Impact Investing: A Necessary Response to COVID-19

ON May 19, 2020

Invest in small businesses and nonprofits!

Put all your money into finding a vaccine!

Emergency responses are the only option now!

Spend everything you have, now, on all of the above!

The noise is deafening because there is no SINGLE  way of responding to COVID-19. Every investor has a different investment strategy, timeline, and impact integration method. Yet we all feel the urgency to respond to what has become a global health crisis, economic disaster, and systemic risk. 

As we face this global health crisis, we are seeing the closure of small businesses, the deepening of existing social inequities, and the largest hardships for our most vulnerable communities. It is imperative to utilize every tool available in building response and to not let marginalized communities be further marginalized.

In response, there is a reinvigorated need for collaboration. Between investors and investments, foundations and grantees, and governments and communities, society as a whole must work together to combat COVID-19 on a medical front, an economic front, and a social front to ensure that as many resources as possible are accessible for those who need it most.

Alongside donations and grants, impact investments have a powerful role to play in stepping up to address today’s problems. From maintaining a nonprofit’s operations to ensuring that small businesses actually receive Paycheck Protection Program“PPP” loans, investors of all kinds, investment managers, and consultants are offering creative solutions that further the fight against COVID-19.

Grant Making vs PRIs?

As the Minnesota Council of Foundations recently urged in their “Integrated Capital Crisis Response & Recovery Approach”, the devastating impact of COVID-19 requires foundations to be “bold, creative, and fast” in deploying capital.

So why Integrated Capital? By incorporating Program Related Investments (PRIs) alongside the more traditional form of grant-making, philanthropy can activate more of its capital to be working towards solutions for the world’s problems. Through PRIs, a foundation is able to activate capital in its endowment or re-deploy investments in the future, allowing for the capital to continue towards the foundation’s mission over time. 

How are Impact Investors Responding to COVID-19

Here are some of the ways we see impact investors step up to the task:

Bridge Loans – This can be the difference between small businesses and nonprofits staying in operation or closing their doors. With bridge loans, nonprofits that serve the most vulnerable in our communities can maintain payroll and turn their energies toward evolving their services to public health regulations.

Flexible Interest Payments and Terms – All investors and foundations have existing grantees or investments facing the challenges of COVID-19. By waiving interest payments, extending payment deadlines, and opening communication channels, impact investors can continue to support current grantees and borrowers. 

Open Communication – The unexpected economic impact of COVID-19 may cause fear of change in grant availabilities. Actively addressing these changes and concerns is an important component of supporting communities during this time.

Capital for Community Development Financial Institutions (CDFIs) – In accessing money from the Paycheck Protection Program (PPP), qualified banks must also have enough liquidity to provide capital to their clients for an eight week assessment period before they are reimbursed by the Small Business Association. By providing capital for CDFIs, more PPP money will be accessible to small businesses in marginalized communities that are underserved by commercial banks.

A Highlight (PPP and CDFIs)

The Center for Responsible Lending (CRL) estimates that upwards of 90% of POC owned businesses face being shut out of PPP loans when applying through mainstream banks or credit unions. Many banks participating in PPP are only issuing these loans to existing clients, which is a barrier to People of Color (POC) owned businesses that are less likely to have commercial banking relationships.

Major banks have also been accused of prioritizing larger loan applications in order to maximize loan-related fees and profits. This shuts out small businesses as a whole since PPP loan sizes are based on a businesses’ average monthly payroll. The prioritization of larger businesses disproportionately affects POC- and women-owned businesses, which on average have 30% fewer employees compared to their white- or male-owned counterparts. 

Community Development Financial Institutions (CDFIs) are “profitable but not profit-maximizing”, ensuring that the community is put first, before shareholders. They are financial institutions that focus on personal lending and business development in poorer local communities. With their focus on communities traditionally underserved by commercial banking, CDFIs are especially well suited to tackle issues with PPP funding distribution.

Final takeaway:

Know this: you have a choice about how to weather this crisis as a player in the impact marketplace, and it is not a binary one. Your actions today can determine the longer-term impact and returns you help generate. We are not asking for you to put the viability of your own organization at risk, but to remember (or even prioritize) the ‘impact’ in impact investing.”  – Open Roads Alliance, Quoted in Impact Alpha March 19th 2020

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What I'm doing now

The tide is turning: more people are thinking about their moral, social and environmental values when they shop, play, and invest. Impact investing is going mainstream with more robust and consistent impact measurement and monitoring happening every day. The blowback on ESG (Environmental, Social, Governance) makes true impact investing (which requires impact measurement) all the more relevant. Will changing how people view money change the world? Well, it isn’t a panacea for all that afflicts us but as they say, “follow the money”. Investors have power. Use yours wisely.