New Frontier: A Community Foundation Embraces Impact Investing

photo: Jat306/shutterstock — photo: Jat306/shutterstock

On the long list of things that community foundations rarely fund, you’ll likely see “loans” and “capital projects” in there somewhere. These are the types of investments that many funders steer clear of, especially community foundations that have limited discretionary dollars to hand out once or twice per year.

This is why a recent $3 million commitment stood out to us at the Coastal Community Foundation (CCF). Thus far, we’ve covered two funders with this same name—one in Charleston, South Carolina, and the other in Encinitas, California. Here, we’re talking about the South Carolina funder, which has been on the local giving scene since 1974 and has over $250 million in assets. Normally with this funder, giving is split between two grant cycles per year toward causes in the fields of community development, arts and culture, education, children, special needs and the environment. But this spring, CCF made a different kind of investment—a newsworthy one that steps outside these parameters and pursues a different strategy entirely.

Under the theme of “place-based impact investing,” CCF last month committed $3 million for projects that have both a social benefit and a financial payoff. While many foundations are now experimenting with impact investing, it seems that community foundations have been slower to embrace this strategy. But there are signs that this is changing. For example, the Chicago Community Trust catalyzed Benefit Chicago, a $100 million effort to mobilize nonprofit impact investments in the city. And we recently reported on the fast-rising interest among institutions that host donor-advised funds in this strategy.

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With its new investments, CFF is looking to get at least the same or better financial returns that it gets with traditional investments, so the funded ideas will need to generate some cash flow to repay the foundation.

CFF’s $3 million will be going toward a first round of loans, equity investments, and loan guarantees. This isn’t an opportunity for programs in a service-oriented nonprofit, but rather money for things like capital projects that hold promise of being both charitable and yielding financial returns. Quite a few impact investments by foundations have taken the form of loans to nonprofits, like community financial development institutions or housing groups, that yield low-risk and reliable returns. Other investments go to business enterprises that also advance social goals.

"We don't have a preference whether it’s a nonprofit or a for-profit," said Christa Divis, CCF’s vice president of finance and chief financial officer. "We’re looking at the project."

This kind of funding shift may be concerning for some nonprofits. As we've discussed in the past, foundation impact investing has drawn criticism for its potential to divert scarce capital away from traditional grantmaking or put precious endowment wealth at risk.

Despite such concerns, impact investing has a powerful appeal for very good reasons: it's a way to bring larger amounts of capital to bear on tough problems, and it enables foundations to tap resources that are under its control, but which often sit on the sidelines in ways that don't advance the mission.

One area where CCF’s impact investing could expand its muscle is around affordable housing. The coastal region that CCF serves is rapidly growing, which means that housing prices are going up and affordable housing is more scarce than in the past. Traditional grantmaking has limited leverage in addressing capital-intensive housing challenges, while loans and other investments on a larger scale can make a dent in the problem. This is one of the most active areas of impact investing, right now.

As part of CCF's new strategy, investments of $50,000 to $600,000 are available to nonprofit and for-profit groups that have projects in the midst of development or that will launch within the next six months.

“Foundations are, by nature, instruments of social change. Traditionally, that change has been made through grantmaking,” said Divis. “Today, we are enhancing our capacity to make change.”

CCF has a geographic focus on the South Carolina counties of Beaufort, Berkeley, Charleston, Colleton, Dorchester, Georgetown, Hampton, Horry and Jasper. The Carolinas are prime example of a place that has been seeing an increase in wealthy donors lately and significant boosts in local philanthropy, as we often report.