“E,” for environmental, gets most of the love in ESG investing. Investments in the “S” and “G,” for social and governance, particularly in housing, can help build wealth and upward mobility for American families. Fund managers operating in those sectors need to design and market their products accordingly.
Wall Street investors have committed billions of investment dollars to the housing market, which is often viewed as a way to extract wealth from renters. If that money were instead invested with an ESG focus on community development, it could help build wealth and put money in the pockets of hundreds of thousands of lower-income families – and radically transform how housing is viewed in America.
Community development – that is, investments in homes and neighborhoods that support them – has always been considered a socially responsible investment.
Now more than ever, community development investments can make a tangible and specific impact on the country’s ongoing housing affordability crisis and the $10 trillion racial wealth gap, two issues inexorably linked by the fact that the median homeowner has 40 times the net worth of a renter, and that people of color remain far more likely to rent their homes than white households.
Solutions to the problem of wealth inequality have largely focused on using philanthropy to make it easier for lower-income and underrepresented people to become homeowners.
Yet not everyone wants to be a homeowner, and for many the path to homeownership is long and difficult. ESG investments in housing with a focus on wealth-building opportunities for renters could make a real impact on the wealth gap.
One model for this is the Renter Wealth Creation Fund, which we at Enterprise launched last month. Longtime residents of affordable housing properties in the fund have the opportunity to receive a payout – 80% of the profit – when the property is refinanced or sold. Investors receive a targeted financial return of 4%. The fund aims to raise $250 million from investors (and has thus far raised $47 million).
This presents a wealth-building opportunity for renters who would otherwise have no financial stake in their home, even after years of rent payments, all while targeting a reasonable financial return for the fund’s investors.
The fund was specifically designed around feedback from renters. In focus groups, renters made it clear that while the potential for a payout was exciting, the sole focus on long-term wealth ignored the day-to-day challenges they face today. They were concerned with meeting their immediate needs, like groceries or bills. “Wealth” wasn’t an abstract future goal; it meant the financial freedom to be able to order dinner in, instead of cooking, to put a few extra dollars toward debt payments, or pursue small comforts that increase quality of life.
With their feedback, we tailored the program so that residents living in properties in which the fund invests also get a monthly cash reward when they pay their rent on time. The amount is a small percentage of their rent that we anticipate will grow over time and put a few more dollars in residents’ pockets every month.
The Renter Wealth Creation Fund’s investors are creating the opportunity for both long-term and short-term wealth for renters and earning a risk-adjusted return at the same time. They are making a tangible impact on people’s lives. They are helping to solve an urgent and growing challenge. These types of investments are the future of ESG.
The economic impact of a pandemic, inflation, and a looming recession have made wealth inequality top of mind for millions. Investors have an opportunity to use housing as both an investment vehicle and a way to help solve one of the most pressing issues facing families across the country. As investment managers, it is our job to make that opportunity clear.
Lori Chatman is interim co-CEO of Enterprise Community Partners, a national affordable housing nonprofit. Chris Herrmann is chief investment officer and fund manager of Enterprise’s real estate equity division.