CDFIs Put the ‘S’ in ESG

It stands for “Environmental, Social, and Governance,” and represents a growing movement of investors and business leaders working to steer the private sector toward making a positive impact on the world and measuring their success in those efforts.

Much of the conversation and action in the ESG space, to date, has focused on the “E” and “G.” That may be because for many businesses environmental and governance policies have a more straightforward application, like measurable emissions targets, waste reduction programs, or transparency initiatives. Social impact and commitments that show tangible results toward an ambitious goal like ending systemic racism can be less clear cut. It’s simple enough for companies to state “Black Lives Matter,” or pledge to break down barriers that hold back minorities in their communities. But what concrete actions can they take to show they are committed to the social wellbeing of communities in which they operate and show progress toward real social goals? Community Development Financial Institutions (CDFIs) provide one answer.

As mission-driven financial institutions, CDFIs sit on the frontlines, serving low-income and minority communities where support is needed most.

CDFI loans and banking services help minority-owned small businesses get off the ground and grow, fund volunteer organizations that design programs for the benefit of local communities, and help overlooked families access fair mortgages and other vital lending products. By bringing traditional banking and lending services to communities in need — in many instances the only services available — CDFIs revitalize our nation’s poor and working-class neighborhoods.

The direct positive impact that CDFIs have on minorities and underserved communities is substantial. According to data from the Opportunity Finance Network, a network of CDFIs across the country, through fiscal year 2018 its member institutions delivered 1 more than $75 billion in loans, which directly contributed to creating or preserving 1.56 million jobs, enabled the start-up of more than 400,000 small businesses and microenterprises, and allowed for the rehabilitation of more than two million housing units. Taken together, these numbers represent a meaningful impact in the lives of many millions of Americans who might otherwise have been left behind due to the indifference or structural barriers in our traditional financial system.

Given that potential impact, those businesses that were inspired during the racial justice protests of 2020 to proclaim their commitment to a more equitable society should be looking to CDFIs as one way to demonstrate their support for Black lives.

CDFIs receive the majority of their funding from banks, the federal government, and institutional investors and they are one of the surest ways to prove to stakeholders that you’re dedicated to social change through concrete results. Many banks already support CDFIs through regulations put in place by The Community Reinvestment Act (CRA). But far more can be done. And it’s not just banks that can help. Companies ranging from Netflix to PayPal to Twitter have all invested in CDFIs.

Like other aspects of ESG, support for CDFIs needs to be measurable and it needs to be consistent. The goal should be more than a one-time check-cutting. Rather, through sustained support, CDFIs will be better able to plan for the long-term and build business plans that maximize the impact of their available resources.

Investing in CDFIs strengthens local communities and tells investors that a company takes its social commitments seriously and can deliver results. Simply put, CDFIs can put the “S” in ESG for businesses that want to have a hand in creating a more just and equitable society.

Steven A. Sugarman is the Founder of The Change Company CDFI, LLC (changellc.com), a Community Development Financial Institution certified by the U.S. Department of Treasury and State of California to expand access to lending and banking to Black, Latino and low-income borrowers and communities.