How did we get here? A background on social impact investing

By David F. Schon

In 2005, Kofi Annan convened the world’s largest institutional investors to develop Principles for Responsible Investment (PRI). These principles are based on the concept that environmental, social, and governance (ESG) factors affect the performance of investment portfolios and should be considered alongside financial factors to properly fulfill fiduciary duty.

The 2008 financial crisis shifted global focus to ESG; ESG took on new meaning and more interest by both the general public and for-profit organizations of all types. More recently, the social impact or corporate responsibility of an organization has entered the national conversation in a big way. Financial institutions, philanthropic organizations, state and local governmental entities, and businesses of all ilks and size have started to pay attention to the concept of Corporate Social Responsibility (CSR) and to assess the impact their business is making on society and the environment.

In 2009, the Global Impact Investing Network (GIIN) was founded to help accelerate the development of the impact investing industry. The GIIN developed a tool to measure impact and a taxonomy to organize impact categories and themes. Impact categories include real estate, climate, energy, financial services, gender, and health, amongst others. We are told over and over again that next-generation investors are now asking more and more for “social impact investments.” Affordable housing development is a clear impact delivery model for real estate by improving housing quality, increasing residential stability, increasing housing affordability, and increasing access to supportive services through housing.

The primary method of affordable housing production and preservation in the U.S. over the past 30 years has been the Low-Income Housing Tax Credit (LIHTC) program. Affordable housing development through public-private partnerships has been around for decades, though, back to the federal housing programs starting around mid-last century, like Section 202, Section 236, and Section 221(d)(3) and the project-based Housing Assistance Payments programs in the 1970s and 1980s. LIHTC deals have been closing since the late 80s and early 90s, and banks have been investing in LIHTC properties in order to meet Community Redevelopment Act requirements.

As of late, the lack of affordable housing for all socioeconomic groups has been pushed to the forefront. It is estimated 11 million units of housing are needed to address rent burdened households in the United States, not to mention the difficulties of homeownership for middle-income Americans, particularly those in minority populations.

Housing developers are looking to impact investors as a potential new source of capital. This is happening as the availability of LIHTC equity in different states and of state and local government gap financing are facing their limits.

Meanwhile, the amount of private equity and venture capital has increased across most industries. Private equity has known since the recession that affordable housing investment, regardless of social impact intent, can deliver market or close to market rate returns in strong markets. However, investment has not been structured in a way that is accessible to the typical small affordable housing developer or consultant; they are used to dealing on a project-by-project basis and whose model and fee structure is not based on economies of scales.

In the past couple of years, more organizations with clear social impact intent have pushed into the housing sphere. In 2019, big tech, under the auspices of CSR, and due to the affordable housing crisis in the U.S., made significant philanthropic commitments to housing in California. Hospital systems and health care providers are also setting up housing divisions and entering into partnerships with localities around housing production.

There is an increased focus on the metrics of social impact around housing. Institutions of higher education are receiving research funding to measure social impact effects of business practices related to housing delivery, and housing impacts on health, amongst others. Georgetown University established the Beeck Center for Social Impact and Innovation. Together with the Federal Reserve Bank of New York and the U.S. Impact Investing Alliance, the Beeck Center developed guidelines for assessing the social impact, reporting framework, and recommended outcome measures for Opportunity Zone investments, including affordable housing.

Impact investment in housing is bringing to the table voices that have typically not spoken to each other directly. Small affordable housing developers are speaking directly to institutional investors and philanthropy. Philanthropy and institutional investors are learning about Section 8 and zoning.

Resident advocates, community developers, health organizations, university researchers, philanthropic groups, large financial organizations, large-scale sophisticated market-rate developers, along with “mom & pop” affordable housing developers and consultants, are discussing how to measure the social impact of housing on residents and discussing mobility, health outcomes, business operations, market returns, and exits, all in one conversation.

Having the “housing conversation” from a social impact perspective broadens the platform from regulated affordable housing to also include “workforce housing” or “naturally occurring affordable housing” as well as homeownership and wealth building. This mitigates any remaining stigma and sets the stage for more productive coalitions around housing issues and conversations from an employer perspective, from a geographic perspective, and from a perspective away from socio-economic status.

Nixon Peabody is convening these voices and facilitating meaningful conversations about the future of housing in our country. Please contact us if you want to join the conversation.

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David F. Schon


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