Most impact investors focus their energy on identifying opportunities in public and private equity, alternatives, fixed income and direct investments, giving little thought to where they keep their cash. Yet there are myriad opportunities to generate positive impact with cash while preserving the liquidity, convenience and low risk of this asset class. Whether in a retirement portfolio, an institutional endowment or pension fund, or in a family’s everyday checking and savings account, investors can relatively easily deploy their most liquid holdings to support local communities and underserved populations – and disrupt the flow of capital to financial institutions that may not share their values.
Investing Cash with a Purpose
While there is an all-time high of $14 trillion in deposits sitting in U.S. banks — including $5 trillion in money market accounts and $3 trillion in savings accounts — estimates suggest that less than 1% of those funds are in socially impactful options, such as minority depository institutions. (Indeed, for impact investors, it is concerning that minority-owned banks were more plentiful just a few years ago than they are today; in 2019, according to Black Enterprise, there were 22 Black-owned banks as compared to 48 in 2001.)
Meanwhile, community development financial institutions (CDFIs) have grown exponentially, though deposits in CDFIs still represent a fraction of total cash assets. CDFIs are private financial institutions that are 100% dedicated to delivering responsible, affordable lending to low-income, low-wealth and other disadvantaged people and communities. The first CDFI was launched in 1973 with the formation of the South Shore Bank in Chicago. Spurred on by the Community Reinvestment Act (CRA) of 1977, the CDFI field has grown to more than $222 billion in assets deployed by more than 1,100 institutions. According to the CDFI industry association Opportunity Finance Network, over the years CDFIs have helped to:
- Create or maintain more than 1.5 million jobs,
- Start or expand more than 419,000 businesses and microenterprises, and
- Support the development or rehabilitation of more than 2.1 million housing units and 1,583 community facility projects.
An Alternative to Big Banks
Values-aligned investors have come to realize that many of the traditional entities that hold their cash assets pursue business activities which work against those values. For example, some banks use their massive balance sheets to finance coal-fired power plants or mining projects that lead to deforestation and climate change. In fact, a 2020 report showed that U.S. banks have financed fossil fuels with $2.7 trillion since the Paris Agreement was adopted (2016-19), with financing on the rise each year. While some large institutions have taken steps to decrease funding of controversial sectors, their efforts pale in comparison to the scale of the investments.
Also, an array of large financial institutions have acquired local banks over the years, contributing to disinvestment in local businesses, in particular businesses in low-income communities. This is especially true in neighborhoods with large BIPOC (Black, indigenous, and people of color) populations.
Further, the consolidation in the financial services industry has led to a concentration of power that favors investment in large businesses: Companies with the resources to meet the demands of big financial institutions are much better positioned to get loans than smaller enterprises that sometimes lack the balance sheets, or relationships, that are used to determine creditworthiness.
In This Report
In this report we provide an overview of the institutions that offer cash and cash alternatives. We also highlight the key characteristics of each vehicle and their potential for positive impact. We have included brief case studies to help bring to life the possibilities for investors to include cash in their impact toolkits. Please note these examples are provided for illustrative purposes and are not intended as investment recommendations.