Because they are accountable for reaching low-wealth communities and know how to do so, community development financial institutions are the right vehicle to bring green finance where it’s needed most
Rural communities ravaged by California wildfires. Communities of color on the Gulf Coast threatened by rising sea levels. Latino communities in the Southwest scorched by record heat and drought. There is tremendous overlap between the people that community development financial institutions (CDFIs) serve and those most impacted by climate change.
As with most global crises, climate change hurts low-wealth communities the most. Without an intentional strategy to address climate mitigation and resilience in these communities, the gap will continue to grow, and entire communities will be left to suffer.
The Biden Administration recognizes this reality and has committed 40% of public investments that address climate change, pollution, renewable energy, and other environmental issues to “historically disadvantaged communities.”
The recently passed Inflation Reduction Act is considered the largest climate legislation in U.S. history, with the potential to “jumpstart an economic transformation.” It includes the creation of a $27 billion green financing vehicle to finance clean energy and climate projects that reduce greenhouse gas emissions.
Administered by the EPA, the Greenhouse Gas Reduction Fund is a historic opportunity to bring together climate justice and economic justice. CDFIs stand ready to partner with the EPA to make meaningful progress on reducing greenhouse gas emissions in the low-income communities prioritized by the law.
Specialized lenders with a tailored approach
The households that could most benefit from lower energy bills struggle to implement energy efficiency upgrades. Even with public incentives, clean energy technologies are financially inaccessible in too many communities, especially those underserved by mainstream banks.
Climate-smart technologies will not reach low-income communities unless they are paired with an attractive package of support, including no- or low-cost green financing and hands-on technical services, through trusted partners. This is what CDFIs do. More than capital providers, CDFIs are “capital plus,” tailoring loans to fit people, not credit scores, and pairing loans with financial education, business coaching, and other resources to help people realize their economic potential.
There are more than 1,300 certified CDFIs in all 50 states, and nearly 40% of them lend in persistent poverty areas. Certified CDFIs must direct at least 60% of their financial products to low-income areas, and most CDFIs do much more than that, as much as 88% for loan funds and venture capital funds. As of 2020, a majority of CDFIs in OFN’s network offer green lending products.
“If you want to reach low-income, low-wealth communities in a meaningful way, CDFIs are the answer,” said Jennifer A. Vasiloff, OFN’s chief external affairs officer. “In other words, if you miss the lender, you miss the borrower.”
Global crisis, local solutions
CDFIs are experts in place-based investing to address localized needs. They have the networks and relationships needed to put capital to work for low-income and historically marginalized communities.
As capillaries of the financial system, CDFIs reach deep into these communities to finance small businesses, affordable housing, health centers, and other vital community projects. As loans are paid back, CDFIs recycle the money to new borrowers, multiplying the impact on local economies.
CDFIs are effective because they know and look like their customers. “Our lenders live in the communities we serve,” said CEO of Arkansas-based Southern Bancorp, Darrin Williams, in an interview about CDFI small business lending during the pandemic. “They go to school with the people they lend money to. They go to church with them. We have these deep, intimate relationships.”
Making the most of available resources
CDFIs and other mission lenders have shown that they can deliver federal dollars to underserved markets better than other lenders.
During the pandemic, when the Paycheck Protection Program (PPP) was failing to reach businesses most in need of help, the federal government turned to CDFIs to ensure relief got to low-income communities. CDFIs and other mission lenders made at least $34 billion in PPP loans to small businesses and helped more disadvantaged businesses than any other type of PPP lender.
CDFIs are also experts at leveraging philanthropic, public, and private capital and collaborating with other lending institutions: every dollar injected into a CDFI catalyzes eight dollars in private sector investment. In other words, investing $8 billion of Greenhouse Gas Reduction Fund capital directly into CDFIs and other mission lenders could leverage an additional $64 billion to slow the impacts of climate change and transform local economies in rural, urban, and Native communities.
The Greenhouse Gas Reduction Fund is a once-in-a-generation opportunity to accelerate the clean energy transition. Because CDFIs have a mission to reach low-wealth communities — and have specialized expertise in doing so — they are ideally positioned to finance projects that reduce greenhouse gas emissions and curb the impact of climate change in the most vulnerable communities.