How easy is it to invest in local communities?
The Dynamics of Local Impact Investing
During the COVID-19 pandemic, it has seemed that Wall Street continues to make money while Main Street suffers. Many investors are seeking ways to invest in ways that make a local impact. However, for the average individual investor, options for making true investments are limited and impact investments are difficult to establish even for accredited investors. As I explored the local impact investing landscape in my area, I discovered many interesting opportunities for supporting regenerative agriculture and accessible housing, but few opportunities for impact investing.
In attempts to build a carbon offset fund that invests in farmers that practice regenerative agriculture, it is challenging to define each dollar. Some efforts are made to duplicate models that have worked in other places, but finding equal value between the amount of carbon sequestered, farming activities, and each investor’s dollar is very complicated. Federal and state agencies are working to put together guidance on how to measure the value of carbon. Plus, regenerative farmers are hard to find. Converting to regenerative agriculture is risky and expensive for farmers, which poses a critical need for investors that can offer their support. Even where initial funding is available, there needs to be clear incentives in place and assurance that converting to regenerative agriculture will be a smart investment for the farmer. It seems more viable for new farmers to implement regenerative practices from the beginning rather than investing in a seasoned farmer to convert their entire operations.
It is also challenging to offer a widely successful offset fund without the verification offered on the public carbon offset markets. There is a lot of potential through networks of land trusts and a lot of policy progress in the northeast. It is tricky when dealing with many smaller land parcels, but these organizations are looking to pool them through networks of farmers. There must also be sufficient interest in the local area to implement such projects. More frequently, impact investors will underwrite or sponsor smaller-scale projects, such as a farm laboratory studying carbon or an educational outreach campaign, but few opportunities are available for the average investor.
Many local communities would benefit from deep-energy retrofits of affordable and accessible housing, but naturally these projects require significant up-front financing. Much attention has been given to opportunity zones, but few investors feel they can trust that they actually prevent gentrification. The Habitat for Human in San Diego was able to rely on a Donor Advised Fund (DAF) that provided a reliable stream of income. The DAF was funded by investor gifts, from which grants to Habitat could be directed using the dividends and capital gains of the investment portfolio. This type of solution is sustainable because the initial gift is able to raimin somewhat preserved while donations are made to the organization through the accumulating excess dollars. Similar to the challenges with the carbon offset fund, such projects need a lengthy timeline of planning and a well coordinated network of both community organizations and investors. These elements are hard to come by.
In most areas, there are local community development credit unions that offer loans directly to impactful projects, which are always seeking funding. For most average investors, it is most appropriate to turn to these organizations and offer their support rather than searching for viable projects individually.