The US community investment sector is in a period of “transition”, according to a new report that looks at how different investor group are reacting to the increasingly popular impact investment market and the potential barriers for the industry.
The report, by the Initiative for Responsible Investment at Harvard University in collaboration with US SIF and the Milken Institute, explains that while the financial crisis reduced investment opportunities and heightened perception of risk, it also led to a renewed interest in new investment approaches that benefit the community.
As a result, it argues that the sector has the potential to expand its reach, as well as its range of investment products that deliver community development outcomes in the US.
Four investor groups – high net-worth individuals and family offices, philanthropic endowments, institutional investors and retail investors – were analysed for the study. Interviews were conducted with institutional investors, consultants, wealth managers, fund managers, policymakers, and related stakeholders.
The report states, “Regardless of portfolio size, investors have an increased interest in where their investments go and how they are affecting society at large. These changing attitudes coincide with increased excitement around growing and maintaining local economies.”
Three barriers to community investment were identified. This included different investment types having different expectations. For example, high net-worth individuals showed signs of willingness to accept below market returns in exchange for identifiable social and environmental benefits. In contrast, retail investors were affected by the lack of products with short-term timeframes for returns.
The other barriers cited were a lack of knowledge about community-orientated investment products and a shortage of community investment products that have the scale appropriate for larger institutional investors.
The report added that the research has resulted in those conducting the study being convinced that bringing new players into the field will require both their financial and social or environment return expectations to be met and developing messages and products that speak to these expectations.
It explained, “As community development finance continues to evolve, it will be critical for both practitioners and investors to keep addressing the core challenges and opportunities that affect the ability and interest of investors to commit to this space.
“We all must continue to address any misinformation among investors about community investment and to drive the developments of products across all asset classes.”