In 2020, the Low Income Investment Fund (LIIF) initiated a strategic shift toward integrating racial equity into all its work. Central to this change was the development of the Impact-Risk-Profitability Framework (IRP Framework), designed to recalibrate how we evaluate and execute lending decisions. The IRP Framework is not just a set of tools; it’s a commitment to align our financial strategies with tangible impact, ensuring that our investments actively support racial equity.
We began our phased implementation of the framework in 2023, which has brought challenges and triumphs. Using the Impact Scorecard, Risk Rating Model and Profitability Model, the IRP Framework encourages a balanced approach to lending decision-making, where the impact on racial equity is weighed alongside traditional considerations of risk and profitability. This balance is essential in our pursuit of directing $5 billion in investments over the next decade, 2020-2030, toward community development projects that advance racial equity. Finding this balance has revealed key challenges and learnings.
First, we are discovering that assessing impact and opportunities to advance racial equity does not solely occur during underwriting but spans the entire deal cycle. This encompasses the business development and screening phases, and even the subtle, often overlooked “invisible pipeline” of decision-making.
As we implement this framework, we see the most critical point in our deal cycle for considering racial equity is in the business development and screening phases. We need our lenders to be comfortable talking to prospective and current borrowers about race. “Many of our customers know LIIF as a place to obtain capital. They expect a conversation about financing, not about race,” one of our lenders noted. We took in that feedback and are developing training aimed at helping them integrate these crucial discussions into their financial conversations.
However, a persisting challenge remains: integrating impact assessment into the deal timeline in a manner that significantly influences decision-making, while being practical and implementable. The lending team continues to grapple with this, seeking effective ways to embed these considerations into every interaction with borrowers.
Another significant step in our journey is including the Impact Scorecard in the screening process so that our term sheet reflects impact, risk and profit considerations. The robust impact assessment adds work to closing a deal, but to truly shift our practices, we need this step in the underwriting phase. This move will ensure that decisions on lending not only reflect financial aspects but also the expected social impact.
Moreover, the IRP Framework has shed light on the “invisible pipeline” of decision-making in lending. This concept encompasses the subtle choices lenders make, from prioritizing calls to selecting which conferences to attend, which significantly influence the allocation of capital. Acknowledging and addressing these “invisible” elements is vital in steering capital toward projects that genuinely advance racial equity.
Data plays a crucial role in this endeavor. The second major challenge we face is the calibration of decision-making in the absence of comprehensive reference data. As each deal in 2023 brings new insights into Impact, Risk and Profitability values, we recognize the need for more extensive data to set expectations and make comparisons. In response, we have embarked on the Impact Scorecard Lookback project. With this project, we aim to create a comprehensive dataset of our historic lending activities. Having a thorough understanding of how we previously and currently operate enables us to set informed goals for future investments that balance impact with risk and return. This task, however, introduces the ongoing challenge of continuous improvement of the scorecard, even while collecting historical data. Determining the right thresholds and boundaries for driving new goals and incentives for the business remains a critical area for development.
As we move forward, the continuous improvement of the Impact Scorecard remains a priority. Aligning on a common language to describe impact and integrating these considerations into credit approval discussions are steps toward ensuring that all stakeholders are on the same page regarding the loan’s impact attributes.
While challenges are part of this transformative journey, the IRP Framework has already demonstrated its potential to drive meaningful change. By directing capital toward projects that specifically address the needs of Black, Latino and other marginalized communities, LIIF is not only challenging traditional financial practices but also paving the way for a more equitable future in capital deployment.
The IRP Framework marks a new chapter for LIIF, where the focus is not just on financial returns but on creating a lasting, positive impact on communities. It’s a commitment to ongoing learning and adaptation, ensuring that our investments consistently contribute to building a more equitable and inclusive society.