March 24, 2021 •Hattie Brown
This is the third post of a series discussing the role of the ESG and impact investing field in advancing racial equity by increasing access to capital and measuring impact.
In the previous posts of this series, we discussed the racial wealth gap and the impact that historically low access to capital has had on communities of color. We also discussed what firms in the ESG and impact investing space are doing to advance racial equity. These strategies run the gamut from creating dedicated funds designed to reach Black, Indigenous, and People of Color (BIPOC) entrepreneurs, such as Reinventure Capital; to employing screening methods for companies with strong diversity, equity, and inclusion policies, like the Minority Empowerment ETF cocreated by Impact Shares and the NAACP (in ESG terms, a positive screen to increase exposure); to reimagining the process of due diligence with a racial equity lens, such as the Due Diligence 2.0 Commitment.
As previously discussed, the other side of the coin is measuring the impact of this work. Investors are using various tools and methodologies to plan, measure, and track impact over time. Organizations such as Mission Investors Exchange have put together resources for racial equity knowledge sharing in the investor community.
With a new administration comes new opportunities to further this work. President Joe Biden’s Build Back Better plan has promised to bring racial equity to the forefront of economic development by strengthening access to capital through a variety of mechanisms.
Priority Area: Equity Investments in the Small Business Opportunity Fund
According to President Biden’s Build Back Better agenda, one of the administration’s top priorities is to leverage the use of blended investment structures (both public and private sources of capital) to encourage small business growth and opportunity for Black and Brown entrepreneurs through the Small Business Opportunity Fund. This plan makes permanent the New Markets Tax Credit Program, a highly efficient tax-credit allocation program that has generated $8 of private investment for every $1 invested by the federal government since the program’s inception in 2010 to support local business growth in underserved communities. The program provides a credit of up to 40% for equity investments that benefit low- and middle-income communities.
The Small Business Opportunity Fund will dedicate $30 billion to leverage private investment of $5 for every $1 in new public funds, with the ultimate goal of reaching $150 billion in new capital opportunities for small businesses and entrepreneurs that have been structurally excluded and disproportionately impacted by the pandemic. Research from the Federal Reserve Bank of New York indicates that nearly twice the number of Black-owned businesses closed compared to white-owned businesses in the early months of the COVID-19 pandemic.
The plan also expands and extends the Obama-era State Small Business Credit Initiative (SSBCI), a program that has increased access to venture capital in underserved parts of the country. Historically, three-fourths of venture capital has been concentrated in just four cities: New York, Boston, San Francisco, and Los Angeles. Since the program’s inception in 2010, 80% of venture capital supported by the SSBCI went to states that previously received less than 20% of venture capital. The recently passed stimulus package includes $10 billion for the SSBCI, with $2.5 billion set aside for businesses owned and operated by socially and economically disadvantaged individuals, including minority-owned businesses.
Photo by Tim Mossholder on Unsplash
Priority Area: Capitalizing CDFIs
President Biden recognizes that CDFIs play a critical role in deploying capital to their communities. More than $27 billion in emergency assistance went to CDFIs, minority depository, and other community financial institutions in the omnibus appropriations and COVID-19 relief bill, and the Build Back Better agenda includes a plan to double their direct funding. In addition to venture capital, the SSBCI also focuses on lending to small businesses, with 80% of funding going to businesses with 10 or fewer employees. These mechanisms include the Capital Access Program, the Collateral Support Program, and the Loan Guarantee Program, which are primarily administered through CDFIs and community banks.
In order to deploy the capital, President Biden’s plan draws on key elements from the proposed Jobs and Neighborhood Investment Act, endorsed by the Black Economic Alliance, including the following criteria for community financial institutions:
- Demonstrate specified lending history regarding low- and moderate-income borrowers and other targeted populations; and
- Provide details regarding plans to expand or maintain lending to certain minority communities and historically disadvantaged borrowers. (In ESG terms, this mechanism can be viewed as screening criteria by the government.)
With respect to impact measurement, there is a great deal of potential to evaluate the work of CDFIs and understand the impact of their dollars. And while CDFIs are primarily concerned with deploying flexible, patient (long-term) capital to their communities, measuring impact could mean even greater capitalization.
Catherine Dun Rappaport, vice president of learning and impact measurement at BlueHub Capital, explains the importance of measuring. “In terms of impact, BlueHub does its deepest dive before we drop our dollars, because we can walk away from projects that are not impactful,” she says. “CDFIs don’t do too much ex-post, because we’re not resourced to and because we have less agency in supporting impact after financing decisions are made. I think there is more meaningful analysis about the long-term impact of CDFI lending that can be done with the help of outside funders.”
Within the Biden agenda, there is clearly opportunity and demonstrated commitment to increasing access to capital for historically underserved communities. By placing racial equity at the center of economic development, we can begin to repair the damage that has resulted in decades of lost wealth for communities of color. What remains to be seen is the extent to which impact measurement will be emphasized.
If you enjoyed this series, stay tuned for our upcoming series on Opportunity Zones, another priority of the Biden administration.