Much like the broader financial system, green lending in the US has primarily focused on higher-income, White borrowers with higher credit scores. The very communities that bear the brunt of the climate crisis are also historically the most underinvested when it comes to resiliency and green energy projects. 

We will never make significant progress addressing our climate crisis without investing in climate solutions that support historically under-resourced communities. 

To overcome traditional obstacles, community development financial institutions – mission-driven institutions providing financial services to traditionally underserved communities – are increasingly prioritizing loans to support community green energy projects. As soon as this spring, CDFIs will be awarded significant federal funding through the Greenhouse Gas Reduction Fund, or GGRF, a $27 billion program administered by the EPA under the Biden administration’s Inflation Reduction Act. These community lenders are currently determining how to best put this landmark investment into action.

CDFIs are uniquely positioned to provide appropriate capital for local resiliency and greenhouse gas reducing projects, thanks to their roots in low- and moderate-income communities which are often on the frontlines of climate change. However, as we’ve seen with affordable housing and microenterprise finance, flexible credit enhancement for CDFIs and other community lenders can go a long way to ramp up their green financing efforts.

Catalytic capital

Philanthropy has a role to play in bridging the gap between community development needs and lenders’ risk tolerance. One example lies in the Community Investment Guarantee Pool, or CIGP, which leverages philanthropic balance sheets to guarantee loans for small businesses, affordable housing, and climate financing in communities of low wealth. 

CIGP was conceived by the Kresge Foundation, which partnered with CIGP’s parent company, Locus, to launch the fund in 2019.  It is a first-of-its-kind platform that compiles guarantee commitments from a wide-reaching coalition of mission-minded investors. CIGP’s model aims to further push philanthropy and mission-driven investors to consider new models of giving that set up intermediaries with the tools and resources to drive impact and sustain long-term success. 

Kresge, which was also one of the first investors in the pool, is joined by 16 other guarantors, including the Robert Wood Johnson Foundation, the Chan-Zuckerburg Initiative, and The California Endowment, to name a few. With a pooled model, philanthropies mitigate their risk, find new ways to collaborate, increase their impact and give lenders an option for credit enhancement to finance projects. 

All this can be done with little to no upfront funding. Philanthropies provide guarantee commitments but do not need to contribute money unless a guarantee claim is triggered by borrower defaults. They also maximize the impact of their dollars, as the guarantees then open avenues of additional capital to borrowers. 

Mitigating risk

Beneficiaries of CIGP guarantees include CDFIs that are well-positioned to bring funding into underserved communities. Guarantees make lenders more likely to launch new loan products or enter new markets. They can remove a layer of risk – perceived or actual – for lenders who have historically shied away from financing projects in low-income communities, including loans that support climate-related efforts. 

Climate finance is a different animal for experienced CDFIs historically focused on housing, small businesses, or commercial real estate. As a result, these emerging green lenders are actively developing relevant policies and practices related to underwriting, structuring deals, and sourcing projects. 

When past transformational federal programs, such as Low-Income Housing Tax Credits, were launched, we know that experienced players were the first ones to seize the opportunity. Guarantees enable smaller partners more grounded in communities to be better positioned and prepared to secure GGRF capital and put it to use in a timely and impactful manner. By enhancing the capacity of CDFIs and other community organizations that are piloting programs, these guarantees can set them up to deploy GGRF capital when it becomes available. 

While only $4 million of CIGP’s guarantees have been for climate change solutions to date, reflecting the nascency of green finance within community development, CIGP’s current pipeline includes $66 million of climate-related opportunities that could be GGRF-eligible. This includes $5.5 million that has already been approved by CIGP’s credit committee and is expected to ultimately unlock nearly $30 million of additional capital for community-based green energy and rural greenhouse gas-absorbing programs. Examples of these projects include solar installations for nonprofit organizations and pre-development financing for multi-family housing energy-efficiency retrofits.

The fact is communities know best what they need but often lack the necessary resources to drive impactful change. With unfunded guarantees maximally leveraging the clout and support of philanthropies, CIGP is encouraging funders and investors to embrace this tool as an investment in communities most affected by the climate crisis. 

Supporting the aspirations of economically excluded communities is both a moral and economic imperative. To meet the scale of this crisis, funders of climate solutions must consider new approaches that center the needs of these communities. This significant investment of federal funds into climate solutions is the right opportunity to prioritize finding new, effective models to provide equitable access to capital.

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Jim Baek is Executive Director of CIGP. Aaron Seybert is Managing Director of the Social Investment Practice at The Kresge Foundation.