Last December, the Urban Institute, a leading Washington DC-based think tank, released a short report, A New Era of Racial Equity in Community Development Funding: Leveraging Private and Philanthropic Commitments in the Post-George Floyd Era. Could a new era of racial equity in community development funding be upon us? The title of the report seems to offer an optimistic answer to this question.
Authored by Brett Theodos, Steven Brown, Michael Neil, Ellen Seidman and Shena Ashley, the report says financial commitments to racial equity made by foundations and corporate donors between June 2020 and December 2021 totaled $215 billion. dollars, of which more than half. going to “community development activities and investments” (6). Community Development Financial Institutions (CDFIs) are the main beneficiaries of these funds. The authors add to the optimism by writing that so far, the fulfillment of the promises has been “either on schedule or ahead of schedule” (6).
But many questions remain, such as: will the money go where it is needed, and will the commitment be sustained? Or, as happened a few years ago after an initial push to fund racial equity following the police killing of Michael Brown, will racial equity philanthropy once again stagnate when it is replaced by another crisis? After Donald Trump was elected president in 2016, philanthropic adviser Will Cordery noted that many foundations cut funding to black-led movement groups.
Will this time be different? As Theodos and his co-authors detail in their report, business and philanthropy don’t just need money; If a “new era of racial equity” is truly to occur, businesses and philanthropy must make many changes to the way they operate.
How are racial equity pledges structured?
With corporate announcements, skepticism about large numbers is warranted. Last year, an article in NPQ about commitments made by banks under the Community Reinvestment Act (CRA) noted that announcements of commitments are usually much larger – often by a factor of five – than the amount of new funds committed. For example, Jesse Van Tol, CEO of the National Coalition for Community Reinvestment (NCRC), explained that $384 billion in deals with 14 banks that his organization helped negotiate resulted in “$70 billion to $80 billion in net new business.” Certainly, it is not negligible, but it is also much less than 384 billion dollars.
Is the same dynamic at work in the new set of racial equity commitments? The simple answer: yes, it is.
In total, of the $215 billion in pledges announced, more than $200 billion came from the private sector, with banks and financial institutions accounting for more than a fifth of this total (16). The Foundation’s commitments totaled approximately $12.6 billion. Company commitments are much larger but often come with repayment obligations. For example, of the $49.5 billion in corporate commitments made by the nation’s 50 largest public companies (the $200 billion figure is based on a broader set of 1,000 companies) , the Washington Post found that $45.2 billion (91.3%) was in investments or loans, with just over $4.2 billion offered as grants.
Another caveat from the Urban Institute team – as with ARC commitments, racial equity commitments “represent a mix of new funding and targeting, delivery and execution of existing products and activities” (6).
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In short, corporate press releases can be misleading. Nonetheless, subsidies coupled with loan commitments, access to banking and credit, targeted purchases, growth capital, and impact investments could prove effective. The obvious question that remains is: what will be their impact?
Using Racial Equity Funding to Revamp Community Finance
In their report, the authors delve into what I like to call the paradox of community finance, which is that while CDFIs have grown rapidly, leading to some very impressive numbers, they are only a fragment of the financial world. CDFI assets reached $266 billion by 2020, a remarkable increase from a baseline of $4 billion in the mid-1990s. But $266 billion is still less than one percent of an estimate $27.7 trillion in bank assets. Citing previous research by lead author Theodos, the report highlights remaining gaps in community finance, noting that “between 2011 and 2015, 27% of U.S. counties had no CDFI lending activity , and half of all counties had annual CDFI loan activity that amounted to less than $7 for each person earning less than 200% of the federal poverty level” (9).
Presumably, following record federal commitments to CDFIs in 2020, these spreads are now smaller. Nevertheless, the authors note that to effectively advance racial justice, more money is not enough. Theodos and his co-authors offer 11 areas where practice changes — not just dollar increases — are needed. In summary, these changes include the following:
- A greater percentage of support for CDFIs should take the form of operational support (equity, grants), rather than low-interest loans.
- Loans, when granted to CDFIs, must not only carry low interest rates, but must be extended over longer periods, with tenors of at least 10 years.
- Investments in fintech – not just technological hardware, but technical assistance to train staff in its use – are needed.
- Anti-gentrification capacity needs to be built – more specifically, this means political support for land banks and community land trusts that facilitate long-term community control over land use.
- Non-profit organizations that facilitate direct community ownership of land, for both commercial and residential purposes, need additional support.
- It is important to have the voice of the community heard in financial decisions.
- Government-sponsored firms Fannie Mae and Freddie Mac, both of which hold trillions in home loans, can be leveraged “to better serve the parts of the market where they are lagging — small loans, prefab housing, preservation of affordable housing and climate resilience among them” (11).
- CDFI dollars can go further if Fannie and Freddie redeem CDFI debt for “non-housing, mission-based community development loans.”
- New insurance products backed by “mission-funded insurance companies” are needed to enable BIPOC communities to develop land and expand community assets. As NPQ noted, the prevalence of property of heirs— land held in common by heirs — has often hindered access to capital; Black land justice advocates and allies have called on the federal government to provide mix of grants, insurance, technical assistance and loans to remedy.
- Grants aimed at promoting home and small business ownership in BIPOC communities should be redirected, particularly by using down payment assistance and small business grants to unlock larger business loans.
- ARC rules, as advised by Dedrick Asante-Muhammad of the NCRC, need to be rewritten to specifically measure “how these regulations affect communities and people of color” (12).
The road to follow
As Theodos and his co-authors recognize, to achieve community economic development, it is important to work simultaneously on the financial and business development aspects. Neglect either, and the overall system will not change. As they point out, “a lack of demand for capital does not indicate a lack of need; this signals a lack of capacity to absorb the investments that these communities have missed out on. This capacity must be strengthened” (7).
In the final section of their report, Theodos and his team offer some additional caveats. One is to avoid the temptation to back big but easy projects that meet numerical “commitment to racial equity” goals, but don’t prioritize higher-risk, more impactful investments. A second is to revise the measures to ensure that the equity impact measures correspond to the extended time horizons demanded by the work. A third is not to hesitate to recognize the scale of the necessary investments, which the authors estimate cost between 500 million and 1 billion dollars. by district: “on a scale comparable to the Marshall Plan which provided American aid for the economic redevelopment of Western Europe after the Second World War” (14). Finally, the authors call for new standards in business and philanthropy, including “transforming workplace culture, changing power dynamics, and diversifying the workforce, especially leadership and vendor mix.” Without internal change, they warn, “external commitments to equity are likely to wane” (15).
In their conclusion, the authors acknowledge that these are the early days; if a paradigm shift is possible, many obstacles remain to achieve it. Last year, Lisa Mensah, CEO of Opportunity Funding Networka CDFI trade association, said NPQ that CDFIs must “go deep” to fulfill their mission. His argument to CDFI funders was that community finance will go deep “if they have the funds to go deep,” a point Theodos and his co-authors agree on. The authors write that the 2020 and 2021 commitments offer “a chance to reimagine how the private sector can and should invest in communities as a vehicle for greater racial equity” (15). Whether that chance is taken, they concede, remains to be seen.