How the Financial Services Industry is Different
This article is the last in a three-part series on corporate philanthropy and mission investingby Peter Broffman. Peter is an Encore Fellow with Mission Investors Exchange, and formerly was Executive Director of the Intel Foundation. In this series, Broffman explores the opportunities and challenges that mission investing presents to corporations and corporate foundations and makes a strong case that the tools of mission investing are underused in the field of corporate philanthropy.
In my previous blogs (Part 1 and 2), I mentioned that corporate philanthropy is changing. Leading corporations are moving away from philanthropic programs that rely primarily on grantmaking and are moving towards more comprehensive “social impact portfolios” that integrate a broad variety of corporate resources to help solve social problems.
Mission investing can be a powerful tool for a corporation or corporate foundation to increase social impact while preserving some assets for future use. The ability to make an investment that achieves a measurable social impact while it provides a financial return that can then be reinvested into other charitable pursuits is a huge benefit to the corporation or foundation.
There are excellent examples of corporations, primarily from the financial services sector, that have used mission investments to help address social problems. Unfortunately, many corporations and corporate foundations outside the financial services sector have been slow to include mission investing in their social impact portfolios and cite a number of perceived challenges. (See Part 2 for more on this.)
So, how and why are companies in the financial services industry different? Why have they taken the lead in adopting mission investing, while other companies and their foundations have been slow to incorporate it into their social impact portfolios?
The corporate foundations of banks and other financial services companies are different than most other corporate foundations in two key ways that explain their willingness and ability to engage in mission investing:
1) Banks have strong regulatory motivation
The activities of commercial banks and other lending institutions are governed in part by the Community Reinvestment Act (CRA) of 1977. The CRA requires banks to meet the credit needs of all segments of the communities they serve. Enforcement agencies look at the extent to which the bank is contributing to community development and extending credit to individuals, businesses and organizations in low- and moderate-income neighborhoods. Motivated in part by CRA requirements, commercial banks have entire CRA departments that implement their community investment activities. This includes a comprehensive and coordinated effort to ensure that social impact investing is a part of the bank’s overall portfolio and that investments are reaching communities in need.
Banks use different types of loans and other financial instruments to accommodate the diverse needs of for-profit and nonprofit customers. In most cases, banks are looking for market-rate returns as they provide financing to companies and nonprofits that are doing social good. However, some banks also use Equity Equivalent (EQ2) investments – a relatively new type of investment which is the functional equivalent of a PRI – to aid nonprofits that would not typically qualify for a traditional bank loan. Also, while CRA regulators do not examine or consider the activities, social impact investing by a bank’s foundation can bolster the parent institution’s reputation as a community investor.
Insurance companies are not regulated under the CRA, so their motivations are not quite the same as banks. (Some insurance companies do also own banks, which then does bring CRA compliance into play.) However, insurance companies have other motivations that also encourage mission investing. Insurance companies are subject to state insurance regulations. Some of those state regulations encourage community investment. In some states, insurance regulators look at the social impact investments of insurance companies as a factor in determining their alignment with the intent of state regulations. Therefore, as a matter of practice, many insurance companies have an incentive to make social impact investments that parallel what banks are motivated to do under the requirements of the CRA. As such, many insurance companies include social impact investments in their corporate and foundation portfolios.
2) Mission investing aligns with banks and financial insurance companies’ core business
For the most part, investing is a core activity of a financial services company. So, it’s not much of a stretch for them to use their existing resources – trained and experienced staff, established investment criteria, deal flow and business processes – to do social impact investing as a portion of their business. Both banks and insurance companies typically have entire community investment departments dedicated entirely to coordinating social impact investing. In some banks, the corporate community investment arm and the bank’s foundation, while operating as separate entities, report under the same organizational umbrella and share staff expertise.
So, while all companies and foundations can use mission investments as effective tools for accomplishing social impact goals while at the same time generating a financial return that can be reinvested, banks and insurance companies are uniquely motivated and equipped to incorporate mission investing as part of their business portfolio. Banks and insurance companies are asserting leadership in this area, and can be viewed as exemplars for other companies to emulate.