northern new england community foundation impact investing a rural community foundation case study

8/10/2019 Northern New England Community Foundation Impact Investing a Rural Community Foundation Case Study

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NORTHERN NEW ENGLANCOMMUNITY FOUNDATIO

IMPACT INVESTING

A Rural Community Foundation Case Stu

September 20



ACKNOWLEDGEMENTS

This case study focused on impact investing

by rural community foundations was prepared with the generous support of the

Annie E. Casey Foundation. It was preparedby GPS Capital Partners and The

Philanthropic Initiative, nationalconsultancies that collaborate in supporting

the community foundation sector to learnabout and implement impact investing. Theauthors gratefully acknowledge attorneys

Timothy L. Horner and Daniel C. Persinger,

partners in the law firm of Warner Norcross

& Judd LLP of Grand Rapids, Michigan, fortheir insights in the discussion of securities

laws in relation to community foundation

impact investing. Any errors are theresponsibility of the authors.

PHOTO CREDITS

We thank the following for the use of their

photographs and maps in this case study :

Maine Farmland TrustGeoff Forester Photography, courtesy of

New Hampshire Community Loan Fund

Vermont Community Loan FundOpportunities Credit UnionFresh Tracks CapitalPricewaterhouseCoopers/National Venture

Capital Association MoneyTree(tm)Report based on data from ThomsonReuters

New Hampshire Public Radio and NPR,partners on State Impact, a reportingproject of NPR Member Organizations

TABLE OF CONTENTS

Executive Summary 1

I. Northern New England Community

Foundations:Windows on Rural and Place-BasedImpact Investing 5

II. Vetting Impact Investing within theCommunity Foundation 10

III. Approaches to CommunityFoundation Impact Investing 14

IV. Community Foundation ImpactInvesting Strategic Planning 17

V. Impact Investment Policy 27

VI. Operating Systems and SharedServices 28

VII. Leveraging the Strategy 34

VIII. Conclusion and Next Steps 37

Appendices 42



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EXECUTIVE SUMMARY

In summer 2011, the Maine CommunityFoundation, New Hampshire CharitableFoundation and the Vermont CommunityFoundation (Northern New England

Community Foundations, or NNE CFs)came together to jointly evaluate thepotential for expanding impact investing asa program strategy and donor service withintheir largely rural states and across thethree-state region.1

The community foundations structured theproject in phases with go no-go decisionpoints. Phase I confirmed both donorinterest in impact investing and demand forimpact capital in a range of sectors that

reinforce the community foundations’strategic plans--particularly local jobcreation and sustainable development.Phase II proceeded on parallel tracks ofassisting each community foundation to

develop a state-focused impact investingstrategy, and assessing the feasibility ofregional collaborative activity. This focusedon a shared services platform to support the

NNE CFs in executing state-focused as wellas regional impact investing.

During and following Phase II, eachcommunity foundation responded toselected local requests for impactinvestment, while generally maintaining alow profile with prospective investees untilformal impact investing strategies andsystems were in place. MaineCF andNHCF are moving forward to formalizethose systems, while VCF is building upon

its strong, existing Vermont Investmentsprogram (a summary of activities acrossphases appears in Appendix A).

All NNE CFs are encouraged by the interestthat their programs are starting to generate,and will research the potential to attract newdonors and co-investors interested in impactinvesting as a tool for improving local qualityof life for all. While the NNE CFs remaininterested in potential shared services tosource needed capacities and longer-term

strategic opportunities a regional investmentstrategy may offer, their in-state strategiesand operations are top priorities for now.

The NNE CF’s process illustrates thatcommunity foundations have differentstarting points and pathways for buildingimpact investing programs. If engaging inthe activity as a program strategy and/ordonor service, however, they generallycover four tasks over time: Initial StrategicPlanning, Impact Investing Policy Design,

Operating Systems Design and ProgramManagement (see Roadmap, Figure 1).

Many of these tasks are similar whethercarried out by an urban or rural communityfoundation. Common to both are the corefiduciary responsibility and related need forinvestment policy, governance structures,an economically sustainable operating plan,

Rural Community Foundation ImpactInvesting: National Context

An increasing number of urban and ruralcommunity foundations are launching orbroadening impact investing strategies,including through donor engagement. This case

study focuses on how rural as well as othercommunity foundations can do so, by:

• Chronicling the work of three state-wideNorthern New England communityfoundations serving largely rural areas, fromdifferent starting points and with variedgoals.

• Offering an impact investing roadmap, withdiscussion of how the tasks and issues playout for rural institutions.

• Identifying operating issues and options ascommunity foundations launch and/or

expand programs.• Reviewing community foundations’ potential

to leverage their impact investing strategies,along with regulatory considerations.

• Revealing the potential to enhance impactand efficiency through collaboration.

• Identifying “lessons learned” from the ruralcommunity foundations’ experiences bothindividually and as a collaborative.



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Lessons Learned

The NNE CF’s experience to date yieldslessons for community and otherfoundations on both rural impact investingand impact investing program design:

Rural Impact Investing

• Rural communities offer opportunitiesfor impact investing.

• High priorities include environmentallysustainable economic development innatural resource-based sectors such asfarming, forestry, fisheries and energythat can generate permanent local jobs.

• Investing to strengthen value chainsbetween producers, processors,distributors and institutional and retailconsumers helps to retain wealth in theregion while reducing carbon footprints.

• Parallel community developmentinvestments in quality affordablehousing, education, health,transportation, parks, and arts andculture improve the quality of life in local

communities, making them moreattractive as places to develop a careerand raise a family.

• There is a tension between urban andrural development, even within largelyrural states. Economic activity clustersin population centers, while needs arehigh and customized strategies areneeded in more remote areas.

• The large territory covered by many

rural community foundations requiresinvestment that can impact both therural and more densely populated areaswith stronger economic performance.

• It is important to work with local andregional community developmentfinancial institutions (CDFIs) and other

established intermediaries andgovernment agencies to capitalize onand leverage the existing expertise andpools of low-cost, patient capital.

Impact Investing Program Design

• Cultivate champions, who build interestand may significantly back the programwith grants or investments.

• Engage donors early in the process, asdonors become more interested inimpact investing with peer learning.Maintain donor communications and

incorporate donor preferences intoprogram design.

• Impact investing pools can offerefficiencies over one-off investments;donors are receptive to pools if thefocus meets their interests and they canclosely follow the impact.

• Create an internal Impact InvestingCommittee made up of board membersand other interested stakeholders, which

helps to move the program forward.

• Undertake a landscape scan of marketopportunity covering potentialinvestments and public and privatepartners to inform the development ofan impact investing strategy.

• Leverage the community foundation’sstature as a trusted institution withinrural communities, which inspiresconfidence from donors that it can

execute a locally-focused impactinvesting program.

• Anticipate that community foundationdonors, board members and leadershipwill require an impact investing programthat incorporates the same level of



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fiduciary care as any foundationinvestment.

• Anticipate that sourcing, structuring andmonitoring quality impact investments isa labor intensive process. Achieving

financial sustainability for the programmay involve charging someadministrative fees and/or highergeneral donor advised fund fees, orraising complementary grant support.

The case study is organized in eightsections:

• Northern New England CommunityFoundations: Windows on Rural andPlace-Based Impact Investing

• Vetting Impact Investing within theCommunity Foundation

• Approaches to Community FoundationImpact Investing

• Community Foundation Impact InvestingStrategic Planning

• Impact Investment Policy• Operating Systems and Shared

Services

• Leveraging the Strategy

• Conclusion and Next Steps

It includes appendices with additionalbackground on the NNE CF project, andresources for rural community foundationsand others interested in rural impactinvesting.

Maine Community Foundation made a loan to Maine Farmland Trust, an award-winning statewideorganization that works to protect farmland; support farmers; and advance farming. Structured as aland trust, MFT’s is the state’s leading force in protecting farmland, often working in partnership withlocal and regional land trusts. MFT is equally engaged in keeping farming vital. Through FarmLink,MFT places next-generation farmers on land. Through its Buy/Protect/Sell program, MFT helps makefarmland more affordable for farmers. And through its Farm Viability projects, MFT helps existingfarmers prosper, through both direct assistance and innovative community projects.



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I. NORTHERN NEW ENGLAND COMMUNITY FOUNDATIONS:WINDOWS ON RURAL AND PLACE-BASED IMPACT INVESTING

In summer 2011, three rural, statewidecommunity foundations in Northern New

England (NNE CFs) came together toexplore (1) how each would expand impactinvesting as a program strategy and donorservice; (2) possible synergies andefficiencies they could gain by learning andplanning together, and (3) the potential for acollaborative implementation platform.

The Vermont Community Foundation, NewHampshire Charitable Foundation and

Maine Community Foundation (collectivelyNNE CFs) vary in age, asset size andimpact investing experience. They share acommitment to using a full range ofphilanthropic tools to respond to the needsand opportunities of their states, whichshare a predominantly rural character.They also share an interest in learning fromeach other’s experience and capturing anysynergies through joint effort.

Three Rural Statewide Community

Foundations

The Vermont Community Foundation (VCF) was created in 1986 and with $173million in assets, it is one of the nation’smost experienced community foundationimpact investors. In 2001 VCF’s boardauthorized creating the VermontInvestments program that dedicates 5percent of all pooled assets to investmentsin or primarily benefitting the state. Throughthis program, VCF currently manages a

$7.0 million portfolio of investments acrossasset classes (investment structures),including loans to many of the state’sCommunity Development FinancialInstitutions (CDFIs, see Appendix F);insured deposits in banks and credit unionswith strong community developmentperformance; fixed-income securities(bonds) supporting in-state affordable housing, family economic security andnonprofit organizations; and venture capitalfunds supporting regional job creation. VCF

joined the NNE CFs to explore potentialregional impact investing strategies, alongwith greater donor engagement andrefinements to its current impact investingsystems and impact reporting.

Defining Terms: Impact Investingand Rural America

Impact Investing: Investing into companies,

organizations, and funds with the intention togenerate measurable social andenvironmental impact alongside a financialreturn (Global Impact Investing Network).Impact investments can be of any asset class(investment structure, such as debt, equity,deposits or real estate) or expected financialreturn.

The Northern New England CommunityFoundations sought to research theopportunities for making below market- ormarket-rate loans or investments from grantfunds or primary pool assets to achievestrategic priorities of the foundations or theirdonors.

Rural America: Although rural Americacovers nearly 75 percent of the nation’s landarea and is home to 51 million people (CarseyInstitute 2012), most federal definitions of ruralfocus on the fact that rural is not urban. TheOffice of Management and Budget definesrural as any county not included in aMetropolitan Statistical Area (MSA), which itdefines as a single city with a population of50,000 or more, or an urbanized area (as

defined by the Bureau of the Census) with apopulation of at least 50,000 and a total MSApopulation of at least 100,000.



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New Hampshire Charitable Foundation

(NHCF) was created in 1962 and with over$525 million in assets, has the longesthistory in impact investing. NHCF carriedout donor requested lending as far back as

1971 and also supported the creation of oneof nation’s pioneering CDFIs in the early1980s, the New Hampshire CommunityLoan Fund. NHCF has maintained a largeloan to this CDFI for nearly a decade, andcontinues to manage eight donor-capitalizedloan funds of different purposes totaling$800,000. The donor-capitalized fundsprovide a range of support to the non-profitsector typically as “lenders of last resort.”These include The New HampshireChildren’s Museum, theaters and other

cultural institutions and conservation-basedreal estate purchases. NHCF also investedin a state-focused venture capital firm andhas in its traditional investment portfolio asustainable timber fund holding. NHCF joined the NNE CFs to explore the potentialfor regional impact investing strategies;expanding its impact investing program inalignment with its strategic plan; increasingdonor engagement; and streamlining theoperation of its current donor-capitalizedloan funds.

Maine Community Foundation (MaineCF)was created in 1983 and has grown to over$300 million in assets. It has made acouple of loans to local intermediariesbeginning in the 1980s. The communityfoundation renewed activity in recent yearswith a $1 million loan to Maine FarmlandTrust (MFT) that is capitalized by acombination of donor and discretionaryfunds. Maine has significant interest inimpact investing among some of its board

members and donors. It joined the NNECFs to explore the potential for regionalimpact investing strategies, and to build arobust impact investing program alignedwith its strategic plan and featuring donorengagement.

Place Determines Design

In impact investing as in grantmaking andcommunity development, place determinesdesign. Rural states and communities differ

considerably, based upon their naturalresources, proximity to large metropolitanareas, history, population, and other factors.

In her article, Community Development inRural America: Collaborative, Regional, andComprehensive, Cynthia M. Duncan sets outa typology of three types of rural communities,with their challenges and opportunities. In hisarticle, Why Invest in Rural America, andHow?, Karl Stauber similarly notes four typesof rural communities, three goals and fourapproaches to their development. Impactinvesting can be a critical tool in each settingand approach:

Rural Community Types:• Urban Periphery—rural areas within a 90-

minute commute of urban employment,services, and social opportunities

• Sparsely Populated—areas where thepopulation density is low and oftendeclining and therefore the demand fortraditional services, employment, andsocial opportunities are limited by isolation

• High Amenity—rural areas of significantscenic beauty, cultural opportunities, and

attraction to wealthy and retired people• High Poverty—rural areas characterized

by persistent poverty or rapid declines inincome.

Successful Rural Public Policy: SocietalBenefits

• Survival of the rural middle class• Reducing concentrated rural poverty• Sustaining and improving the quality of

the natural environment.

Means for Achieving Societal Benefits:

• Increased human capital• Conservation of the natural environment

and culture• Increased regional competitive

investments• Investments in infrastructure that support

the expansion of newer competitiveadvantage, not the protection of oldercompetitive advantage.



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Early in the collaborative, the threecommunity foundations identified goals forworking together: (1) to accelerate andincrease their learning; (2) to identify andtake advantage of potential efficiencies suchas material development, joint training and

shared staffing; and (3) to explore thepossibility of collaborative investing inregional issues, thereby enlarging anddiversifying their respective pipelines andimpact while mitigating risks.

The primary concerns of the group included:(1) the time it would take to participate, (2)the challenge of managing sharedexpectations, and – should they decide toact together – (3) the allocation ofresponsibilities. They identified 10 guiding

principles for the collaborative, whichappear in Appendix B.

Impact Investing: A Trend AmongCommunity Foundations Nationally

The NNE CFs’ interest in expanding theiruse of impact investing reflects growinginterest by community foundations

nationally. While some of the issues facingrural community foundations are unique,many are shared by urban as well as ruralor reservation institutions. Againstshrinking public sector resources, all faceweakened markets; high unemployment;inadequate supply of quality, affordablehousing; and increased needs for a range ofhuman services. At the same, many areseeing increased interest by entrepreneursand donors in focusing their time, talent andtreasure in strengthening the communities

they call home.

These stakeholders are reinventing localeconomies around the principal of valuechains that build and retain local wealthbetween local businesses, nonprofitorganizations, capital sources andresidents. Where possible, businesses arealso selling their quality, locally producedgoods within their regions, displacing large,carbon-intensive transport of goods withlocal wealth-enhancing, regional rural-to-

urban ties.

Community Foundation Impact Investing: Focusing Many on Place

Community foundation impact investingvaries from private foundation practice, withrural institutions no exception:

• As mostly place-based institutions,community foundations typically makeimpact investments to benefit their local

community. In the case of small or ruralareas, this can limit qualified deal flow.

• The composition of communityfoundation assets from numerousdonors, nonprofit agencies and othersconfers a strong sense of fiduciaryresponsibility and a broad mission ofstrengthening local institutions and

The Changing Demographic Profileof Rural America

While the population in all three Northern NewEngland states increased between 2000 and2010, demographics are shifting toward anolder and more diverse population. Staff atVermont’s Opportunities Credit Union (aCDFI) speak French, Bosnian, Spanish,

Portuguese and Arabic in order to servepopulations resettling under the VermontRefugee Resettlement Program. The regionalso remains home to Native American tribesand peoples, some of whom are served by thenorthern Maine CDFI, Four DirectionsCommunity Development Financial Institution.

Losses and shifts in population are affectingmany other rural American communities. Thecombination of lower birth rates, out-migrationof youth and in-migration of ethnic minoritypopulations is creating communities whose

aging populations, new communities of colorand concentrations of children of color call forchanges in economic and human servicesplanning. Innovative CDFIs such as the LatinoCommunity Credit Union in North Carolina aremodeling impact investing strategies that areserving well in the changing landscape.



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opportunities for all. The impactinvesting strategy must satisfy the riskmanagement concerns of allstakeholders while focusing on programareas most likely to yield qualifiedinvestment opportunities.

• Depending upon the level of donoradvised funds (DAF), communityfoundations may have limiteddiscretionary dollars for impactinvesting.

• Community foundations enjoy theunique potential advantage of directlyengaging their donors in impactinvesting. This can expand theresources for financing qualified

projects, add a distinctive and innovativeelement to the community foundation –donor relationship and position thecommunity foundation as a leader inmobilizing financial resources for localopportunities and needs.

• Community foundations seek to growthe availability of capital for social good,and impact investing may attract a “new”type of donor/investor who questionsgrant strategies, yet is willing to commit

social, intellectual and financial capitalto solve community challenges.

Rural Community Foundations and

Impact Investing

Rural and statewide community foundationssuch as the NNE CFs face additionalopportunities and challenges, including:

• While they may cover large geographicareas, rural states often have a

relatively small and familiar set ofcommunity and government leaders.This makes it possible to form strongcoalitions and public-privatepartnerships around priority interests.

• Over recent decades, many statewidecommunity foundations have created

affiliates and/or local funds, allowinglocal knowledge, relationships andresponsive philanthropy throughout thestate.

• Statewide and rural community

foundations often serve different kindsof market environments—from majorcities to sparsely populated counties.Within these communities,demographics may be changing insignificant ways (see sidebar).2

• Boom and bust cycles of naturalresource extraction may have depletedenvironmental capital for farming,forestry, fishing or mining. Often apatient capital source combined with

technical assistance, impact investingcan help to restore working landscapes,local economies and cultural traditions.Longer term, it can support communityresiliency—the ability to both respond toshocks and engage in the ongoinginnovation necessary to adapt tomacroeconomic and demographic shifts.

Within typologies of rural community types(see sidebar)3 each NNE CF is High Amenity. Each attracts wealthy people from

throughout the Northeast for scenic beauty,cultural opportunities including outstandingmetropolitan areas and universities andyear around recreation. Each also alreadyhas an existing base of impact investorsand financial intermediaries.

Despite the amenities and assets, thesestates face challenges common to most ofthe country’s rural areas:

• It can be difficult to attract and/or retain

human capital to lead and sustain localtransformation, a constraint affectingboth community developmentorganizations4 and entrepreneurialgrowth firms. Existing developmentleaders and organizations are stretchedto meet multiple local needs, whileentrepreneurial firms compete for talentwith densely populated areas offering



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professional and quality of lifeadvantages.

• Each has suffered economically andenvironmentally as a result of pastresource extraction-driven economies.

Their 2011 poverty levels increasedsince 2010, to 13.0, 7.1 and 11.2percent for Maine, New Hampshire andVermont, respectively.5

• The more remote areas suffer from thehighest poverty rates and greatestshortages of health and other services.

• Unemployment, while lower than manyplaces in the U.S., remains a problem.

• Cold winters bring high heatingexpense, making housing affordabilityan issue for many. When a breadwinnerneeds to drive a long distance to work,the housing plus transportation costbecomes more burdensome.

• Homelessness occurs but may be“invisible,” as affected individuals andfamilies live with other family or in cars. As in urban areas, those at risk ofhomelessness often face behavioral

health issues.

• Throughout the region, there is pressureon land tenure. The attractiveness ofNorthern New England, and its proximity

to large urban areas, fuels demand forland that can be developed. A proactivesustainable development strategy isrequired to secure land as the workingfarms, forests and fisheries needed toprovide predictable jobs and income to

local families and beautiful scenery fortourists and visitors.

• With escalating land prices, similarstrategies are needed to preserve theregion’s affordable housing, includingrental, manufactured and other types.

For the NNE CFs and the communities theyserve, the meaning and value of ruralidentity extends far beyond the “not urban,”default of several federal agencies (see

Defining Terms sidebar). Instead, itrepresents a stewardship calling forpreserving farm, forest, fish, energy, andtourism assets along with the traditions,skills and relationships that developed inrelation to them. Impact investing bycommunity foundations is among the toolsfor renewing rural areas with workinglandscapes, value chains and vibrant towns.Innovation and the flexibility to adapt tochanging market opportunities anddemographics are additional resources that

can help to create the quality of life neededto attract and hold today’s mix of diversebusinesses, entrepreneurs, workers andfamilies.

The New Hampshire CharitableFoundation helped to incubate andcapitalize the New HampshireCommunity Loan Fund, whose ChildCare Facilities program works toincrease the number and the qualityof child care and early educationopportunities across New Hampshire.



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II. VETTING IMPACT INVESTING WITHIN THE COMMUNITY FOUNDATION

Among the key tasks for any communityfoundation planning an impact investingstrategy is vetting the concept withstakeholders, including the institution’s

board, staff, donors and strategic partners.Community foundations typically undertakethis task through a series of steps (seeInitial Strategic Planning in the Roadmap,Figure 1):

• Identify champions. Given a

community foundation’s leadership inbringing together donor, nonprofit andcommunity interests, it is important toidentify trusted board members, staffand partners to both set out the visionand inspire confidence in the executionfor a new impact investing program.

Generally organized as an ImpactInvestment Committee, such a grouptypically includes one or more membersof the community foundation’s boardinvestment committee. However, it isseparate from that body and reportsdirectly to the community foundation’sboard of directors. The Impact InvestingCommittee typically includes volunteerswith both professional investingexperience and impact investinginterest, who are staffed by an internalteam. It often becomes the governing

body for the program, once launched. As such, it meets regularly to evaluateand decide upon investment requests,oversee impact investing portfolio

performance and review strategy.

• Build the internal team. One of impactinvesting’s benefits is the increasedinteraction it sparks between membersof the community foundation’s finance,program and donor services areas.Particularly if donor engagement isplanned, the impact investing strategywill consider questions to which eacharea brings unique expertise:

o Finance & Investments: What dollarvolume, structure or type of impactinvesting to propose? What risktolerance, expected financial returnand funding sources? What liquidityplanning is needed (i.e. how can theprogram always maintain some cashon hand for new investments and/ordonor redemptions). What lossprotection mechanisms are needed?How can the program be financiallysustainable? What fee, other

compensation structure or resourcegeneration strategy is needed?

o Program: What program areas canoffer investing opportunities thatdemonstrate enhanced philanthropicresults to the foundation, its donorsand other partners? What sectorscan benefit from capital investmentto drive needed changes? Whatnonprofit and other organizationshave the financial and managerial

strength to take on impactinvestments? What organizationscan partner with the communityfoundation to build market interestand capacity for the program, as wellas to track and report on socialimpact?

In the Lead for Impact Investing

VCF’s board of directors led the move for thatfoundation’s 2001 path breaking creation ofVermont Investments, a strategy that investsfive percent of all pooled assets in holdingsthat are based and/or focused in Vermont

(see Appendix G, VCF’s Investment Policy).

Community foundations in both Maine andNew Hampshire created special ImpactInvestment Committees to guide theirdevelopment of investment strategy, policyand operating plans (a step that VCF alsotook in a recent process of refining itsapproach).



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investments, and the Form 990 provides aplace for community foundations to reporton them. Impact investments with anexpected market-rate of return, variouslycalled “mission-related investments”—MRIs--or double or triple bottom line investments

(for their social and/or environmental as wellas financial expected returns) have nospecial treatment under the regulations foreither private or community foundations.They are subject to the same regulationsand fiduciary care as any other endowmentasset.

Community foundations typically adapt theapplicable regulatory guidance for privatefoundation program-related investing,although they are not subject to identicalprovisions.7

There are further regulatory considerationsfor community foundations as they considerengaging donors, nonprofit agencies andpotential co-investors in impact investingstrategies. These are discussed in SectionVII, Leveraging the Strategy.

Rural Community Foundation

Considerations in Impact Investing

Are there ways that vetting an impact

investing strategy might differ between anurban and rural setting?

• The community foundation in bothsettings often starts off being extremelywell trusted, so the stakes are high forpreserving “brand” and managingreputation risk. The importance of thismatter may be heightened in a ruralsetting due to the perception that“everybody knows everybody.”

• There may be a smaller pool of leadersfrom which to choose for guiding impactinvesting strategy and overseeing theprogram once launched. For thisreason, it may be useful to involvetrusted outside members who bringexperience from comparable settings.

• Similarly, because people tend to knoweach other, a rural communityfoundation’s impact investing planningmay create expectations on where the

foundation will invest and/or with whomit will partner. Before engaging localpartners in the market research for animpact investing program, it is useful tothink ahead on how to manageexpectations and achieve win-wins.

Vetting Impact Investingwithin the Community Foundation

At MaineCF, Vice Presidents Peter Taylor

(Program) and Jim Geary (CFO & Director ofInvestments) spent many hours jointlydesigning, executing and managing a loan toMaine Farmland Trust. In the course ofmaking this investment (which combineddiscretionary and donor funds), theyexchanged many ideas about how an impactinvesting program could be expanded andopened for further donor participation.

Early in the NNE CF project, they expandedthe team to include Jen Southard, Director ofPhilanthropic Services. Jen brought important

insights into donor preferences and the needfor education among all stakeholders onemerging social enterprise models. Educationwould be particularly needed to explain theproposed strategy in which both for-profit andnonprofit organizations would be eligible forimpact investments, provided their serviceswould advance the community foundation’smission and repayment expectations.

As a smaller foundation, VCF officers oftenwear multiple hats. CFO Debbie Rooney hada major hand in the early design of VCF’sVermont Investments and remains engaged in

cultivating, structuring and managinginvestments under this innovative program. Asthe program has matured and local interest inimpact investing builds, however, VCF isrefining its policies and systems. It is alsomore intentionally building a cross-area teamincluding Tom Roberts, Senior Philanthropic Advisor and Jen Peterson, Vice President forProgram and Grants.



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• In communities where communitydevelopment finance intermediariessuch as CDFIs already exist,competitive issues may be sensitive.The community foundation will againneed to define its role in a way that

generates win-wins for valued partnerinstitutions in the region.

The NNE CFs faced all these potentialchallenges. Among their ways of managingthem have been to:

• Speak candidly with local organizationsabout the fact that they were beginningan exploration of whether and how toexpand their impact investing, whichwould move through several stages

before becoming operational.

• Explain that this process would be goingon parallel to the communityfoundations’ strategic planning processand would be aligned with prioritiesthere.

• Provide informal updates, which signalthat the strategy is proceeding but willhave mission/program and financialcriteria that will necessarily limiteligibility.

• Engage consultants to perform the in-depth market research, which theconsultants accurately describe asbeing on behalf of a regional consortiumof foundations.

• Encourage those performing marketresearch and guiding the formulation ofinvestment criteria to develop a pipelineof example deals. This can stimulatethought within the foundation aboutwhich of its grantees and partners may

be eligible for investment, and whatother types of investees the communityfoundation might look for to fulfillmission objectives.

• Arrange for the availability of capacitybuilding services—for intermediariesthat may be partners in the future andfor other potential investees.



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III. APPROACHES TO COMMUNITY FOUNDATION IMPACT INVESTING

While a few community foundations have been making impact investments for decades, manymore are just taking up the practice (Figures 2 - 4). Their process illustrates that there are manyways to begin impact investing, and community foundations often build, diversify and blendstrategies over time. Key variables include whether a community foundation:

• Initiates impact investing internally or in response to donor requests

• Funds impact investing with discretionary and/or donor funds

• Seeks market-rate or concessionary expected financial returns

• Invests in a single asset class or a range of asset classes (i.e., debt, equity, deposits, etc.)

• Invests directly and/or via intermediaries of funds.

• Invests only in its local community, or in a broader geography

• Focuses on a specific issue, set of issues or the broad spectrum of community needs

• Offers donor engagement in impact investing via an allocation made from all pooled assets(low engagement and low administrative cost), participation in an impact investing fund(medium engagement and cost) or participation in customized and/or deal-by-dealtransactions (high engagement and administrative cost; Table 1).

Experience suggests that a community foundation’s top priority in impact investing is a well-managed program that is aligned with the broader priorities of the institution. It is less importantthat the strategy rapidly--or in some cases ever--incorporate all approaches. Moreover, it isimportant that the selected approaches reflect the context – the availability of donors and co-investors, compelling needs and gaps – and the capacity of the community foundation toimplement.

Figure 2. Community Foundation Membership in Mission Investors Exchange

as a Portion of Total Membership

Community foundations appear to be taking up the practice of impact investing at a higher ratethan foundations a whole. The nation’s approximately 750 community foundations representsome one-tenth of one percent of its approximately 75,000 foundations. Yet communityfoundations represent 23 percent of membership in the Mission Investors Exchange, a U.S.-based trade association of foundations that are using and/or exploring the use of impactinvesting (Mission Investors Exchange 2013).



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Table 1. Community Foundation Donor Engagement Structuring Options

Option Description Donor Engagement Comments

FoundationPool

Example:VermontCommunityFoundation

Foundation dedicates

an allocation from allits fund types,including donoradvised funds, tocreate an impactinvesting pool

Low Foundation places a portion

of donor funds that arecomingled with other fundsin impact investments

Foundation bears the cost

of impact investing strategy,which varies according tothe range of targeted assetclasses, return levels andother factors. There is noincremental cost toaccommodate donorinterests, but also minimalleveraging of impactinvesting as a means todeepen donor engagement.Vermont expects to add adonor engagementcomponent.

PooledFunds withDonorEngagement

Examples:MaineCommunityFoundation,MarinCommunityFoundation, MinneapolisFoundation

Foundation createsimpact investingpool(s) in which itinvites donors to investa portion of their donoradvised fund.

Medium Donor commits a portion of adonor advised fund to impactinvesting but does notcontrol the selection ofspecific investments

Balances the efficiency anddiversification benefits of apooled impact investingstrategy with a level ofdonor engagement. Likelyrequires “high touch”communications, impactreporting and a possibledonor impact investinglearning circle to ensuregrowth and continuity ofdonor engagement.

Case-by-Case

Examples:GreaterCincinnatiFoundation,OrangeCountyCommunityFoundation(both alsolend CFdiscretionaryfunds)

Foundation offersdonors the option toparticipate in individualimpact investments ona case-by-case basis.

High Donor commits a portion adonor advised fund tospecific investments but hasless risk diversification andlearning from participating inone or more impactinvestment pools

Requires foundation torecruit investors for dealson a case-by-case basis.High administrative cost forthe foundation and lowerdiversification of risk for thedonor.



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IV. COMMUNITY FOUNDATION IMPACT INVESTING STRATEGIC PLANNING

Having created buy-in at their institutions toproceed with an impact investing strategicplanning process, and reviewed approachesby other community foundations, the NNE

CFs looked to anchor their strategy in anassessment of donor interest. The goal wasto filter rather than bypass the equallyimportant findings that would come from alater market needs assessment. Adaptingthe Roadmap framework, they:

• Assessed donor interest in and designpreferences for an impact investingprogram.

• Assessed the regional impact investing

landscape in the context of prioritydonor interests. This included assessingthe level of qualified demand for capital,the strength of local intermediaries andcapacity building partners, and thepotential to leverage communityfoundation investments with capital fromconventional actors such as banksfulfilling the Community Reinvestment Act (see Appendix F).

• Formulated a preliminary impact

investing strategy.

• Aligned the strategy with institutionalstrategic planning processes in process,thereby establishing relationshipsbetween impact investing, grantmakingand other activities of the foundation.

• Made a preliminary assessment of riskfactors and mitigants.

• Determined next steps.

MaineCF and NHCF were engaged ininstitution-wide strategic planning processesthat addressed whether and how toincorporate impact investing with donorengagement. The desire to synchronizeimpact investing planning with strategicplanning slowed the pace of implementation

while allowing important alignment with newmulti-year plans.

VCF’s goals in this process were quite

specific, since it already had a well-established impact investing portfolio: (1)determine whether to proactively engagedonors as co-investors in impact investingand (2) develop a regional platform thatexpanded their potential pipeline of mission-aligned investment. The differing agendasand positions on the planning roadmapamong the NNE CFs made it challenging forVCF to fully take advantage of thecollaborative process, although thefoundation continued to cultivate

investments linked to its in-state priorities ofdeveloping local food systems andresponding to critical needs such asaffordable housing. VCF continues to lookat ways to engage donors in impactinvesting, including field of interest impactinvestment strategies that reflect donorinterests.

Following is a chronicle of how theRoadmap elements built upon each other.

Donor Demand for Impact Investing

The donor focus groups within each stateidentified a group of donors who werereceptive to using modest amounts of fundsto test how impact investing couldstrengthen the community foundation’sresponse to local opportunities andchallenges (focus group questions appear in Appendix C):

• Donors were intrigued by the idea of

using their philanthropic "principal"within DAFs and community foundationsas recyclable resources for impactinvesting.

• Their interest in impact investingtypically increased with education on thetopic. In the course of each 90 minutefocus group, many, if not most,



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participants who had known little aboutimpact investing became fascinated withits potential and eager to learn more.

• Across the states, donor prioritiesincluded: create local jobs; expand

access to capital for well-managed localnonprofit organizations and businesses;and conserve the environment. Whilemost donors had a strong draw to localinvesting, a number were intrigued bythe opportunity to work regionally.

• They expressed interest in impactinvesting strategies that both drive directsocial and/or environmental impact andleverage capital from banks and otherconventional investors.

• Both donors and foundation leadersrequired strategies that mitigate therisks of impact investing throughrigorous due diligence and monitoring.This requirement signaled a need for asimilar degree of professional

management for impact investments asfor any other community foundation-managed financial assets.

• Financial advisors (who participated inone focus group and several individualinterviews) often need particularcultivation. While awareness of impactinvesting among these partners isincreasing, many remain unfamiliar, aswell as skeptical about investmentstrategies that might intentionally accept

a below market-rate expected return(see sidebar).

Assessing Underserved MarketsUnderserved markets—whether urban orrural—are places or sectors where theperceived risks and/or transaction costs ofproviding financing fall outside the risk-return appetite of conventional capitalsources (Appendix F). Impact investorsperform market assessment or landscapescans to understand whether and how local

capital markets are functioning, includingwhere the gaps, emerging opportunities andrelated risks may lie. Tips and tools forassessing the potential and risks include:

• Distinguish “qualified demand forcapital” from community need.Qualifying investments will support a:

o Social thesis that describesmission fit, including tangible(measurable) ways that the

investment advances thecommunity foundation’s missionand program goals.

o Investment thesis that describeshow the investment will repay,generally with some financial returnor yield. Repayment can comefrom earned income; reliably

Testing Impact Investing with TraditionalFinancial Advisors

Through individual interviews and participationin focus groups, financial advisors providedthe following perspectives:

• In general, traditional financial advisorsneed more education about impactinvesting. They would like specificexamples to better understand the

opportunities for their donors.• They are much more interested in market-

rate investments than concessionaryones.

• Some financial advisors expressedconcern about the donor advisedmanagement fees charged by thecommunity foundation.

• Double and triple bottom line advisors saythat interest in impact investing amongclients is high and “our challenge iskeeping up with it.”

From past work with professional advisors,experience teaches that if cl ient/donor interestcan be demonstrated, advisors will follow theirclients and become increasingly conversantand eventually enthusiastic about impactinvesting, its tools, and its goals. Butcommunity foundations are advised toeducate advisors and “sell” the concept.



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pledged grants and/or refinancing;savings (as might come fromenergy efficiency improvementsand/or co-location); or appreciationin assets that can be sold togenerate cash (such as real estate

and/or a business or portion of abusiness).

• Assess both investment opportunitiesand the “ecosystem” of support forinvestment prospects. Potentialinvestees in underserved marketsgenerally require non-financial capacitybuilding in order to understand how theymay benefit from, qualify for and repayimpact investment.

• Bear in mind the full range of resourcesthat can be engaged for regionaldevelopment strategy. As described byThe Wealth Creation in RuralCommunities project of the FordFoundation, this includes a region’s

financial, natural, built, individual,intellectual, social, and political capital(see Seven Forms of Wealth sidebar).8

• Understand risk management as criticalto success. The goal is to matchinvestment strategies and vehicles tothe region’s adaptive and growthopportunities, rather than fundingactivities that are low value and/orunsustainable. With a strong riskmanagement orientation, community

foundations can increasingly mobilizetheir own, donor, agency, and partnercapital behind regional impact investingstrategies in ways that are consistentwith their obligations as fiduciaries.

Opportunities and Challenges inNorthern New England

Rural communities offer distinctopportunities and challenges for any impact

investment strategy, as they do forgrantmaking strategies. Opportunities andadvantages in Northern New Englandinclude:

• Productive natural capital (workinglandscapes, forests, waterfronts andtourist areas).

• Individual, intellectual and politicalcapital (skills, entrepreneurialism, statepolicies favorable to economic and

community development, as well asfederal rural policies).

• Financial capital and acumen inengaged CDFIs, regionally focusedventure funds, community banks andindividual impact investors.

Unlocking Latent Market Potential:Patient Capital and Strong Partners

In underserved markets, and in emergingsectors with potential social benefits such assustainable agriculture, the transaction sizestend to be small and the process of dealsourcing and structuring labor intensive.

Patient capital from impact investors,combined with grants, technical assistanceand other supports from a range of public andprivate partners, are needed to unleash the

latent potential in these markets.

Local intermediaries such as CDFIs often playa crucial role in cultivating latent demand andproviding the technical assistance that lessexperienced organizations may need toqualify for investment. For this reason, manycommunity and other foundations channeltheir impact investing through intermediaries.

Fortunately, there are tested approaches forcommunity foundations serving areas thatmay lack specialized intermediaries. An

increasing number of CDFIs operate on aregional or national basis and may be happyto partner with rural communities. In addition,the community foundation may be able toprovide guarantees or other support toencourage community lending by local banks,credit unions or public sector financingagencies.



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Challenges that affect Northern NewEngland include:

• Limited population (the U.S. censusreported 2009 state populations ofapproximately 1.3 million in each of

Maine and New Hampshire, and650,000 in Vermont).

• Geographic dispersion of human andbuilt capital (population anddevelopment), which contribute to

limited deal flow and clusters of activityand impact.

• Limited economic opportunity andamenities typically found in more urbanor densely populated areas, making itdifficult to attract businesses or a highlyskilled workforce. Successful companiesthat are bought out may leave the area,taking jobs.

• Sectoral and geographic “silos” of

activity. For example, farm, food, fishand forest sectors may all be evolvingsustainable practices, but theirstrategies may not be coordinated.Similarly, community banks and CDFIsmay be interested in regionaldevelopment, but they typically focuswithin state or smaller regions.

• Historical dependence upon extractivebusiness models. These exported rawmaterials and forfeited the economic

benefit, infrastructure and skillsdevelopment of value added processingand local retailing.

• Gaps in availability of capital by stage,type of investment (debt, equity, quasi-equity), industry, and geography haveincreased in recent years. One exampleis the retreat of commercial banks frommost non-secured small businesslending, limiting access to growth capitalfor local job creation.

These factors inform both the need andparameters for a Northern New Englandimpact investing strategy. Implicationsinclude:

• The best sources for long-term job andwealth creation for communities may be

Seven Forms of Wealth

The Ford Foundation’s Wealth Creation inRural Communities project focuses on sevenforms of wealth that can be leveraged in acommunity foundation impact investing

strategy:

1. Financial capital includes bank accounts,equity investments, and bonds. Any incomestream flowing through a community is a formof financial capital. The interest that ruralhouseholds spend on credit card payments, forexample, can become a community asset whena community-owned bank controls it.

2. Natural capital includes forests, fish, water,and the other ecological resources in whichrural communities are rich.

3. Social capital is the stock of trust,relationships, and networks that support ahealthy community. These can become asource of wealth when, for example, socialnetworks allow rural residents to share ideas onorganic farming, wind leases, or local investingopportunities.

4. Individual capital is the stock of skills and thephysical and mental capabilities of people in aregion. It includes human health, technicalskills, and the entrepreneurial ability to startnew businesses.

5. Built capital includes wind turbines, energy-efficient homes, and other forms ofinfrastructure that represent community wealth.

6. Intellectual capital is the stock of knowledgeand innovation in a region, embodied not inindividual minds — as individual capital is —but in the enduring intellectual products thoseminds have created, such as inventions,published writings, or new investing vehicles.

7. Political capital is the stock of power andgoodwill held by individuals or groups that canbe spent or shared to achieve desired ends.Earnings from investments in political capitalinclude increased influence in decision-makingand increased control over other forms ofcapital. (Kelly and Norwood 2010)



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locally-based firms seeking incrementalgrowth with existing owners (versus theconventional model of exponentialgrowth, exit to public markets andfrequent loss of local jobs).

• Risk-adjusted return expectations oncapital to fuel such sustainable jobcreation may not meet commercialcriteria.

• There is a significant need for regionalvalue chain development, if the visionfor greater regional value-addition,wealth creation and sustainability is tobe realized.

• Such a vision requires and provides

opportunity for regionally-focusedbusinesses that make up sectoral valuechains.

• Given that natural resource-basedeconomics are often cyclical and localand regional value chains are in an earlystage of development, specialized,flexible financing is needed.

• Parallel investments that improve thequality of life and services in local

communities can increase the odds ofattracting and retaining the neededskilled workforce. Such investments alsorespond to critical local needs, includingaffordable housing; senior housing;quality, integrative health care (includingbehavioral, mental and dental health);quality education and childcare; andarts, culture and recreationalorganizations.

• There is a tension between urban and

rural development, even within largelyrural Northern New England states.Economic activity clusters in populationcenters, but there are forces in eachstate including the communityfoundations that defend the interests ofthe much larger footprint of remote andchallenged areas.

Translating a Landscape Scan to anInvestment Strategy

The community foundation can bring equityand sustainability lenses to the landscapescan questions to probe whether access to

capital and capacity building services isequitable, and whether capital is allocated inways that strengthen or undermine the long-term viability of community residents,institutions, traditions and the naturalresources upon which these depend.

Following are key findings from the NNECFs landscape scan that was carried out inall three states (landscape scan interviewquestions appear in Appendix D).

Baseline Assessment of Impact Investing Activity

Northern New England has been the seat ofimportant impact investing initiatives goingback to the 1970s. As a result, there areimpact investors, intermediaries, funds,supportive government agencies, andtechnical assistance providers active withineach state, some of whom operatethroughout the region:

• Regional impact investments fall in threebroad sectors, each of which deliverstargeted social and/or environmentalimpact (Figure 5):

o Economic Development—Earlyand growth stage businesses(including farms), and largerbusinesses such as factories andworking forests, that create or retain jobs.

o Community Development—Nonprofit and other organizationsthat meet basic needs such asaffordable housing and health care,or provide a range of cultural andother services that enrich communitylife for all.



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o Sustainable development—Anoverlay to economic and communitydevelopment investments thatconserve and restore naturalresources. This includes developinglocal or regional value chains

between producers, processors,distributers, and retailers thatrecirculate dollars to create localwealth while reducing imports andrelated carbon emissions.

Figure 5. Northern New England Impact Investing Sectors

• As of 2010, an estimated $1.9 billion inimpact investment was made in theregion each year from private, publicand nonprofit sources, including

foundations:

o The 2010 estimated breakdown bystate included: Maine, $934 million;New Hampshire, $652 million andVermont, $353 million. The variationbetween states is largely influencedby the volume of transactions usingthe federal New Markets Tax Creditprogram (NMTC), which offerstaxable investors a tax credit of 39percent over seven years for

providing flexible financing toprojects located in low-incomecommunities. Typically, NMTCsupports large projects involvingsome form of commercial realestate, such as factories, workingforests, or health care institutions.Estimated 2010 NMTC transactionsfor each state were $401 million (43

percent of total) in Maine; $245million (38 percent) in NewHampshire; and $93 million (26percent) in Vermont.

o Other impact investments in eachstate supported small business,affordable housing, nonprofitorganizations, and smallersustainable real estate transactionssuch as local farms.

o Banks were the largest source ofimpact investments, mostly throughtheir community developmentlending that fulfills obligations under

the federal CommunityReinvestment Act.

o Bank lending depended upon CDFIsand federal and state agencies,which provide investableopportunities, credit enhancement(protection against loss), andincentives such as the NMTC and

Economic Development! Create Jobs

• Early stage firms

• Growth firms

• CommercialReal Estate,including Land

Community Development! Meet underserved needs;

enrich community life

• Affordable housing• Health, human services &

human capital development• Arts & Culture

SustainableDevelopment

! Conserve, restorenatural resources

• Farm, fish, forest•

Local value chains• Green / Transit-Oriented

Development



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produce substantial regionalfinancing demand from healthcenters and hospitals serving remoteareas and low-income residents--investments that provide particularlystrong “multiplier effects” through

nearby pharmacy, home health care,restaurant, hotel, and transportationsmall businesses and jobs.

o Child Care. The region’s strongnetwork of CDFIs, including CoastalEnterprises, New HampshireCommunity Loan Fund and VermontCommunity Loan Fund, were someof the nation’s earliest lenders forchildcare. The sector faceschallenges in obtaining financing as

the many home-based operatorshave limited resources and publicsector support fluctuates. Whileindividual loans tend to be small,need is persistent.

o Nonprofit Sector . Across the region,nonprofit organizations provideessential human services andcultural enrichment. Flexiblefinancing combined with technicalassistance on financial

management, identifying newrevenue sources and facilitiesplanning (including energy efficiencyand co-location) can assist theseorganizations to be more sustainableand effective. However, suchfinancing and guidance is oftendifficult for nonprofits to obtain fromconventional sources.

• Sustainable Development: Overlay to

Economic and Community

DevelopmentSustainable development consists ofeconomic and community developmentprojects, products and processes thatconserve or restore environment. In thistransformational overlay to thosesectors, capital is needed for:

o Land . There is an ongoing need tosecure land and/or waterfront rightsat affordable prices. Financing isneeded to convey forestland tosustainable uses, secure farmlandfor emerging farmers committed to

sustainable practices, and securewaterfront rights for sustainablefishery operators.

o Green Retrofits and NewConstruction. “Green” buildingpractices that incorporate energyconservation and other benefitsreduce operating costs for bothexisting and new buildings. Whilegovernment and utility programsmay help to finance the installation

costs, flexible financing is oftenneeded.

Community Foundation Impact InvestingStrategy

NNE CFs’ donor focus groups and marketassessment determined that theirinstitutions’ increased participation andleadership in regional impact investing couldadd value on a number of levels. Bycombining impact investing with

complementary grants, convenings andcommunications, they could help to meetfinancing needs and improve strategiccoordination among current practitioners.Their integrated approach could:

• Expand and replicate successfulmodels, fill financing gaps and leveragelarger conventional capital sources tomeet both current and latent demand forfinancing.

• Engage donors through impactinvesting, thereby activating communityfoundations assets held in donoradvised funds for mission-driveninvesting opportunities.

• Use their strong reputations to conveneand educate funders and potentialinvestors about regional impact



25

investing, which could lead toopportunities for the communityfoundations to aggregate capital frominterested national and local foundationsand corporations, as well as prospectiveindividual donors.

• Mobilize grant funding for the region’stechnical assistance providers that helplocal organizations to qualify for andeffectively manage impact investments.

• Track, evaluate and communicate boththe social and financial performance ofimpact investment in their states and theregion, thereby helping to spurimprovements in performance andgreater investor interest.

The focus groups and broader fieldinterviews determined that, as donors andother interested investors become involvedin impact investing, they needintermediation. Community foundationsrepresent a trusted broker. As such, theycan help to source and vet investment-worthy opportunities in ways that are win-wins for investors, existing intermediariesand the range of community organizations,entrepreneurs and households that can

qualify for impact capital.

With leveraging as a guiding principle, theNNE CFs determined to advance on modestinitial impact investing programs that mightcatalyze the larger sums of capital neededin the region over time. The strategy wouldfocus on opportunities to replicate testedmodels and leverage conventional

investors, while including some smaller,phased investments that help to developnew models. All three NNE CFs expressedan initial preference for investing throughproven intermediaries, or in partnership withthese institutions, who they might retain to

provide investment due diligence and/orportfolio management.

Status of Impact Investing Strategies

Following Phase II of the project, each NNECF continued to advance its impactinvesting strategy. For each, the processentails incorporating findings from the donorfocus groups and demand for capitalassessment with an understanding of

approaches used by other communityfoundations, and their own foundation’spriorities, capacity and appetite forinnovation. As of the writing of this case,progress includes:

MaineCF: In May 2013, the MaineCFBoard of Directors endorsed an expandedimpact investing program to provideopportunities for donors to pool charitableresources with community foundationresources for the purpose of making loans

and investments to advance thefoundation’s strategic goals. These includedeveloping creative strategies to makebigger and longer-term commitments inorder to achieve measurable outcomes inbuilding a strong economy.

MaineCF plans to combine impact investingwith grantmaking and other foundationactivities to attain outcomes that grants orinvestments alone cannot achieve. Forexample, MaineCF has initiated a capacity

building initiative focused on organizationsengaged in community development financein Maine, which are its likely impactinvesting partners in the future.

The foundation plans to begin by focusingits impact investing program on two areasaligned with the foundation’s strategic plan:

Impact Investing: A Scaling Tool

MaineCF’s proposed impact investingstrategy states that “Impact investmentsare made with the anticipation that thecapital can be recovered for future use.For this reason, strategic investmentscan be made at a scale that is typicallybeyond that of most of our grantmaking.”



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o Sustainable agriculture andfisheries, a promising sector ofMaine’s economy that isexperiencing growth due to theincrease in the demand for locallygrown food.

o Economic and communitydevelopment, with a focus onenterprise expansion and downtownrevitalization, especially the adaptivereuse of historic buildings incommunity centers for cultural, civic,commercial or residential purpose.

MaineCF will establish two impact investingpools to combine capital from multiplecommunity foundation donors for each of

the two focus areas. The communityfoundation plans to invest throughintermediaries who bring expertise in each.It hopes to raise $2 million from donors foreach fund by the end of 2013, and willdevelop specific donor engagement andcommunications tools to share theoutcomes and what is learned throughimpact investing.

NHCF: In March 2013, NHCF staffpresented its proposed impact investing

strategy to its impact investment committeeand later to the full board, who gaveencouragement to proceed slowly and“learn as we go.” During June, NCHF’sChief Financial Officer and Vice Presidentof Finance, Michael Wilson, and SeniorProgram Officer, Celina Adams, presentedan overview of work to date and keyquestions at all eight regional advisoryboard meetings across the state (withNHCF’s president, Dick Ober, taking onemeeting). Staff fielded a variety of

questions, listened to feedback and hearduniform interest and support, along withappreciation that staff engaged advisorviews while developing strategy (theadvisory boards had requested to grapplewith the issue in development). There wasa feeling that the local boards would beallies in connecting staff with investmentopportunities and donors. Over the summer,

the core staff team engaged a broader arrayof colleagues to begin developing donoroutreach and communication plans as wellas program- specific investment criteria. In August, NHCF and MaineCF met to shareprogress and learnings from their respective

institutions. Staff returns to NHCF’s board ofdirectors in the fall with a full impactinvesting strategy recommendation.

VCF: VCF continues to refine its impactinvesting model and bring its investments incloser alignment with the foundation’spriorities and commitment to respond tourgent needs. CFO Debbie Rooneyoversees the portfolio, while working withthe VCF Impact Investing Committee aswell as seasoned niche investment

professionals to perform due diligence andstructure potential investments in the localfood system and affordable housing. Thisapproach has several advantages:

• It leverages deep local market andsector knowledge on the part of theretained specialists.

• It is cost-effective, given that thespecialists are highly efficient, local andwith minimal overhead.

• It allows CFO Debbie Rooney and other

staff to develop and maintain an in-depth knowledge of portfolio companies,which is useful for evoking the potentialof impact investing in conversations withdonors and other potential partners.

The Vermont Comm-unity Loan Fund’s financing for affordablehousing developers anda Waldorf School are just two examples ofstrengthening local

institutions to providequality services.



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V. IMPACT INVESTMENT POLICY

Formalizing an impact investment policyand drafting the investment policy statementtypically closely follow the planning of animpact investing strategy.

The investment policy statement is abackbone of fiduciary responsibility, whichspells out how the duties of loyalty and carewill be executed and by whom. Theseduties are as important for impact investingas for any other community foundationassets. Investment policy statements aretypically living documents that are reviewedand revised by oversight committees fromtime to time.

The impact investing policy may be writteninto a foundation’s general investmentpolicy or formulated as a stand-alone impactinvesting policy statement. Communityfoundations may favor creating a stand-alone impact investing policy statement,given that the funding for this program maybe a carve out from larger pooled fundsand/or may be largely capitalized with donorfunds.

As suggested on the Roadmap, the

investment policy statement typicallyaddresses the scope of an impact investingprogram, including:

• Source and amount of funds in theprogram.

• Priority program areas or themes.

• Targeted asset classes and expected

financial returns, along with any relevantfinancial performance benchmarks.

• Any targeted geographies.

• Due diligence protocols and investmentcriteria.

• Portfolio management protocols,including frequency of reporting andentities or individuals receiving reports.

• Governance, including responsibility forinvestment decision-making, oversightand reporting and other matters.

MaineCF’s board of directors adapted animpact investing policy in in May 2013.NHCF will finalize its impact investing policyas the foundation moves to expandedprogram launch in coming months. VCFtook the opportunity of revisiting andformalizing its impact investing policy aspart of this collaborative process, drawingon both outside expert resources (from theTuck Business School at DartmouthCollege) and their new impact investingcommittee (see Appendix G).

The Vermont Community Foundation’sinvestment policy statement allows for VermontInvestments (Appendix G) in a range of assetclasses, including insured deposits in theOpportunities Credit Union, a CDFI that lendsfor the needs of low-income residents;Vermont Community Loan Fund, a CDFI thatfinances affordable housing, small business

(including farms), nonprofit facilities and childcare; and Fresh Tracks Capital, a regionalventure capital fund whose investments ingrowth businesses such as the Native American-owned Native Energy create jobswithin the state.



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Table 2. Impact Investing Tasks: Managing In-House or OutsourcingTask Internal External Advisor / Partner

InternalEducation

• Easy to assess internaleducation needs

• Time consuming to producecontent

• Excellent impact investing training capacityexists; general materials can be customized tolocal community foundation

• Efficiencies and cost sharing possible via

sharing some or all training functions or genericmaterials with other foundations• Associations such as Mission Investors

Exchange offer educational services rangingfrom webinars to in-depth institutes

Deal Sourcing • Optimizes ability to connectimpact investing strategy withcommunity foundation strategyand grantees

• It is easy for communityfoundation to take a lead in thisarea and incorporate externaladvisor and/or partner

recommendations as they arise

• External advisors or partners may be aware ofregional deal flow and able to generateopportunities that are a good fit with communityfoundation’s strategy;

• Advisors and partners may also be aware ofrisk factors that can limit time involved incultivating deals that may not proceed

Financial DueDiligence

• Full due diligence is generally atime consuming and skill-intensive process

• External advisors and/or partners typicallybring necessary skills and may have priorknowledge of particular investees and/orcomparable organizations (“comps”) thatimproves efficiency and quality of due diligence

DealApprovals

• Community foundation typicallycreates impact investmentcommittee to recommend and/orapprove deals; approval may beat board committee or boardlevel

• External advisors and/or partners may adviseand/or serve on internal impact investmentcommittees

Legal

Structure andDocumentation

• Community foundation may use

investee legal documents and/orexecute portions of legaldocumentation using boilerplateforms; review by qualifiedattorney is recommended

• External counsel for impact investments often

have in-depth knowledge of similartransactions that may be useful in documentingand closing individual deals. This is particularlytrue for equity and real estate transactions.Insured deposits and fixed income investmentstend to be more standard.

DealNegotiatingand Closing

• Important for communityfoundation to be involved, asissues addressed (includingsocial metrics) become centralto the long-term relationship andportfolio monitoring

• External advisors, partners and/or counseloften helpful in identifying critical issues andmodels from comparable transactions

Portfolio

Monitoringand Reporting

• Important for community

foundation to be involved, tooversee financial and socialperformance; monitor risk levels;address any problems identifiedin quarterly investee reports;maintain investee relationships;and harvest information forreporting to impact investmentcommittee, directors and otherstakeholders

• Portions of portfolio monitoring task can be

outsourced, including loan and/or investmentadministration; gathering and review offinancial and social impact information; creationand updating of financial and socialperformance dashboards; management ofworkouts (troubled investments)

• When outsourcing portfolio monitoring,community foundation must receive quarterlynotice of any potential performance problems



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Table 3. Working with Regional Impact Investing Advisors and/or PartnersRegional Advisor orPartner Type

Pro Con

IndividualProfessionals

• Qualified professionals mayhave extensive experience inimpact investing, often by virtue

of having previously worked fora CDFI or other impact investingorganization.

• Capacity to manage a largerportfolio or multiple assignments atone time may be limited.

CDFIs and SimilarMission-DrivenIntermediaries

• May possess excellent marketand sector knowledge, whichcontributes to quality duediligence

• May lack objectivity due to conflictsof interest (may be competitive withother organizations that thecommunity foundation would like tofund).

• Skill set is likely limited to a smallnumber of asset classes.

• CDFIs must be screened forperformance qualities. It is helpful ifthey have obtained a CARS rating

(CDFI Assessment and RatingService)Asset managementfirms specializing insocial investing

• May be able to supportcommunity foundation in duediligence on multiple assetclasses

• May not be familiar with communitydevelopment investing. Feestructure requires comparativeanalysis.

Other intermediaries,such as banks

• May be willing to leveragefoundation investment with bankinvestment, and may help toattract other investors.

• Community foundation could be asmall, but labor–intensive customer,leading to lack of attentive service.

Public agencies • May have extensive usefulinformation about grants, creditenhancement and other

programs.

• Public agencies are key partners toprivate sector impact investors, butless likely to provide due diligence

or asset management services.

VCF is well advanced in an operating modelin which it sources its own deals andmonitors its own impact investing portfolio.However, it retains outside professionals forin-depth due diligence. VCF is fortunatethat its conventional investment consultant,Colonial Consulting LLC, has been willing toassist the community foundation in setting

up and evaluating some of the investmentsfor its Vermont Investments program(Appendix G). Colonial Consulting remainsinvolved in monitoring Vermont Investmentsalong with the VCF’s conventionalinvestments and as noted the foundationhas remained at or very near the top decileof financial performance for community

foundations of its size. For its increasinginterest in local food systems projects (seesidebar, following section), VCF partnerswith seasoned niche financial experts toobtain due diligence. This includes workingclosely with one of the foundation’ssupporting organizations that is activelyinvolved in building capacity and/or

investing in local food systems. It alsoincludes working with other regional impactinvestment leaders such as CastaneaFoundation, a private operating foundationwhose focus and experience in local foodsystems provides VCF with opportunities forco-investment, pipeline development andinvestment structuring support.



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Table 4. Shared Services Platform – Potential Services

Functions /Services Description Example Provider(s)

Deal Originations

Deal Sourcing Largely in-house via grantees, donors, partners,although an impact investing collaborative might jointlysource deals under a shared strategy, such as regionalenvironmental sustainability, food systems or transit-oriented development.

Other investors, advisors,Community DevelopmentFinancial Institutions(CDFIs), banks,incubators, universities.

Due Diligence Often out-sourced and may be shared by multipleimpact investors with aligned goals that are backing thesame organizations and/or projects.

Consultants, selectedCDFIs or intermediaries.

Legal

Prepare TermSheet

Professional consultation helpful for all legal tasks,especially at first. An area for substantial cost saving ifshared among multiple aligned impact investors for

investments in the same organizations and/or projects(even if these may not occur at exactly the same time).

Attorney, ideallyspecialized in impactinvesting including

program-relatedinvesting.

Negotiate

TermsProfessional consultation helpful, especially at first. As above.

Document

InvestmentProfessional consultation helpful, especially at first. As above.

CloseInvestment

Professional consultation helpful, especially at first. As above. Consultantscan also be helpful.

Asset Management & Reporting

PortfolioMonitoring

Frequently outsourced Consultants, CDFIs orsimilar intermediaries.

Social Metrics& Evaluation

Frequently outsourced for either the design and/ormanagement of some aspect of social metricsreporting. Can range from designing and populating adashboard to a more comprehensive programevaluation. Can engage regional academic institutions.

University, consultants,selected CDFIs,community developmentunits of bank regulatoryagencies.

Leverage Program

Facilitate DealCo-Investment

Foundation always “at the table” but many tasks canbe outsourced

Consultants, CDFIs andsimilar intermediaries.

SourceAdditionalCapital

Foundation always “at the table;” selected tasks canbe outsourced.

Consultants.

Build Capacity & Communications for Program

MarketCapacityBuildingServices

Create support clearinghouse/”ecosystem” for socialenterprises to learn about and potentially qualify forimpact investment. This may draw on services thatfoundations using the shared services platform alreadyoffer and/or refer to, including training and incubatorssponsored by local universities, community colleges,government agencies; and nonprofit organizationcapacity-building.

As described, and CDFIs,government agencies(SBA Score program forsmall businesses, USDAfor rural businesses,CDFI Fund capacitybuilding programs),selected consultants.



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Functions /Services Description Example Provider(s)

Education Board, donor and staff training on impact investingstrategy and execution; foundations can leveragefoundation trade associations and other providers,whose offerings can be customized to the foundation.

Consultants, selectedCDFIs or similarintermediaries, tradeassociations.

Communi-cations

General consultation and development of coremessaging and/or templates, which can be customizedto the foundation.

Communications firm.

The NNE CFs also realized that theadvantages of collaboration must beweighed against the potentialdisadvantages. These include:

• Time required to be involved in a

collaborative project, which may slow anindividual community foundation’smomentum.

• Fair share allocation of costs – bothupfront and ongoing.

• Fair share receipt of services byindividual community foundations.

• Ability to “exit” if the collaboration is notserving the needs of an individualfoundation, or if the effort loses supportfor other reasons.

• Potential financial destabilization of acollaborative, if one or more individual

foundations exit.

The NNE CFs are proceeding with acommitment to continue sharing learningsand exploring where shared services canadd value.

There were 11 venture capital investments in New Hampshire during 2011, compared to 400

in neighboring Massachusetts. New Hampshire Charitable Foundation invested in theGranite Fund, a state-based and state-backed, $30 million venture capital fund managed byBorealis Ventures that seeks to increase the flow of start-up capital to innovative, locallyheadquartered technology firms that create jobs. Using funds from the federal JumpstartOur Business Startups Act (JOBS Act), the state’s $4.5 million investment provides up to 15percent downside risk protection to private investors, creating a win-win for local companies,employees and impact investors. (Statistics and the map of venture deals by state are basedon the PricewaterhouseCoopers/National Venture Capital Association MoneyTree™ Reportbased on data from Thomson Reuters. Narrative from New Hampshire Public Radio 2012,http://stateimpact.npr.org/new-hampshire/maps/11072)



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VII. LEVERAGING THE STRATEGY

Rural community foundations can exerciseleadership in the impact investing sphere byboth educating and engaging donors, co-investors and other partners. Given that

most rural community foundations are ofmodest size, leveraging is a criticalcomponent of the impact investing strategy.

Education Efforts. Rural communityfoundations can educate the philanthropicand nonprofit community; foster andstrengthen existing and new intermediaries;support local nonprofit organizations andsocial enterprises in qualifying for impactinvestment; and educate and advocate withlocal, state and federal agencies. Each of

the NNE CFs has taken recent leadershiproles on these fronts:

• MaineCF has sponsored and helped toorganize a series of meetings on impactinvesting with the Maine PhilanthropyCenter . These events have broughttogether current and potential impactinvestors as well as intermediaries;cultivated partnerships; and highlightedregional investing opportunities.

• NHCF provided an educational sessionon impact investing at its Regional Advisor summit with 250 attendees.

• VCF sponsors its regional grantmakersassociation and is in engaging in co-investments with a number of regionalimpact investors.

The effort to build awareness of regionalimpact investing and each communityfoundation’s role is paying off:

• In Maine, an anonymous donor hasmade a $500,000 gift to providepermanent capital for MaineCF’s impactinvesting pool that will supportsustainable agriculture and fisheries; afield-of-interest fund has made a pledge

to transfer $360,000 (10 percent of thefund’s corpus) to be used for impactinvesting over the next ten years; andanother anonymous donor has pledged

$500,000 for impact investing for a five-to 10-year period.

• In New Hampshire, Borealis Ventures, aNew Hampshire–based venture capitalfirm in which NHCF had made priorinvestments, approached the communityfoundation with a novel investmentopportunity. The Granite Fund, the newinvestment vehicle, is closely alignedwith the Foundation’s re-affirmedinterest in local job creation. Through a

partnership with the State of NewHampshire, this new Borealis Venturesfund will provide downside riskprotection to investors for a strategy thatchannels growth capital to technology,clean energy and other businesses withstrong job creation potential in the state.

• In Vermont, the community foundationpartners with others on its food systemsstrategy (see sidebar), includingCastanea Foundation and High

Meadows Fund (a VCF supportingorganization). VCF has made aninvestment into the regional VermontSustainable Jobs Fund, for which localfood systems is a key focal area.

Leveraging Additional Capital. Beyondtheir current leadership in local impactinvesting partnerships, each NNE CFenvisions the potential to attract additionalcapital from foundations and other impactinvestors who share the NNE CF’s impact

investing interests and would channel theirimpact investments through and/or inalignment with the community foundations.

There are precedents for communityfoundations serving such a local capitalconduit function. Wells Fargo extended a



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$500,000 loan to the Marin CommunityFoundation (MCF) for re-lending to localnonprofit organizations under MCF’s impactinvesting program (an in-house loan fundthat also attracts allocations from donoradvised funds). Dignity Health, a faith-

based health institution that operates some40 hospitals, has extended a $500,000 loanto the Arizona Community Foundation forsimilar purposes.

The potential exists for national and regionalfamily foundations to similarly direct theirimpact investing assets through one of theNNE CFs, based upon the investor’s priorityinterests and geography. During NNE CFfocus groups, a number of participants whohad their own family foundations indicated

strong interest in co-investment.

Cultivating such relationships involvesunderstanding and managing certain riskfactors, including:

• Competition with other localorganizations that are also seekingresources. As one example, CDFIsseek capital from regional and nationalinvestors. It will be important todifferentiate the community foundation’s

goals and seek win-win strategies withsuch institutions. These mightemphasize use of investor proceeds forpurposes that are different from andcomplementary with CDFI activities, andthe ability of the community foundationto aggregate large numbers of smallinvestors to make one large investmentin a CDFI on favorable terms.

Regulatory issues. As part of its work forthe NNE CFs, GPS Capital Partners carried

out preliminary research on regulatoryissues affecting the NNE CFs’ ability toexecute impact investing strategiesinvolving donors and external co-investors.While the specifics of regulatory compliancemust be researched and established at thelevel of each state’s securities agency,preliminary findings indicate:11

Vermont Community FoundationRallies all Tools for Healthy Local Food

“The Vermont Community Foundation is rallyingits philanthropic tools behind the Food & FarmInitiative, beginning in Vermont schools, where close

to 40 percent of children qualify for free and reducedprice meals.

This has benefits that extend far beyond the child.Children introduce new foods to their household.They develop tastes that drive their purchases laterin life. Schools are institutions that regularlypurchase in bulk, driving processing and distributionthat makes farming more sustainable andinnovative, a support to local and state economies.

VCF Will Gather Groups and Individuals /Support Research / Coordinate Plans. We willsupport: • Those working to increase access to local food

in schools, especially scalable and statewidemodels.

• Key recommendations, related to the 10-yearstrategic plan.

• Work with donors in Vermont and beyond tobring more support.

Focus Grants On Programs That: • Provide skills to stakeholders to develop and

manage Farm to School programs.

• Provide farmers with the technical assistancethey need to work effectively with schools.

• Strengthen the system for collecting, processing,and distributing products for consistency inquality, quantity, and delivery time.

• Develop metrics that help schools andinstitutions demonstrate the impact of Farm toSchool, to encourage continued investment.

Direct Parts of our Investment Portfolio to Foodand Farm Work There are impact investing in projects that wouldmake it easier to deliver local foods to Vermontmarkets and beyond. Among the opportunities wemay consider:• A proposed meat processing facility in

Middlebury to meet demand for local meat andprovide some of the job training identified as aneed in Farm to Plate.

• A proposed storage, processing, and agritourismfacility in St. Johnsbury that would supportsmall-scale Farm to School programs and helplocal producers share their products withvisitors.” (Vermont Community Foundation 2013)



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VIII. CONCLUSION AND NEXT STEPS

All three NNE CFs are expanding use ofimpact investing in their portfolio ofapproaches to achieving social andenvironmental impact in their diverse,

primarily rural communities. Theopportunities include:

• Scale successful models and fillfinancing gaps within their states,particularly for local job creation andenvironmentally sustainabledevelopment:

o MaineCF and NHCF will align impactinvesting to their new strategicplans.

o MaineCF will focus on the emergingsustainable agriculture, fisheries andfood systems sector, and businessand downtown development,especially preserving historicbuildings in downtown areas tospark economic development.

o NHCF will seek to tie its impactinvestment to its broad focus in sixareas: environment, health,

education, economic development,arts and culture, and civicengagement. The Foundation willseek a balance betweenresponsiveness to community needand opportunity and its deeperinitiative work in substance usedisorders, early childhood education,and key environmental initiatives.During its phased work to developan impact investment strategy,NHCF made one investment in a job

creation venture fund, but took ahiatus from its traditional, donor-driven nonprofit lending.

o VCF is filling gaps in the sustainablefood system (see sidebar, SectionVII) and affordable housing sectors,and will continue to invest inopportunities that improve Vermont

communities, especially those thatare rural and underserved.

• Respond to donors’ interests, and

potentially differentiate communityfoundations from alternative donoradvised fund providers. Some donorsare engaged today; many are excited tolearn and do more. They are informedby a range of values, ranging frompromoting self-sufficiency andentrepreneurship to preserving a senseof place to preserving the environment.They are also receptive to joining incommunity foundation impact investingpools. They understand that in the

absence of compensating fees,customizing investments is costly for thefoundation.

• Activate more fully the substantialportion of community foundation assetsin donor advised funds for missionpurposes.

• Leverage community foundationcredibility to educate and attractpotential investors inside and outside

the foundation about the field of impactinvesting.

• Serve as impact investing aggregators,mobilizing capital from regionalgrantmakers and others, includingnational and local private foundationsand individuals of means who may bemore attracted to investing thangrantmaking as a means to drive socialchange:

o MaineCF’s early success inattracting grant and loancommitments for its proposed impactinvesting pools providesencouraging evidence of thepotential here.



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• Help to track and evaluate the efficacyof impact investments in their states and

the region.

o Along with standardized social impactdashboards such as the GlobalImpact Investing Network’s IRIS,vignettes such as MaineCF’ssnapshot of its Maine Farmland Trustinvestment can be highly motivational(see sidebar).

o As part of a shared services platform,the NNE CFs may be able to partnerwith university programs such as theUniversity of New Hampshire’sCarsey Institute for social metricstracking system design and ongoing

reporting.

• Combine impact investing withcomplementary grants, convenings andcommunications as a portfolio ofapproaches that improves strategiccoordination, efficiency and capacity todrive impact among the field’spractitioners.

o MaineCF has initiated a nonprofitcapacity building program focused

on CDFIs parallel to its impactinvesting program, as one exampleof such an approach. All three NNECFs’ involvement in impact investingconvenings are another example.

• Generate new perspectives on acommunity foundation’s community,which has potential to increase theeffectiveness of grantmaking and othercommunity foundation activities.

As noted in earlier sections, riskmanagement is critical to long-termsuccess. The goal of an impact investingstrategy is to match investment strategiesand vehicles to the region’s adaptive andgrowth opportunities, demonstrating social,environmental and financial success thatattracts more donors and partners overtime. This is a long-term strategy in whichcommunities are likely better served bycommunity foundations moving cautiouslywith success than overstretching current

market capacity. As they proceed, risks andpotential mitigation strategies include:

• Risk: The community foundations areunable to raise sufficient capital fromdonors given small population sizes anda limited number of high net worthdonors.

Investing to Conserve WorkingLandscapes in the Farm Sector

MaineCF’s $1 million dollar low-interest loanto support Maine Farmland Trust’s efforts topermanently protect farmland is an example of

where the foundation is already using impactinvesting to advance a strategic priority andengage donors. In 2009, nine donors joinedwith MaineCF to make this loan. To date, 26farms covering 8,803 acres have beenprotected from development and transferredto the next generation of farmers. Theseprojects have leveraged over $4,376,000 inbank financing and $8,965,000 in additionalloan funds from private investors.



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o Mitigation: Obtain pre-commitmentsof donor capital representing asubstantial portion of any targetedpool or initiative capital goal beforelaunch. This can be structured aschallenge investment to other

donors.

o Mitigation: The communityfoundations can create a smallergoal, phase and/or otherwise reviseexpectations. They can frame theirinitial impact investing as a learningevaluation that will be reviewed andpotentially expanded as milestonesare achieved.

• Risk: There is insufficient qualified deal

flow to deploy the capital. This situationmay arise particularly in job creation-focused strategies, where the universeof potential investments includes micro-and small businesses. Here theentrepreneurs seeking capital have fewassets to invest in project equity (similarto the downpayment on a house) and/orto pledge as collateral. The deals tendto be smaller and riskier than realestate-collateralized investments.

o Mitigation: Community foundationscan educate donors about theimportance and specialcharacteristics of microlendingand/or seed investment strategies,which deploy small dollar amountsfor important results.

o Mitigation: Community foundationscan lend through intermediaries whoare expert in using available loanguarantee programs, such as the

USDA, SBA and certain state-basedprograms. Their strategy can alsotarget a mix of loans to businessenterprises and commercial realestate. A commercial real estateinvesting strategy targets muchlarger transactions including workinglandscapes and historic buildings,Loans for such purposes can be

guaranteed, and can use tax creditsto lower the cost of financing andattract a larger universe ofpotentially credible investees.

• Risk: The investments fail to perform

financially.

o Mitigation: Having in place a rigorousdue diligence protocol goes a longway to selecting qualified investeeson the front end. Then, establishingperformance expectations with allparties is critical. This includes bothrepayment expectations for investeesand wavier forms on donoragreements that highlight thepotential for financial loss.

o Mitigation: Apply proven ways to limitthe financial risk of impact investing,including: working withintermediaries; making small, stagedinvestments; engaging in public-private partnerships, such as theGranite Fund in New Hampshire; andestablishing a strong ecosystem ofmanagement and capacity buildingsupports for investees. Finally, theprogram can have a loan loss reserve

that protects donors and otherinvestors from loss, in the event thatone or more investments do notperform. A strong communityfoundation impact investing programcan bring all these risk managementtactics to bear.

• Risk: The investments fail to generatedesired social and/or environmentalimpact.

o Mitigation: It is important to monitorimpact at both the individualinvestment and portfolio level. NNECF strategies are setting out targetfinancial and social successmeasures in advance, and individualinvestment review will evaluateexpected financial and social returnsduring the due diligence process.



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Quarterly monitoring of portfolioinvestments allows for performancereview and dialogue if mid-coursecorrections are needed.

• Risk: A cost-effective operating structure

cannot be found.

o Mitigation: Careful evaluation ofprogram goals and executionoptions in advance should identifycost-effective solutions. Limitedcontracts with vendors allow forperiodically re-evaluatingperformance and cost-effectiveness.Continued exploration of cost-sharing and a shared platformshould continue.

• Risk: Donors prefer customized, one-offapproaches to pooled strategies.

o Mitigation: Pooled impact investingstrategies offer strong opportunitiesto generate social impact, along withconsiderable administrative costsavings. The pooled strategy mightoffer “best efforts” to reinvest in thedonor priority geographies orprogram areas and reporting should

include case examples respondingto donor interests. If donors expressa preference for more customizedapproaches, mitigation includestriggering a special service fee.

• Risk: The reputation of the communityfoundation is tarnished. There could bemultiple causes for this, including butnot limited to a perception that thecommunity foundation is entering into areal or perceived violation of fiduciary

responsibility, commercializingphilanthropy or cannibalizing both localCDFIs and grantmaking.

o Mitigation: Ongoingcommunications, evaluation anddialogue on the nature and evolvingmeans of change agency.Dialogues should communicate the

community foundation’s compliancewith and commitment to all relevantregulations, philanthropic values andwin-win relationships with mission-aligned organizations.

• Risk: Community foundations wishingto pursue a collaborative strategy havedifficulty creating a common strategyand platform for impact investing.

o Mitigation: The communityfoundations can pursue independentstrategies, seeking collaborationwhere possible. In the short term,MaineCF and NHCF will jointly meetto review progress and learnings,and to explore potential collaboration

between staffs.

Collaborative effort among communityfoundations is helping to accelerate learningand mitigate risk. However, these gains canbe offset by added time and cost in theshort term, recalling the African proverb “Ifyou want to go fast, go alone. If you want togo far, go together.”

Fortunately, the sector’s trade associationsincluding the Council On Foundations and

Mission Investors Exchange have cometogether to support community foundationsin learning about and launching impactinvesting strategies. This sets the stage forsector-wide gains in effectiveness. Wehope that this report focused on ruralcommunity foundation impact investing is auseful addition to the sector’s body ofknowledge, and that, as additional ruralcommunity foundations design andimplement programs, they too will sharetheir experience and learning.

In rural philanthropy generally and impactinvesting in particular, we see potential toreinforce the importance of rural economiesand ways of life--for those who live thereand for the nation as a whole. Increasingrural focus on land conservation, long-termwealth creation, innovation and adaptationis yielding financial as well as social and



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environmental returns. Far exceeding theclassification as simply “not urban,” thesedistinctive communities are modelingenvironmentally sustainable approaches tocommunity and economic development thatare influencing the practice in larger regions

including cities. With the support,leadership and, increasingly, impactinvestment of their community foundations,they are safeguarding places of naturalbeauty, varying character, traditions andeconomic renewal for all to enjoy.



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Appendices

Appendix A. Northern New England Community Foundations Impact Investing ProjectPhase I and II Activity

Appendix B. Northern New England Community Foundations Impact Investing Project

Guiding Principles for Collaboration

Appendix C. Focus Group Questions for Donors and Prospective Donors

Appendix D. Research Process and Questions on Demand for Capitaland Intermediary and Investment Advisor Capacity

Appendix E. Regulatory Considerations for Impact Investing by Community and PrivateFoundations Side by Side

Appendix F. The Impact Investing Ecosystem by Institution Type

Appendix G. The Vermont Community Foundation Investment Policy

Appendix H. Resources



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Appendix A

Northern New England Community Foundations Impact Investing ProjectPhase I and II Activity

Over Phase I and II, the Northern New England community foundations (NNE CFs):

Phase I:

• Came together to learn of each other’s history with impact investing and goals for the future.

• Created multi-functional teams within each community foundation to participate in theproject, including finance, program and development officer representation.

• Carried out donor focus groups to educate and determine donor preferences for how impactinvesting might be focused and structured within the community foundation. These sessionsrevealed a strong interest in impact investing by donors of all ages, with primary interests insparking environmentally sustainable local development and job creation.

• Carried out a scan of the landscape for impact investing, including a demand for capitalassessment to determine the current level and source of impact investing in the region,along with potential for absorbing new capital that the community foundation impactinvesting programs might unleash.

• Explored options for how all three NNE CFs could collaborate on an ongoing basis, rangingfrom short-term ideas like sourcing expertise collectively to potential longer-term creation ofa regional investment fund.

• Reported learnings to date at the Mission Investors Exchange conference and a MainePhilanthropy Center forum.

Phase I satisfied its two go no-go elements of (1) identifying strong donor interest in impactinvesting as a program strategy and donor service, and (2) identifying adequate qualifieddemand for capital in donor areas of interest.

Phase II:

• Assessed priority next steps, which revealed the importance for two community foundationsof developing impact investing strategies that could be incorporated into emerging strategicplans. This shifted the focus for these institutions to internal and in-state processes,lowering the priority of a potential regional fund in the near term.

• Created a community foundation impact investing roadmap and action plans customized toeach institution.

• Created an internal impact investing committee to oversee strategy and implementation ateach community foundation.

• Met regularly in person or by phone. Multi-functional teams from all three communityfoundations shared learning and internally developed materials, identified priority needs andexplored common ground. This facilitated reporting to each community foundation’s internalimpact investing committee, staff and board.



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• Reviewed impact investing models used by other community and private foundations, andexplored how a shared services platform could offer a cost-effective solution for providingthe quality of needed impact investing professional support.

• Carried out preliminary research on regulatory issues affecting their ability to plan and

execute impact investing strategies involving donors and potential external co-investors.

• Secured funding to support reporting learnings to the field. The NNE CFs presented theirwork at the 2012 Council on Foundations (COF) community foundation meeting andrepresentatives joined COF’s new roundtable on building community foundation impactinvesting capacity.

Phase II satisfied its primary go no-go element of securing board support within eachcommunity foundation to expand impact investing programs, including with donor engagement(although this may be staged at the VCF). As described within the case study, each communityfoundation also developed and/or refined its impact investing strategy and operating plan duringthis phase. All three institutions are advancing the implementation of those plans. They remain

open to the potential for collaboration in various ways over time. MaineCF and NHCF areactively sharing information and exploring the potential for collaboration as they launch theirnewer programs.



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Appendix BNorthern New England Community Foundations Impact Investing Project

Guiding Principles for Collaboration

1. Carry out our fiduciary responsibility.

2. Focus on community priorities that are ‘market tested,’ i.e. address capital gaps.3. Seek ‘fair share’ geographic costing, allocation (e.g. ranges, diversity, liquidity).4. Develop financially sustainable operation.5. Communicate regularly and “invest” in the collaborative; openly talk about the balance

between states and region.6. Provide opportunity for individual community foundations to exit within a longer term

structure; and buffer against changes in people.7. Demonstrate leadership (and innovation) in responding to community needs.8. Build off existing infrastructure “writ large.” Seek unique value proposition. Be additive;

do no harm to what is already in place.9. Serve both statewide and regional level.10. Actively learn and share results with the field.



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Appendix CFocus Group Questions for Donors and Prospective Donors

Overview: Focus groups could include a mix of current and potential donors to serve severalpurposes:

1) Provide educational content to donors and prospective donors about the opportunity,

potential and specific types of impact investments, as well as role and accomplishmentsof the community foundation.

2) Provide the community foundation with practical feedback from donors and prospectivedonors on their appetite for, concerns about and specific interests in various types ofimpact investments, as well as appropriate roles for the foundation in offering impactinvesting opportunities.

3) Potentially enroll select donors in helping the community foundation to develop theseproducts and services.

Focus Group Process:

1) Frame focus group questions with an educational description of impact investing. Givesome concrete examples of specific impact investments made in the region and potentialopportunities going forward.

2) Questions about interest in the concept:

a) Were you familiar with this concept of impact investing (sometimes called “socialinvesting” and increasingly called “impact investing”)? Is our description clear andunderstandable? What clarifications do you need?

b) Have you ever made an investment - or considered one - that fits the description weoffered of impact investing? What was it? How did you do it? What were yourmotivations?

c) What are the major obstacles or limitations to you in considering impact investments?

d) How would you rate your interest in making some of the specific kinds of investments we

described earlier? Why?e) What could make impact investing an attractive possibility for you? What criteria orcharacteristics would you take into account: e.g. risk, return, timeframe, track record,urgency of the issue area, innovation, etc.

3) Share with the group some preliminary ideas for how the community foundation couldstructure and offer opportunities for impact investing. Get feedback on their concerns,interest, and suggestions for improvement:

a) This community foundation already has the following impact investments: (fill in) Doyou think the foundation should make more impact investments?

i) What if some impact investments were made instead of making grants?

ii) What if some impact investments were made instead of investing in traditionalfinancial instruments?

iii) Would you establish or increase a donor advised fund (DAF) at the foundation toengage in impact investing?

b) The community foundation has (or other community foundations have) offered donorsthe opportunity to invest or co-invest with the foundation on some impact investingopportunities, such as (fill in). Would you like to be offered opportunities like this andothers going forward? What do you see as the opportunity? What are your concerns?



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c) This chart (to be developed) describes a range of “products” that would make impactinvesting available to community foundation DAF holders (e.g. invest in a fund, invest inspecific opportunities, etc.). Which of these do you think is most attractive and why?Least attractive and why? What dollar amounts and/or percent of your DAF would youconsider investing these types of impact investments?

d) Do you think the community foundation is well positioned to be offering these kinds of

products/services? Why or why not? Suggestions for improving the positioning?Would you be willing to give the community foundation further advice as it develops itsstrategy for impact investing?



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Appendix DResearch Process and Questions on Demand for Capital

and Intermediary and Investment Advisor Capacity

Pursuant to focus groups and other research to determine priority donor and prospective donorinterests at NNE Cluster foundations, the process for researching the demand for capital will

draw upon the following sources to inform an estimate of qualified deal flow by asset class thatmight develop in each NNE Cluster state over the next one-to-three years. The research willemphasize below market-rate and patient capital that would not be available from conventionalsources. However, it will also consider market-rate opportunities through which NNE Clusterfoundations can reinforce mission:

1) Review existing reports and analyses on demand for credit and investment amongorganizations and businesses in NNE Cluster communities. This includes published fieldreports, as well as internal analyses prepared by the individual foundations and regionalintermediaries and funds.

2) Interview and review recent lending and investment activities by regional Community

Development Financial Institutions (CDFIs), similar intermediaries, community banks andselected private equity funds. Gather their perspectives and estimates on expected lendingand investing activity, including both ongoing business lines and any emerging sectors suchas sustainable agriculture and food systems and community-based health care. Emphasiswill be on the number of quality deals that CDFIs and other intermediaries have looked atand could not fund because they did not have the capital.

3) Interview selected other sustainable community development practitioners who take onfinancing from the range of intermediaries to reality check demand assessments.

4) Review historical and planned investment activities in each state by national intermediariesand funds whose strategies are consistent with the community-based, environmentally

sustainable framework prioritized by each foundation. This will be a broad scan of activityrather than a focused look at particular subsectors.

5) Identify emerging lending and investment opportunities associated with new federal and/orstate programs, which may be accomplished through discussions with regional CDFIs thatclosely monitor federal and state programs.

6) Identify potential credit and investment gaps that offer potential for community foundationimpact investment, and the extent to which regional CDFIs have the expertise and capacityto address these.

7) Review community-based lending and investing activities in other regions and by othercommunity and/or place-based foundations to identify any strategies that may betransferrable, with an emphasis on analyzing the extent to which these approaches may betransferable given expressed donor and prospective donor priorities.

8) Consider the range of asset classes through which NNE Cluster foundations might supportregional CDFI, fund and other investment opportunities, including recoverable grants,guarantees and real assets, some of which (such as land) may have particular relevance inrural settings. Note: we do not assume that any of the NNE Cluster foundations wish to



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emphasize real asset-based impact investing strategies. That said, there may beopportunities for donors to grant land to rural community foundations that cause theinstitution to become at least a temporary landholder, and may support sustainableagriculture or conservation program priorities.

9) Identify lending and investment opportunities that may benefit from collaboration across all

three NNE Cluster foundations, and those that may benefit from further collaboration andco-investment, such as by regional and/or national community development or healthfunders.

10)Subject to foundation approval and/or participation, interview each foundation’s investmentcommittee and primary conventional investment advisor to understand each institution’s risktolerance, interest in and current pipeline of potential market-rate impact investments thatcould reinforce mission and be of interest to DAF holders.

In addition to these questions focused on the demand for capital, the team will survey regionalinvestment intermediary capacity. The survey will focus on identifying a range of investmentmanagers serving each state that can help with due diligence and diversification of investments,

including an assessment of expertise, capacity and cost.

Finally, the team will assess the regional “ecosystem” of organizational capacity building andother market development and/or networking initiatives with potential to inform socialenterprises about how they might benefit from, qualify for and successfully repay communityfoundation impact investment.



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Appendix E16 Regulatory Considerations for Impact Investing by Community and Private Foundations

Side by Side

Considerations

Foundation Type

Community Foundations Private Foundations Foundationstructure

• Exempt from federal income tax underSection 501(c)(3) of the Tax Code andmust comply with its requirements andprohibitions.

• Classified as public charities under theInternal Revenue Service (IRS) publicsupport test, based on normally receivingat least one-third of their support from thegeneral public (including governmentagencies and foundations). An organizationthat fails this automatic test still may qualifyas a public charity if its public support

equals at least 10 percent of all supportand it also has a variety of othercharacteristics, such as a broad-basedboard, that make it sufficiently “public”(Council on Foundations 2008).

• Philanthropic institutions that are tax-exempt, nonprofit, autonomous, publiclysupported, and nonsectarian. In addition,they have a long-term goal of buildingpermanent, named component fundsestablished by many separate donors tocarry out their charitable interests and forthe broad-based charitable interest of and

for the benefit of residents of a definedgeographic area, typically no larger than astate (Community Foundations LeadershipTeam 2008).

• Exempt from federal income taxunder Section 501(c)(3) of theTax Code and must comply withits requirements and prohibitions.

• Generally have endowments froma single source, such as a familyor corporation, and tend not toseek public financial support(Council on Foundations 2010).

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Impact Investing

Motivation • To have a charitable impact.

• To align assets with the mission.• To meet donor demand.

• To develop donor interest.

• To raise the visibility of investment needswithin the community.

• PRI principal that is repaid can be recycled

as new PRIs or grants.

• To have a charitable impact.

• To align assets with the mission.• To manage resources, such as

smoothing distributions.• Program-related investment (PRI)

can help meet payout, if desired.

• PRI principal that is repaid can be

recycled as new PRIs or grants.



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Considerations Foundation Type

Community Foundations Private Foundations

Operation In-house:

• Best to involve program, financial, andlegal units.

• Interaction with donors, boards, and

management of supporting organizationsand agencies may be helpful.

External: • Interaction with trustee bank(s) and a

range of financial advisers is likely to benecessary.

• Support from investment managers,consultants, intermediaries, and legalspecialists may be helpful.

In-house:

• Best to involve program, financial,and legal units.

External:

• Support from investmentmanagers, consultants,intermediaries, and legalspecialists may be helpful.

Governance • Board or its subcommittee. • Bank trustees may have control over

certain funds. • Investment decisions may be delegated tostaff committees.

• Donor advisers or supportingorganizations make requests.

• Board or its subcommittee. • Investment decisions may be

delegated to staff committees or

the foundation president.

Fundingsources

• Unrestricted funds (grant allocation fromexpense budget).

• Supporting organization.• Donor-advised funds.• Agency endowments.

• Grants budget.• Endowment.

• Dedicated pool.

Regulatoryaccounting andreporting

• IRS does not define PRIs for communityfoundations; practitioners use the term tohave the same definition as the one forprivate foundations in the Tax Code of

1969 (see right column).• No minimum distribution requirement, but

community foundations typically establish aspending policy and may fund PRIs fromgrant payout.

• Repaid PRI principal can be treated likeany other repaid investment principal.

• As with any public charity, a communityfoundation must operate primarily for acharitable purpose; only an insubstantialpart of its activities may be devoted to anoncharitable purpose. For any impactinvestment, as for its other activities, the

foundation must determine that a charitablepurpose is being served and no privateinurement or excess private benefit isinvolved.

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• As with grant requests, communityfoundations considering an investmentfrom the expense budget to a non-501(c)(3) should first determine whether itsorganizing documents permit such an

• PRIs for private foundations aredefined in the Tax Code of 1969as investments for which theprimary purpose is charitable or

exempt as defined under Section170(c)(2)(B) of the IRC; nosignificant purpose is theproduction of income orappreciation of capital; and nopurpose is lobbying or otherpolitical activity prohibited underSection 170(c)(2)(B).

• PRIs can be counted as part of aprivate foundation’s 5 percentdistribution requirement.

• Repaid PRI principal adds dollarfor dollar to the distributable

amount in the year repaid.• The value of PRIs outstanding is

not counted in total assets usedto calculate the distributionrequirement.

• A defaulted PRI can be treated asa grant (although the foundationmay continue collection efforts).



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4941, which prohibits a broad range oftransactions involving a private foundationand its disqualified persons (regardless ofthe amounts paid or received) and then

provides limited exceptions to theserestrictions. If a transaction falls into aprohibited category of self-dealing and isnot subject to an exception, the transactionis prohibited and an excise tax applies.Excess benefit transactions are definedunder Section 4958 regarding non-privatefoundation charities and (c)(4) socialwelfare organizations. Unlike the absoluteprohibition on self-dealing, transactionsbetween a public charity and its disqualifiedpersons (separately defined for purposesof Section 4958) are permitted as long asthe disqualified person is not receiving an“excess benefit.” Thus, for a public charityengaged in transactions with its insiders, akey issue is determining fair market valueof the benefits received (Levitt 2010).

• Private inurement is a general tax conceptthat applies across the board to charitiesand certain other types of exemptorganizations. While there is no Tax Codesection or regulation that precisely definesinurement, it involves benefit to personswho have a close relationship with theorganization and may be able to exercisecontrol over the organization as a result of

this relationship (Levitt 2010).• Under the Pension Protection Act of 2006,

certain distributions from donor-advisedfunds are treated as “taxable distributions.”Such distributions are subject to excisetaxes similar to those that apply to privatefoundations, unless the sponsoringorganization—in this case, a communityfoundation—exercises expenditureresponsibility. These include anydistribution

22 to:

o an organization that is not a public

charity;o a non-functionally integrated type III

supporting organization; oro a supporting organization controlled by

the donor or a donor adviser of thefund (Minnesota Council onFoundations 2009).



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• Market-rate, mission-related investments(MRIs) are subject to the standard fiduciaryguidelines that would apply for anyfoundation endowment investment.

“Mission-related investment” is not aregulatory term and there are no specialregulations that apply to MRIs.

Expenditure Responsibility23

To meet the expenditure responsibility requirements in making a program-relatedinvestment, a private foundation must require that each investment be made subject to awritten commitment signed by an appropriate officer, director, or trustee of the recipientorganization. The commitment should specify the purpose of the investment and shouldcontain an agreement by the organization:

1. To use all amounts received from the private foundation only for the purposes of theinvestment and to repay any amount not used for those purposes, provided that, forequity investments, the repayment is within the limitations concerning distributions toholders of equity interests,

2. To submit, at least once a year, a full and complete financial report of the typeordinarily required by commercial investors under similar circumstances and astatement that it has complied with the terms of the investment,

3. To keep adequate books and records and to make them available to the privatefoundation at reasonable times, and

4. Not to use any of the funds to carry on propaganda, influence legislation, influence theoutcome of any public elections, carry on voter registration drives, or, when the recipient is aprivate foundation, to make grants that do not comply with the requirements regardingindividual grants or expenditure responsibility. (IRS 2010).



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Appendix FThe Impact Investing Ecosystem by Institution Type

Banks are the single largest source offinancing in the three Northern NewEngland (NNE) states. However, their

community development financing isdependent upon Community DevelopmentFinancial Institutions (CDFIs) and federaland state agencies, which providestructures, deal flow, credit enhancement(protection against loss), and incentives. Adescription of each institution type and itsrole in NNE capital markets includes:

• CDFIs: Mission-driven financing entitiescertified by the federal government ashaving a primary mission of community

development and a focus in distressedareas and/or undeserved populations.By definition, CDFIs must combinecapacity building services (calleddevelopment services) with theirfinancing, which assist both individualborrowers or investees (businesses,nonprofit organizations and households)and the community in general toeffectively attract and use financing.CDFIs catalyze regional communitydevelopment in a number of essential

ways:

o Innovation, as a result of continuousmarket research on how theprovision of financing to underservedhouseholds, businesses andnonprofit organizations can bettermeet basic community developmentneeds.

o Capacity building services toprepare these segments to bettermanage their existing operations,

plan for the future and qualify forfinancing to execute plans (whereappropriate).

o Ongoing monitoring to assistborrowers and investees inexecuting their plans, includingmeeting investment repaymentobligations.

o Product development to createfinancing vehicles that are properlystructured for specific needs in the

marketplace. This includes (but isnot limited to) such flexibility as:predevelopment financing thatenables nonprofit organizations toundertake early steps in consideringa real estate project in order todetermine its feasibility (such asseeking site control, environmentaltesting, architectural plans); lease-to-own financing for households whocannot afford downpayments;cooperative loans for resident

ownership of manufactured housingparks; seasonal features ofagricultural loans; small loans forfarmers to make safety and otherimprovements to their farms topromote “agritourism,” andstructuring business loans to repayas the borrower meets sales targets.

o Providing early stage financing thatprepares projects and organizationsto qualify for larger amounts offinancing from conventional sources.

o Serving as aggregators for capitalfrom regional and national, mission-driven impact investors and publicagencies who want to back the typesof community development andfinancing that CDFIs carry out. Thisincludes attracting significantallocations of certain federal taxcredits, including New Markets TaxCredits (NMTC), Low IncomeHousing Tax Credits (LIHTC) andHistoric Tax Credits.

o Leveraging conventional capital frombanks, insurance companies andothers through leading financings inwhich the CDFI takes higher riskpositions that provide creditenhancement to the conventional,“senior” lenders. In these so-called“capital stacks” the CDFI is oftenleveraged at least 3:1.



56

o Reporting on the social andenvironmental outputs andoutcomes from their financing.

o Advocating for effective governmentpolicy, based upon their analyses oflocal needs and their track records

of successful financing in sectorsthat conventional capital marketsmay consider too risky.

CDFIs emphasize that they are onlyable to aggregate outside capital to theextent that their balance sheets arestrong. Foundation grants andsubordinated, concessionary loans(program-related investments or PRIs inthe private foundation lexicon) arecritical to these entities having sufficient

net assets to leverage conventionalcapital and execute financings at scale.

NNE is home to several of the nation’soldest and/or best regarded CDFIs.These include Coastal Enterprises, theCommunity Loan Fund (formerly, NewHampshire Community Loan Fund),ROC USA (a newer but highlyinnovative initiative spun out of theCommunity Loan Fund to financeresident-owned cooperative

manufactured housing parks nationally),the Vermont Community Loan Fund,and Opportunities Credit Union(Vermont). However, there are anumber of other CDFIs makingimportant contributions in each state.These may focus in particular regions,such as the island and Native Americanreservation lending programs of Maine’sGenesis Fund and Four DirectionsDevelopment Corporation, respectively,or the small business lending programs

of Community Concepts throughoutVermont.

In addition, regional and national CDFIsand similar entities that are not based inNNE states are active and would like tobe more active in the region. Theseinclude but are not limited to theCooperative Fund of New England, NCB

Capital Impact, Nonprofit Finance Fund,and The Carrot Project.

Despite their strengths, the CDFIs arenot equipped to respond to the fullspectrum of regional financing needs.

Constraints include mission (low-incomefocus can create tension with smallbusiness growth plans), capital structure(mostly debt versus equity, and certaintypes of capital such as that linked toNew Markets Tax Credits necessitatevery large transaction sizes), andhistorical focus / expertise. CDFIexpertise is well matched to currentactivities, and the sector has a goodtrack record of building skills to respondto emerging financing niches. Ongoing

skill building will likely be needed torespond to the range of regionalsustainable development financingopportunities. While CDFIs are acollegial group by and large, there areopportunities for more strategiccoordination of their efforts within theregion, including through potentialreplication and/or co-sponsorship ofsuccessful financing models acrossCDFIs and state lines. CoastalEnterprises, ROC USA and The Carrot

Project are beginning to model thisapproach through their NMTC,manufactured housing and agriculturalmicrolending strategies, respectively.

• Sustainable Real Estate: This refers tomission-driven funds such as LymeTimber or Maine Farmland Trust thatare not CDFIs and focus specifically onpurchases or financings of forest, farmand fishing land or rights.

• Regional Venture Funds & Angels:These actors, including regionally- andstate-focused funds and angels (privateindividuals of means), provide equityand near-equity investments toemerging businesses with growthpotential. They are essential to spurringthe growth of locally-based firms withpotential to both re-shape local and



57

regional economies (introducing valuechains that can drive wealth creationlong into the future) and create jobs.

Given the speculative nature of ventureinvestments, funds and angels expect to

lose approximately one-third of theiroriginal investments, break-even orachieve return of principal on a third andmake significant gains on a third. Tohedge risk, they typically make theirinvestments in stages, beginning withvery small amounts and adding “follow-on” investments only when firms aremeeting milestones or appear likely todo so with a capital infusion.

The amount of venture capital available

for rural investments including in NNEhas always been very small. Thatamount dwindled to almost nothing inthe Great Recession. Angel investorsretreated, and funds found it difficult toraise capital. In spite of theseconstraints, there are a few active fundsfor early stage firms. These include theVermont Sustainable Jobs Fund, SmallEnterprise Growth Fund (Maine), MaineTechnology Center and Granite Fund(New Hampshire). CEI Ventures

serves the region. Fresh Tracks Capital(headquartered in Vermont) andBorealis Ventures (headquartered inNH) target later stage firms in theregion, and a couple of other funds arein organization.

New Hampshire benefits from twoinnovative initiatives to capitalize growthbusinesses: Vested for Growth (VfG) isa near-equity lending program of theNew Hampshire Community Loan Fund

that provides royalty-based financing tosmall businesses (repayment as apercentage of sales). For almost adecade, VfG has helped to fill afinancing gap for businesses that aregrowing but may be unable to attractbank loans due to lack of collateral orrecent losses. The royalty structure isattractive to entrepreneurs who may not

want to give up an ownership stake intheir business to equity investors whomay exert control and eventually selland/or relocate the firm. VfG islaunching a more diversified smallbusiness lending program to fill a gap

for small businesses seeking $50,000 -$2,000,000 in regular term debt or linesof credit that are currently unavailablefrom local banks to all but the verylowest risk borrowers.

More recently, New Hampshire’s statelegislature passed HB605, a lawauthorizing the Business Finance Authority to establish a New Hampshireinnovation business job growth program.The legislation provides the guarantee

for downside risk on equity investmentsin state-based firms. (New HampshireCharitable Foundation is takingadvantage of this opportunity through arecent investment in New Hampshire’sGranite Fund.)

• Banks. As in any economy, NorthernNew England banks are a linchpin.They are actively involved in communitylending and some are “thought partners”to impact investing strategies that

stabilize and advance the region. Forexample, Bangor Savings Bank haslong supported Maine CDFIs and hascrafted programs to administer modestamounts of PRI funds on behalf offoundations (the design for which thebank is pleased to share with others).Skowhegan Savings Bank isrepresented on Maine CommunityFoundation’s board, and is involved inthinking about how the state’s variousfinancing sources can best work

together. At the same time, creditregimes have tightened after the GreatRecession, particularly among thenation’s larger banks that serveNorthern New England. This means thatthe amounts and terms of financing aregenerally less favorable.



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Bank lending in distressed areas isprompted by federal regulation. FDIC-insured depositories (includingcommercial and savings banks) have anobligation under the 1977 federalCommunity Reinvestment Act (CRA) to

help meet the credit needs of thecommunities in which they operate,including low-to moderate incomeareas.24 Under CRA, most banks aresubjected to Performance Evaluationsbased upon three tests: the InvestmentTest, Lending Test and Services Test.

Partnering with CDFIs is one of theprimary ways that banks fulfill CRAobligations for all of the tests.Partnerships typically take the form of:

o Providing loans to the CDFIs thatserve as “loan capital” (similar to afoundation PRI loan, thoughgenerally on less favorable terms; asnoted, foundations provide much ofthe grant and subordinated debt thatallows CDFIs to attract bank andother senior debt). CDFIs relendbank capital in distressed portions ofthe bank’s service area. As withgeographically-targeted grant

programs, the targeting can limit thescope of impact; state-based bankstypically operate state-based CRAprograms.

o Providing equity and debt in NMTCand LIHTC transactions. This oftenaccounts for the largest share ofbank CRA lending, and thesetransactions attract large nationalbank investors.

o Providing senior (low-risk) debt inother economic or community

development projects for whichCDFIs provide the subordinated(junior or higher risk) layers in acapital stack and/or public or privateentities provide guarantees.

o Providing “take out” or refinancing ofprojects for which CDFIs provide themuch riskier, earlier phases ofproject finance.

o Investing in Small BusinessInvestment Corporations (SBICs),specialized, SBA-sponsored smallbusiness lending and/or near-equityinvesting entities that may becertified as CDFIs.

o Buying fixed-income securities(bonds) that are backed by loansoriginated in low-to-moderateincome communities and/or tied tolocal economic development. Thesebonds serve as a secondary market(refinancing source) for the originallenders, providing cash to originatenew loans.

o Making grants to support technicalassistance, particularly related tofinancial literacy, affordable housing

and/or small business development.

Credit enhancement is a criticalunderpinning for bank performance onthe Lending Test. This protectionagainst loss may come in the form of taxcredits, government or private loanguarantees and/or subordinatedpositions taken by mission-drivenlenders such as CDFIs or foundations.In assessing NNE regional bankfinancing, preliminary data suggest that

a majority—approximately $900 millionor 56 percent of the estimated $1.6billion in bank financing in the region—benefits from NMTC or LIHTC, whichprovide significant project equity orcushions against loss.25

Other bank financings will generallycarry guarantees and/or insurance fromfederal agencies such as the SmallBusiness Administration, U.S.Department of Agriculture, Federal

Housing Authority, Health Resourcesand Services Administration (for healthclinics), and Bureau of Indian Affairs, aswell as from state agencies (the Finance Authority of Maine provided some $40million in small business loanguarantees in 2010). In addition, banksreceive various support for communitylending from the Federal Home Loan



59

Bank, a regional system of banker’sbanks that is cooperatively owned by itsmember institutions.26

To comply with the Investment Test,banks typically purchase NMTC or

LIHTC tax credits; purchase fixed-income securities that are based uponloans originated in low-to-moderateincome communities within the bank’sservice area; place deposits in CDFIbanks and credit unions; and/or makeflexible investments in CDFIs, SBICsand similar entities. Bank grants canalso qualify as investments for purposesof the CRA Investment Test.

To comply with the Services Test, banks

may maintain or open branches and/or ATMs serving low-to moderate Incomecommunities and/or may make grants toorganizations that do so (such as theVermont CDFI credit union,Opportunities Credit Union) or thatprovide financial education tocommunity residents.

While the level of NNE bank lending andinvesting is substantial, the assessmentfound that significant further lending is

possible.27

As described above,however, mobilizing this financingrequires the supportive infrastructure ofCDFIs and other capacity buildingpartners, which, in turn, requirefoundation grants and investments.

• Other Private Investors. A range ofother private investors represent currentor potential sources of capital in theregion, including faith-based investors;nonprofit health systems; and regional

corporate and university anchors.28

• State Agencies. Northern NewEngland’s state housing and economicfinance agencies provide a range ofsupport for their jurisdictions. Inaddition to issuing bonds for traditionalpurposes such as education andhospitals, these agencies may provide

modest amounts of loan insurance andsmall but targeted direct lending.

Each state has enacted novel provisionsor initiatives to promote communityinvesting. These include but are not

limited to:o Maine: Bonds to support affordable

housing including on the islands,and to support venture capitalinvesting ($5 million that wasdistributed to three regional funds inapproximately 2003). Individualtaxpayers in Maine who contribute tomatched savings programs for low-income families may be eligible for astate tax credit.29

o New Hampshire: The state’sCommunity Development Finance Agency (CDFA) Tax Credit Program,also known as the CommunityDevelopment Investment Program(CDIP), enables businesses toinvest cash, securities, or realproperty to fund CDFA-approvedprojects in exchange for a 75percent state tax credit. 30 As noted,the state legislature recently passedHB605, a law authorizing the

Business Finance Authority toestablish a New Hampshireinnovation business job growthprogram.

o Vermont: The Vermont CharitableHousing Tax Credit awards a taxcredit to investors who invest inaffordable housing under a currentthreshold interest rate of 1.25%. Thetax credit is equal to the differencebetween the investor’s rate and

1.25%.31

In 2009, the VermontLegislature approved the Farm toPlate (F2P) initiative under thestate’s 2010 jobs bills. F2P taskedthe Vermont Sustainable Jobs Fund(VSJF) with creating a 10-yearstrategic plan to strengthen andexpand the state’s food system. TheVSJF plan’s 33 goals and 60



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Appendix GThe Vermont Community Foundation Investment Policy

I. Vermont Investments

The Vermont Community Foundation (VCF) Board requires that five percent of the VCF’spooled assets be invested in “Vermont Investments” - investments in Vermont companies,agencies, or intermediaries that support and promote healthy and vital Vermont communities, asoutlined in the VCF’s Ends Policy. With our Vermont Investments, we seek:

• new kinds of leverage that direct investments in communities can make – jobs, housing,economic development and financial services for low-income Vermonters

•

opportunities that create impact now and in the future• high social return on these investments as well as an investment return

• ways to act as a partner and promoter of Vermont Investments in order to engage otherVermont institutions.

Currently our Vermont Investments are divided among three categories of investments:46% Community Investments40% Community Directed Bond Portfolio14% Venture Capital

II. Community InvestmentsThe VCF selected the Calvert Foundation to recommend investments, provide due diligence

and administer the community investments portfolio. The aim of these investments is tomaximize overall social impact in Vermont communities most in need while maintaining amoderate risk profile. The underlying intent is to minimize loss and preserve capital. Thebenchmark for the Community Investments is the Citigroup 1 Year Treasury Index. Theinvestment time horizon is a three-year term on average.

Asset Allocation:The community investments portfolio should consist of 40-70% in loans to CommunityDevelopment Financial Institutions (CDFIs) and like institutions, with the remaining 30-60% inCertificates of Deposit with community and/or CDFI banks and credit unions. The mix ofinvestments should reflect a diversity of geographic and investment types.

Considerations for the CDFI (and like institutions) Loans:• Seek to support all credit worthy CDFI’s in the state;

• Seek full investment positions* based on the financial strength of the organization, thesize of the organization and the total size of the VCF’s Vermont Investments;

• Seek geographic diversity;

• Seek to support various community-defined objectives;

• Seek to support out-of-state organizations that have Vermont-based programs.



62

Considerations for CDs with community banks and CDFI banks and credit unions:

• Invest up to but not above the $250,000 federally insured range;

• Support Vermont based CDFI banks and credit unions;

• Focus on entities that target low- to moderate-income residents and geographic regions;

• Invest only in banks that have “Outstanding” Community Reinvestment Act ratings;

• Invest in entities whose lending activity demonstrates a significant commitment to thecommunities they serve;

• Select entities that provide geographic diversity for the whole portfolio.

III. Community Directed Bond Portfolio

The VCF invests this portion of the portfolio with Access Capital Strategies CommunityInvestment Fund. The benchmark for the Community Directed Bond Portfolio is 80% MerrillLynch Mortgage Master/ 20% Merrill Lynch US Treasury 1-10 Year Index.

Asset Allocation:

• Seek 65-75% of the investment for loans originating outside the traditional bankingsector. Seek to be a source of liquidity for originations from revolving loan funds,community development corporations and other community-based organizations inVermont;

• Seek 25-35% of the investment for loans originating from the most aggressive andborrower friendly community lending programs in the state including the highest impactCommunity Reinvestment Act programs.

Considerations: All loans purchased should be loans originated from families with incomes 80% or less than theHUD area median income (the Federal definition of low-and moderate-income) or multifamilyloans for affordable rental housing.

IV. Venture Capital

The VCF invests in venture capital firms focused upon Vermont. The benchmark for theVenture Capital segment of the portfolio is Venture Economics Private Equity PerformanceDatabase, based on timeframes of seven years or longer.

Considerations:

• Consider all opportunities for investing in professionally managed venture capital fundsfocused, at least in part, on Vermont;

• Require at least one investment be made in Vermont of an amount greater than or equalto the VCF’s investment in the respective venture capital fund;

• Seek funds that provide diversification or support our existing portfolio of investments;

• Seek funds managed by experienced organizations and individuals whom theFoundation believes have the ability and resources to invest successfully.

* Full investment position means no more than 10% of the Foundation’s target to Vermont Investmentswill be placed with a single issuer. If an investment of greater than 10% is desired, staff will only act withthe support of the Investment Committee.



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Appendix HResources

Community Foundation and Rural Impact InvestingBernholz, Lucy and Richter, Lisa, Equity Advancing Equity, www.communityphilanthropy.org (includes profiles of many community foundation impact investments by asset class, as well

as a glossary of impact investing terms)Foundation Center, Key Facts on Mission Investing, 2011.http://foundationcenter.org/gainknowledge/research/pdf/keyfacts_missioninvesting2011.pdf

Lawrence, Steven, Foundation Center, Doing Good with Foundation Assets: An UpdatedLook at Program-Related Investing, 2010.

http://foundationcenter.org/gainknowledge/research/pdf/pri_directory_excerpt.pdf

Kelly, Marjorie with Norwood, Jessica, Impact Investing for Rural Wealth Creation, A reportfor the Wealth Creation in Rural Communities project of the Ford Foundation, TellusInstitute, 2010. www.yellowwood.org/ImpactInvestingKellyNorwood.pdf

Wood, David, Rural Mission Investing: The Role of Foundations in Catalyzing Rural MissionInvestment, Initiative for Responsible Investment, 2011, http://hausercenter.org/iri/wp-content/uploads/2010/05/Rural-Mission-Investing.pdf

Social Impact Dashboards

KL Felicitas Foundationhttp://www.klfelicitasfoundation.org/index.php/impact_investing/our_impact/ http://www.klfelicitasfoundation.org/images/files/KLF_Evaluator_Primer_June_2011.pdf

Positioning Donor Advised Fund Investment Options

Community Foundations:The Greater Cincinnati Foundationhttp://www.gcfdn.org/CommunityLeadership/ImpactInvesting/tabid/368/Default.aspx

Marin Community Foundationhttp://www.marincf.org/giving/donors/impactinvesting

Minnesota Initiative FoundationsThese six community foundations work to strengthen the communities and economies ofGreater Minnesota. Each is independent and serves its region with unique grants, businessloans, leadership programs and donor services. http://www.greaterminnesota.net

Orange County Community Foundationhttp://www.ocfunders.org/2013summit/Program%20Related%20Invesmtns%20(PRIs)%20and%20Social%20Investing.pdf

The Seattle Foundation

http://www.seattlefoundation.org/getinvolved/specialprograms/Pages/MissionInvestment.aspx?bv=nposearch



64

Resources, continued

Positioning Donor Advised Fund Investment Options, continued

Global and National Funds and Research:

Impact Assets (former Calvert Giving Fund)RSF Social Finance

Money For GoodHope Consulting, Money For Good: The US Market for Impact Investments and CharitableGifts from Individual Donors and Investors, 2010

Nonprofit Securities Regulations and Terms

Horner, Timothy L, Socially Responsible Investors: Navigating the Legal Requirements,2012 presentation at the Opportunity Finance Network national conference.

Horner, Timothy L. and Makens, Hugh H., Securities Regulation of Fundraising Activities ofReligious and Other Nonprofit Organizations, 1996,

Humann, Kirstin L., National Charitable Giving Counsel, Legal Issues in FundraisingManagement, Humann and American Corporate Counsel Association, 2001.

North American Securities Administrators Association (list of State Commissioners)

U.S. Securities and Exchange Commission Glossary of Investment Terms

Rural CommunitiesJohnson, Kenneth M., Rural Demographic Change in the New Century, Slower Growth,Increased Diversity, , The Carsey Institute, Issue Brief No. 44, Winter 2012.

Stauber, Karl, Why Invest in Rural America—And How? A Critical Public Policy Question forthe 21st Century, Federal Reserve Bank of Kansas City.

Duncan, Cynthia M. Community Development in Rural America: Collaborative, Regional,

and Comprehensive, Investing in What Works for America’s Communities, 2012.

Associations

Council on Foundations, http://www.cof.org

Global Impact Investing Network, http://www.thegiin.orgMission Investors Exchange, https://www.missioninvestors.org



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Endnotes

1 The Northern New England Community Foundations retained GPS Capital Partners and The

Philanthropic Initiative to support all asects of Phase I and II effort. GPS and TPI collaborate insupporting the community foundation sector to learn about and implement impact investing. GPS is anational leader in the design and execution of foundation impact investing strategies across investment

themes, asset classes and expected return levels (www.gpscapitalpartners.com). TPI is a national leaderin supporting philanthropic strategy generally, including community foundation learning action networks(www.tpi.org).2Johnson, Kenneth M., Rural Demographic Change in the New Century, Slower Growth, Increased

Diversity, Carsey Institute, Issue Brief No. 44, Winter 2012.http://www.carseyinstitute.unh.edu/publications/IB-Johnson-Rural-Demographic-Trends.pdf3 Stauber, Karl, Why Invest in Rural America—And How? A Critical Public Policy Question for the 21st

Century, Federal Reserve Bank of Kansas City, kansascityfed.com/Publicat/Econrev/PDF/2q01stau.pdf .Stauber is president and CEO of the Danville Regional Foundation and former Under Secretary forResearch, Education and Economics with the US Department of Agriculture and Deputy Undersecretaryfor Policy and Planning, Small Community and Rural Development.4 In her article, Community Development in Rural America: Collaborative, Regional, and Comprehensive,

Cynthia M. Duncan emphasizes that “Far and away the biggest challenge rural development practitionersface is the need for greater human capital—for more leaders, more entrepreneurs, more skilled workers,and even more economic development professionals to work in their own organizations. Because leadersin rural communities play multiple roles, the loss of one “spark plug” can devastate a small community.The crunch for people also means that organizational capacity is often thin. There are fewer banks andfewer specialized lenders in those banks. Equally important, there are few, if any, corporate partners.Moreover, community development practitioners often must help local leaders move from the old, morestable economy they once relied on to new, more dynamic and less predictable economies of the future.”http://www.whatworksforamerica.org/ideas/community-development-in-rural-america-collaborative-regional-and-comprehensive/#.UfnRDxbYNfQ5 U.S. Census, 2010-11, http://www.census.gov/hhes/www/poverty/data/incpovhlth/2011/tables.html

6 For information on the financial performance of the social investing field generally, see

http://fsinsight.org.7 The program-related investing (PRI) regulations further specify that qualifying PRIs can count toward a

private foundation’s charitable distribution requirement and are safeguarded from the private foundation

jeopardizing investment rules. In addition, private foundations can invest PRIs in for-profit entit ies,provided that the use of proceeds is charitable. In this case, they must exercise ExpenditureResponsibility evidencing pre-investment due diligence that documents the charitable use of process, aswell as annual reporting during the life of the investment to ensure ongoing charitability. The IRSprovides no special regulations pertaining to impact investments that seek an expected market rate ofreturn. Such investments are subject to the same regulations that would apply to any endowment asset.For private foundations, therefore, market-rate impact investments are subject to jeopardizing investmentand other “prudent person” rules. This makes it essential that the foundation use the same care anddiligence in evaluating and documenting market-rate impact investments as it would for any endowmentasset. Attorneys who specialize in foundation impact investing suggest that the due diligence for market-rate impact investments also document any intended mission benefits.8 Kelly, Marjorie with Norwood, Jessica, Impact Investing for Rural Wealth Creation;

Investing for financial returns and community impact. Tellus Institute, November 2010.

www.yellowwood.org/ImpactInvestingKellyNorwood.pdf

9 Latent demand for financing refers to demand from organizations, entrepreneurs and households that

may not currently be seeking financing but whose use of safe, non-predatory financing might benefit boththem and their communities. Latent demand can be estimated by extrapolating from reports of financingsthat spark new economic activity in one community (but may not yet be replicated in others), as well asreports of deferred financing in such sectors as affordable housing and nonprofit organizations.10

Interview with Capital Link reported inGrantmakers In Health Guide to Impact Investing,http://www.gih.org/usr_doc/GIH_Guide_to_Impact_Investing_FINAL_May_2011.pdf



19 See also Nober, Jane C., Economic Development: A Legal Guide for Grantmakers (Arlington, VA:

Council on Foundations, 2005). It provides legal analysis of charitable tax law, including implications forPRIs. The guide contains specific guidance for private foundations, community foundations, andcorporate grantmakers, although readers need to refer to laws, such as the Pension Protection Act of2006, that were enacted after 2005.20

Instructions regarding treatment of PRIs on Form 990-PF and Form 990 are available at, respectively,http://www.irs.gov/pub/irs-pdf/i990pf.pdf and http://foundationcenter.org/findfunders/f990_sample.pdf .Note: variations may apply for international PRIs on Form 990, Schedule F; seehttp://www.irs.gov/charities/article/0,,id=212213,00.html.21

Kramer, Mark and Stetson, Anne, Risk, Return and Social Impact: Demystifying the Law of MissionInvesting by U.S. Foundations, FSG Social Impact Advisors, 2008,http://www.fsg.org/Portals/0/Uploads/Documents/PDF/The_Law_and_Mission_Related_Investing_Full.pdf ?cpgn=WP%20DL%20-%20The%20Law%20and%20Mission%20Related%20Investing%20FULL22

The taxable distributions from a donor-advised fund include any distribution made to an individual andany distribution made for noncharitable purposes.23

http://www.irs.gov/Charities-&-Non-Profits/Private-Foundations/Terms-of-Program-Related-Investments:-Private-Foundation-Expenditure-Responsibility24

http://www.ffiec.gov/cra/25

This estimated proportion refers to aggregate bank lending, which includes large national banks thatfavor New Markets Tax Credit and Low Income Housing Tax Credit transactions. Community banks likelyhave higher proportions of direct small business, affordable housing and nonprofit loans.26

Phase I research did not examine the full role of support for regional financing that is supplied throughthis channel.27

This impression is based upon a very preliminary review of publicly available bank data from which itappears that aggregate bank Community Reinvestment Act investing across the three-state region couldbe more robust in comparison to national peers. Given the relatively sparse deal flow that oftencharacterizes rural areas, a concerted strategy including foundation and CDFI partnerships would likelybe needed to significantly elevate current bank lending levels.28

In Northern New England and elsewhere, faith-based investors provide early stage and patient capitalto CDFIs and nonprofit organizations; nonprofit health systems may make community investments inconjunction with their community benefit obligations, including Communithy Health Needs Assessmentsand Implementation Strategies; and corporate and university anchors may engage in regional community

investing as part of corporate social responsibility, “collective impact” and/or “creating shared value”strategies!

29 http://www.ceimaine.org/Default.aspx?pageId=784488

30 New Hampshire’s Community Development Finance Agency credit can be applied against the New

Hampshire business profits, business enterprise, and insurance premium taxes. The organizations thatare awarded state tax credits are responsible for raising donations in the amount of their tax credit awardfrom for-profit businesses that have a New Hampshire state tax liability. CDFA issues up to $5 million inNew Hampshire business tax credits each fiscal year; due to rollovers and other obligations there was just under $8 million total available for FY12 & FY 13.http://www.nhcdfa.org/web/pressreleases.html?action=single&release_id=12331

http://www.investinvermont.org/tax-benefits32

Lee, Marissa, Vermont ‘Farm to Plate’ to Create Jobs and Strengthen Local Food System, August 11,2011, http://seedstock.com/2011/08/11/vermont-farm-to-plate-local-food-system