and loan resources arrive or to finance those that won’t receive funds.

Take neighborhood daycare centers, especially those operating in low- and moderate-income communities. They provide critical child care services for working parents and guardians, operate on thin margins, and typically employ low-income women of color. Unlike larger, well-connected and well-resourced businesses and nonprofits, these daycare centers might not be positioned to identify and apply for government loans and grants on short notice or work through language barriers. If closed, the economic impact on these workers would put them in a financial crisis and would ripple out to the families they serve.

For the daycare centers lucky enough to receive government capital, our past research on government contracts and grants indicates potential hardship and delays associated with these funds. Most human-service organizations’ revenue comes from the government, and these grants and contracts do not typically cover the full cost of services, are complex to apply for and report on, and, most of the time, do not deliver payments on time.

Recognizing the challenges associated with accessing public dollars, foundations and donors could make place-based impact investments to institutions like daycare centers and expect social returns, in the form of addressing the needs of marginalized communities who are disproportionately suffering during this crisis, and financial returns when government dollars come in or when these centers reopen.

Recoverable grants, credit enhancement tools (like guarantees), and loans could help bridge the gap until government funding arrives, or they could provide essential capital to institutions that can’t access public dollars.

Foundations and donors could move cash to a community development bank, credit union, loan fund, or venture capital fund, which would allow that financial institution to support local communities during recovery. They could look for the federal Community Development Financial Institution certification to ensure the institution is committed to expanding economic opportunity in low-income communities.

They could donate to community foundations, like the New York Community Trust, which provides grants and loans through their NYC COVID-19 Response & Impact Fund, or the Whatcom Community Foundation, which offers emergency preparedness investments and response funding to individuals, families, nonprofits, and businesses.

Holders of donor-advised funds could contact the nonprofit that houses their funds to recommend grants and impact investments that could address immediate capital shortfalls.

Although there’s been much attention on how grantmaking can adapt to meet the needs of the crisis by becoming more equitable and accessible with unsolicited proposals, shortening applications and reporting requirements, and accelerating decisions, the same imperatives could be applied to impact investments as well.

Foundations and donors have an opportunity to step up and protect the vulnerable communities they serve until government funds arrive or social distancing measures are loosened. Making impact investments alongside grants and donations will increase the amount and diversify the type of private financial capital available to help struggling nonprofits, businesses, and neighbors through this crisis.

David Nelligan picks up his son, while Dorothy Williams looks on at Dottie's Family Childcare in the Dorchester neighborhood of Boston, MA on March 17, 2020. Dorothy normally cares for 10 children but was down to two today as parents increasingly work from home and remove their children from situations in which they could contract coronavirus. (Photo by Craig F. Walker/The Boston Globe via Getty Images)

 

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