Investing to end poverty: On fostering economic growth and mobility in Philadelphia

Philadelphia is not only the birthplace of our nation, but also the birthplace of banking.

The First Bank of the United States was chartered in Philadelphia in 1791, with the goal of bringing a sense of stability to the young American economy. It was not until 1913, however, that the Federal Reserve was formed as our country’s central bank, tasked with a dual mandate of stabilizing prices and maximizing employment.

The Federal Reserve acts as a decentralized system of 12 regional reserve banks that make up the private side of the public-private partnership with the Federal Reserve Board of Governors in Washington, D.C. This decentralized approach to central banking was established with the understanding that our national economy comprises myriad microeconomies made up of diverse regions and communities.

Even within Philadelphia, microeconomies are facing various opportunities and challenges that require examination of how different people earn, save and spend their money and the overall impact of these activities on the city and region.

Philadelphia remains the poorest of the 10 largest cities in the United States. Although much recent attention has been placed on Philadelphia’s economic revival, it is essential to consider the persistent fact that over one-quarter of the city’s population lives in poverty. At the Federal Reserve Bank of Philadelphia, we recognize that a lack of opportunity for upward economic mobility for all residents will continue to hinder our city and region’s economic growth if not successfully addressed.

To make meaningful progress on issues like poverty in Philadelphia, we collectively need to undergo various shifts in our thinking.

So, how do these issues intersect with the work around the “impact economy”?

Much of the impact economy discussions to date have focused on impact investors who would like their investments to deliver both financial and social or environmental returns or on the companies that are able to deliver those double- or triple-bottom-line returns through the products and services they produce or the processes and strategies they employ to conduct their business.

The Philadelphia Fed’s involvement in this ecosystem has mostly been around the question: Where are there opportunities to improve economic mobility for low-income residents of the city or those living in low-income communities?

To answer this question, the Philadelphia Fed uses two main tools — research and convening. On the research side, our Community Development Studies and Education team has explored topics including:

• Identifying opportunity occupations or jobs that pay a living wage for people with less than a four-year degree
• Tracking changes in the affordability and availability of rental housing over time
• Exploring potential investment opportunities to address the skills gap between what the local labor force possesses and what employers are demanding.

Armed with this research, we use our convening capacity to catalyze actionable discussions with local leaders from a variety of sectors, including nonprofits, philanthropy, public officials, employers, financial institutions and academia.

What we have come to learn through our research and convening is that to make meaningful progress on issues like poverty in Philadelphia, we collectively need to undergo various shifts in our thinking. When we change the way we look at things, the things we look at may begin to change.

Marrying impact investing and community development finance shifts our perspectives to also identifying the market opportunities in these neighborhoods.

For example, if companies start to see workers as assets to be invested in, instead of a line-item labor cost to be limited, they may begin to offer incumbent working training leading to stable career pathways for current employees while creating entry-level vacancies for local job seekers. They may also offer apprenticeships to provide on-the-job skills training needed to overcome the current skills gap we know is impacting our labor market.

This shift in employer behavior resulting from a shift in perspective could yield long-term return on investment for not only businesses but also employees and our regional economy as a whole. Although these companies may not be considered social enterprises or “impact companies,” altering the way they interact with all stakeholders, i.e., customers, employees and shareholders, can yield both social and financial return.

This is why the Best for PHL initiative, a B Lab program managed by ImpactPHL, is exciting. Empowering businesses to improve their workforce, environment and community through awareness and connection to resources can yield mutually beneficial results for all stakeholders and our regional economy. From an impact investing perspective, domestic community development offers various opportunities for investment and a financial track record that stretches over decades to back those investments.

An effective impact capital strategy is about more than just building and investing financial and physical capital.

Community development finance institutions (CDFIs) have long been supported by banks that are required by the Community Reinvestment Act to lend and invest in all the places where they take deposits via branches. The CRA’s passage was largely a regulatory response to a market failure — banks redlining or restricting access to capital in low-income and minority communities in the 1970s.

Marrying impact investing and community development finance shifts our perspectives to also identifying the market opportunities in these neighborhoods. With the more recent excitement and momentum around impact investing, sophisticated CDFI intermediaries have an opportunity to tap into new sources of capital to continue the work they have been doing in communities for decades, increasing access to credit for small businesses and nonprofits as well as access to affordable housing, quality health care, healthy food, community services and education.

Although community development finance has primarily built its foundation around real estate investing, we have learned that in a city like Philadelphia, neighborhood revitalization does not always empower local residents to move up the economic ladder but can often lead to displacement through gentrification. An impact economy requires both growth AND mobility, and thus, our strategies must include a focus on both improving places AND empowering people.

To this goal, an effective impact capital strategy is about more than just building and investing financial and physical capital. We should also consider how we build and invest in human and social capital in our city.

We have not properly set up many of our nonprofit organizations to be able to successfully achieve, track and report outcomes.

A shift in thinking that could lead to improved return on investment in human capital was explored at a convening hosted by the Philadelphia Fed in late 2015. If funders, namely the philanthropic and public sectors, begin funding outcomes instead of paying for services, we may very well see improved accountability and performance among nonprofits.

This topic of outcomes-based funding, also called pay for success financing or social impact bonds, received overwhelming interest in Philadelphia, proving that city leaders from various sectors are open to exploring new ways of doing things including leveraging private sector investment capital to address social problems. Although these deals have been made in other locations, the lack of progress on structuring one in Philadelphia shows that this change will not come easily.

A critical hindrance to this progress is that we have not properly set up many of our nonprofit organizations to be able to successfully achieve, track and report outcomes. The typical funder-nonprofit relationship has involved restricted funding with rigid reporting requirements regarding outputs, i.e., the number of people served, versus long-term outcomes, i.e., what happened to those people as a result of those services.

Although it will take subsidy and capacity building to empower organizations to be able to operate in this way, this is ultimately the type of long-term investment needed to actualize the returns from reduced social costs that will result from these positive social outcomes.

To achieve these results, this capital investment needs to be informed by solid research supporting evidence-based practice. The Philadelphia Fed is committed to meeting these research needs and is eager to connect with more stakeholders in our district to understand how our research can provide value. We are also committed to investing in the social capital of our city, that is, in fostering an interconnected group of practitioners, investors, intermediaries, philanthropists, community leaders, academics and policymakers.

This movement is proving that an artificial separation of business and philanthropy is far less effective than aligning business acumen with the desire for positive impact.

The goal of the Federal Reserve Bank of Philadelphia is to support economic growth in our region. If one in every four Philadelphians is currently living in poverty, this presents a tremendous opportunity to achieve that growth through increased consumer purchasing power and decreased costs to society that would stem from correcting our city’s chronic poverty problem.

To accomplish this goal, though, we collectively must work together to approach these problems in new and inclusive ways, inviting fresh perspectives to the conversation.

As Albert Einstein famously said, we cannot solve problems with the same level of thinking that created them. What impact investing continues to prove is that although we cannot grant-make our way out of problems such as 25 percent poverty and 38 percent childhood poverty, we can move our capital in ways that address the root causes and market failures leading to these symptoms that create huge societal costs.

This movement is proving that an artificial separation of business and philanthropy is far less effective than aligning business acumen with the desire for positive impact. The Philadelphia Fed is committed to the impact economy ecosystem by supporting intelligently designed, research-informed capital aimed at fostering an inclusive and thriving Philadelphia economy.

Want to learn more? Attend “Investing to End Poverty” presented by ImpactPHL, SOCAP365 and Investors’ Circle-Social Venture Network at FS Investments on Oct. 10. More info and tickets here.