The Aha Moment: Looking for climate mitigation investments? Follow the government money

What is it going to look like when the U.S. government starts tackling climate change? We’re fixing to find out, as climate programs from the 2021 Bipartisan Infrastructure Law (BIL) and the 2022 Inflation Reduction Act (IRA) get funded.

For those of us involved in sustainable or impact investing, how that money rolls out, and who manages it, provides an interesting guidepost – and a possible Aha Moment.

BIL and IRA set aside billions for a wide variety of climate-oriented projects. Here’s one example: the IRA authorized the EPA to set up a $27 billion Greenhouse Gas Reduction Fund (GGRF), specifically to address key climate issues while ensuring low-income and disadvantaged communities aren’t left behind. The EPA has tasked CDFIs (and some other community financial organizations, like green banks) to do the job.

CDFIs are community development financial institutions chartered by the U.S. Treasury’s CDFI Fund. For decades, they have played a critical intermediary role in gathering and disbursing funding in partnership with community residents and local organizations. Their funding can come from both public and private sources.

In other words, you can use them to invest in climate change mitigation, right alongside the U.S. government.

Invest beside Uncle Sam?

I talked with Anna Smukowski, senior director of capital programs at Enterprise Community Partners, about the current state of climate-focused investing. Enterprise co-leads Power Forward Communities, a community investment coalition that recently received a $2 billion grant derived from the GGRF.

“$27 billion is a lot of money, but it’s really only the start of what is needed” to bring climate resilience to commercial buildings, community facilities and residences across the country, she says. “The IRA money can be seen as a pilot program, to demonstrate to private investors the kinds of projects that are possible and the success they can have.”

CDFIs employ experienced financial experts to work with investors and community members. They manage large government block grants, develop public and private investment options for investors, and interact with community businesses and organizations to ensure the money is used to achieve both financial and impact goals.

That’s why putting money with a CDFI can make a lot of sense for investors who want to have a positive climate impact.

How it works

What does it mean to “put money with a CDFI”? In most cases, you’re best off talking to a sustainability-minded financial advisor. CDFIs are all a little different, so they partner with financial advisors who can explain how they work and how they would fit into your investment plan. But here’s a few general points about CDFI “products”:

1. Many CDFIs are local banks or credit unions. In these cases, you can support their work by opening a bank account, say, or by putting money in certificates of deposit.
2. Other CDFIs, function as loan funds, offering fixed-income notes you can invest in. Calvert Impact Capital offers a Community Investment Note that will put your money in CDFI programs, and it is available to anyone on brokerage platforms. But plenty of CDFIs, including Enterprise, sell notes directly to investors.
3. Historically, the risk and return profile of CDFI investments and banking products has been comparable to traditional banks. Impact note returns are often in line with comparable corporate bonds, although some offer below-market rates in order to better meet their charitable purpose. Most bank products have backing from the FDIC, NCUA, or other government institutions.

Community and climate

In an essay cowritten for the book “Investing Now for Prosperous, Sustainable Neighborhoods,” Smukowski explored the overlap between community development and climate investment. “Climate issues are community development issues and vice versa,” she explains. “Communities with a history of economic disinvestment bear the greatest costs of environmental disasters and face the greatest risks from climate change.”

‘Climate issues are community development issues and vice versa. – Anna Smukowski

You’re not likely to see a CDFI ad on your browser, and you may not recognize a CDFI bank branch even if you drove past one – CDFIs don’t have much budget for advertising. But CDFIs have a history of gathering funding and driving impacts all around you. Now that their role is going to be elevated by BIL and IRA funding, it’s becoming an opportunity to put your money where your values are.

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