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Can Community Finance Advance Racial Equity? It Takes an Ecosystem.

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Steven Brown, Michael Neil, Ellen Seidman, and Shena Ashley. The report shows that the commitments to equity in racial relations made by foundations and corporate sponsors between June 2020 to December 2021 amounted to around $215 billion, with over 50% of the amount being allocated toward “community development activities and investments” (6). Community financial institutions for development (CDFIs) are the top beneficiaries of the funds. The authors further add to the optimism that the pledge’s fulfillment is “either on time or ahead of schedule” (6).

However, there are still a lot of questions to be answered, including what happens to the money to where it’s needed, and will the pledge be last? As was the case in the past few years following the initial push to fund race equity in the aftermath of the murder of Michael Brown, will racial equity philanthropy stall out when another issue triggers it? Following Trump’s election as president Donald Trump as president in 2016, philanthropic advisor Will Cordery noted that many foundations stopped funding Black-led group movements.

What will happen this time around? According to Theodos and his coauthors write in their report, businesses and philanthropy aren’t only dependent on funds; if they want a “new era in racial equity” to be a reality, companies and generosity have to change their ways of working.

How Are Racial Equity Commitments Structured?

In the case of corporate announcements, doubt about the magnitude of statements is justified. In the past, an article in NPQ on Community Reinvestment Act (CRA) commitments by banks pointed out commitment announcements are typically much more excellent, often by five times the amount of money committed. For instance, Jesse Van Tol, the CEO of the National Community Reinvestment Coalition (NCRC), stated that the $384 billion of agreements with 14 banks the NCRC helped negotiate produced “$70-80 billion in a net new activity.” Indeed, this isn’t anything to laugh at, but it’s significantly smaller than the $384 billion.

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Do you think the same dynamics are at work in the latest round of racial equity pledges? The simple answer is: yes, it does.

Of the announced $215 billion commitments, more than $200 billion was sourced directly from private companies, with financial institutions and banks accounting for more than half of the sum (16). Foundation commitments were estimated to total $12.6 billion. The promises from corporations are more significant and often have obligations to repay. For instance, from the $49.5 billion in commitments to corporate clients made by the country’s top 50 public companies — the amount of $200 billion is calculated based on more than a hundred thousand businesses–the Washington Post found that $45.2 billion (91.3 percent) was loans or investments and just a bit more than $4.2 billion as grants.

Another cautionary note from the Urban Institute: as CRA pledges, commitments to equity in racial and ethnic diversity “represent a mix of some new funding and some repurposed or refined targeting, delivery, and execution of existing products and activities” (6).

In the end, corporate press releases can be misleading. But, the grants can be successful when combined with loan commitments, access to banking credit, target acquisition, growth capital, and impact investments. The most important question is: how effective will they prove to be?

Using Racial Equity Funding to Retool Community Finance

In their report, the authors examine what I call”the paradox” of community financing. Even though CDFIs have seen rapid growth with impressive figures, they’re only an insignificant fraction of the global financial system. CDFI assets totaled $266 billion by 2020, which is a staggering increase from the previous low of four billion as of the middle 1990s. However, it’s less than 1% of the estimated $27.7 trillion of bank assets. Inciting research done by the lead author Theodos, the report highlights the community finance gap that remains and notes that “between 2011 and 2015, 27 percent of US counties saw no CDFI lending activity, and half of all counties saw annual CDFI lending activity that amounted to less than $7 for every person earning below 200 percent of the federal poverty level” (9).

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Presumably, with massive US commitments to CDFIs as of 2020, the gaps are less pronounced. However, the authors point out that more money alone will not be enough for the effective advancement of the cause of racial equity. Theodos and his coauthors present eleven areas in which changes to practice, not only increases in dollars, are required. To summarise, the modifications include:

A more significant portion of the assistance for CDFIs must come from operational service (equity and grants) instead of low-interest loans.

When loans are offered to CDFIs, they need not to be limited to low-interest rates but also be extended for longer durations of time, with terms of at least ten years.

Finance technology investment is not just about technology hardware but also technical assistance in training staff to utilize it.

Anti-gentrification capacity must be increased–specifically, this means policy support for land banks and community land trusts that facilitate long-term community control over land use.

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Non-profit organizations that promote the direct community ownership of property, whether residential or commercial use, require support.

It is crucial to include the voices of the community in financial decision-making.

The government-owned enterprises Fannie Mae and Freddie Mac have trillions of real estate loans. They can be leveraged “to serve better the parts of the market where they lag–small loans, manufactured housing, affordable housing preservation, and climate resiliency among them” (11).

CDFI dollars can go further when Fannie and Freddie take over CDFI loans for “non-housing, mission-based community development loans.”

New insurance products that are backed by “mission-financed insurance companies” are required to allow BIPOC communities to build property and increase the size of their holdings. As NPQ has observed, many heirs’ properties–land held in common by heirs have frequently slowed access to capital. Black Land Justice advocates and other allies have urged the Federal Government to provide an array of grants as well as technical assistance, insurance, and loans to overcome this.

Subsidies that promote small and home-based business owners in BIPOC communities must be targeted differently, mainly through down-payment assistance and small business grants to enable more commercially-oriented loans.

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CRA rules that, as Dedrick Asante-Muhammad of NCRC has advised, require to be revised to precisely measure “how these regulations affect communities and people of color” (12).

The Road Ahead

According to Theodos and coauthors, it is essential to simultaneously tackle the business and finance side to achieve economic growth in the community. Do not do either, and the system will fail to evolve. They say that “a absence of demand for capital does not mean that there isn’t a need for capital however it indicates the inability of communities to take on the investment communities have missed out on. This capacity has to be built” (7).

In the final part, Theodos and his team provide additional warnings. One is to steer clear of the temptation to fund large, easy projects that can meet numerical “racial equity commitment” targets; however, do not prioritize riskier investment opportunities that have more significant impact. The second option is to change the metrics to ensure that the equity impact measures align with the long-term time horizons required by the research. Another is not to be afraid of acknowledging the investment size necessary to be made, which they estimate to be between $500 million to $1 billion for each neighborhood. This is “comparable in scale to the Marshall Plan that provided US aid for economic redevelopment in Western Europe following World War II” (14). The authors also advocate for new standards within charity and business, including “transforming workplace culture, shifting power dynamics, and diversifying staff, especially leadership, and supplier composition.” However, in the absence of internal change, they warn that “external commitments to equity will likely falter” (15).

In their conclusion, they acknowledge that we are beginning to be a new era; yet, although a paradigm shift is possible, many obstacles stand in the way of achieving it. In the past, Lisa Mensah, CEO of Opportunity Finance Network, a trade association for CDFIs, stated to NPQ that CDFIs need to “go deep” to meet their purpose. She made it towards CDFI financiers that they could be able to go deeper “if they have the funds to go deep,” an assertion that Theodos and his coauthors agree with. The authors state that the 2020 commitments and 2021 present “a chance to reimagine how the private sector can and should invest in communities as a vehicle for greater racial equity” (15). As they say, the extent to which this opportunity is seized is not certain.

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What is Centralized Decentralized Financing (CeDeFi)?

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In our current world, blockchain technology is utilized in various industries, including the finance sector. CeDeFi is an abbreviation that stands for “Centralized Decentralized Finance.” CeDeFi is a financial system that employs both central and decentralized mechanisms. It blends the best features of traditional finance and Decentralized Finance (Defi).

The basics of CeDeFi

CeDeFi can be described as an acronym for “centralized financing decentralized.” CeDeFi refers to the Ethereum-based protocol class that seeks to offer the same advantages as Defi protocols but with more control and central decision-making.

While Defi protocols are permissible and accessible to anyone who wishes to utilize the protocols, CeDeFi protocols are generally run by one entity or a limited number of organizations. This means that CeDeFi protocols have greater control over their functions and governance than Defi protocols.

CeDeFi protocols typically have similar features as Defi protocols, like loans and lending systems, secure currencies, and token swaps. Yet, CeDeFi protocols tend to be quicker and simpler to utilize than Defi protocols due to their centralization. The speed and ease of usage come at the expense of decentralization. CeDeFi protocols are not as resistant to censorship and have lower community involvement than Defi protocols.

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The most popular models for CeDeFi protocols include MakerDAO, Compound, and Synthetix. These protocols have provided similar features as Defi protocols but remain centralized.

The centralization of CeDeFi protocols is more prone to attacks and hacks than Defi protocols. However, the usage of CeDeFi protocols is increasing because they provide a more comfortable experience for users than Defi protocols.

The Binance Company and its Role in the creation of CeDeFi

CeDeFi is a unique type of financial system that is built upon the Ethereum blockchain. CeDeFi was developed by a consortium of the top businesses in the crypto industry, including Binance, MakerDAO, and Kyber Network. CeDeFi gives users access to an open platform with access to a range of financial services like lending, borrowing, and payment transactions.

Binance is among the biggest cryptocurrency exchanges in the world. It is also playing a significant role in the creation of CeDeFi. Binance has provided its knowledge of blockchain technology and security to the CeDeFi consortium. Furthermore, Binance Labs, the venture division of Binance, has invested in several CeDeFi initiatives.

In 2022 in 2022, the CeDeFi system is still in the early stage of growth. But with the support of major companies such as Binance and Binance, CeDeFi could become a significant player in cryptocurrency finance.

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The features of CeDeFi

CeDeFi is a decentralized finance protocol that allows the creation and trading of synthetic assets. In contrast to other protocols, it does not depend on borrowing or lending platforms. Instead, it utilizes the smart contracts system to create new tokens, which track the underlying value of the underlying assets. This lets users trade derivatives and not have to be able to trust a significant party.

CeDeFi protocols also have numerous other benefits that include:

  • CeDeFi protocols are based on Ethereum, which means they are not vulnerable only to one point of failure.
  • CeDeFi protocols are available to anyone who has access to an Ethereum wallet.
  • CeDeFi protocols are compatible with other Ethereum-based protocols providing a broad range of applications.
  • CeDeFi protocol can be modified to make various derivative products.

The primary drawback to CeDeFi protocols is that they are complicated to grasp for those new to the field. But as the industry grows, it is expected that user-friendly interfaces will be created. In general, CeDeFi represents a significant improvement in the decentralized financial sector and could transform the way trade financial instruments.

CeDeFi protocols can transform the trade of derivatives. Removing the need for central exchanges will lower the risk of counterparties and allow traders to trade the products. Furthermore, CeDeFi protocols are in the early stage of development, which means they have a vast potential to grow in this field.

CeDeFi is DeFi

The cryptocurrency industry is filled with abbreviations and acronyms, and CeDeFi and Defi are among the most popular terms used. What is the difference between the two?

As stated, CeDeFi stands for Centralized Decentralized Finance, whereas Defi is a reference to Decentralized Finance. Both CeDeFi and Defi encompass a broad spectrum of terms and refer to various financial products and services that can be developed upon a blockchain.

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However, the main distinction that separates CeDeFi and Defi is their methods of decentralization. CeDeFi, as the name implies, CeDeFi is centralized in its structure, with projects usually being developed and managed by a single organization. Contrarily, Defi projects are decentralized, typically being created and run by a collective of developers.

Let’s take a close review of the significant distinctions between them.

Centralization vs. Decentralization. As mentioned previously, the main distinction between CeDeFi and Defi is their distinct strategies for decentralization. CeDeFi projects are centrally managed; however, the Defi project is decentralized. This is evident in the governance model and development process for CeDeFi and Defi projects.

Governance model. Governance models are a significant difference between Defi and CeDeFi. CeDeFi projects are generally managed by a single entity which could be a company or foundation. Contrary to this, Defi projects are usually controlled by the communities of developers who create and manage the projects. This dispersion of governance makes Defi projects more tolerant of any changes in direction or leadership.

Development process. Development is centralized in CeDeFi, and an individual entity is typically responsible for creating and managing the project. The development method in Defi is decentralized, with various developers working on the same project. Decentralization in development results in Defi projects being more transparent and open and more resistant to changes in direction or leadership.

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Use cases. CeDeFi and Defi each have a broad array of uses. CeDeFi initiatives usually focus on offering central financial products and services, like lending and lending platforms, exchanges, and payment processors. Contrarily, Defi projects often focus on providing financial products and services that are not centralized, including smart contracts, protocols, and stablecoins.

Risk factors. It is also essential to remember that CeDeFi and Defi carry their dangers. CeDeFi projects tend to be riskier than Defi projects because of their centralization. The centralization of CeDeFi tasks makes them more vulnerable to hacks, fraud, and theft. Contrarily, Defi projects are generally considered safer because of their lack of centralization. However, Defi projects remain weak, and they are often complex and hard to comprehend.

The advantages of CeDeFi

CeDeFi is a unique form of decentralized finance that allows users to trade crypto assets without a central exchange. This means that users can deal directly with one another without an intermediary. CeDeFi also comes with a range of additional benefits, such as:

Security. One of the significant benefits of CeDeFi is its increased level of protection than the conventional financial system. It is due to transactions being performed on a distributed network, making it difficult for hackers to attack.

Speed. Another benefit to CeDeFi can be that the transactions process faster than the conventional financial systems. There’s no requirement for third-party approval, which may take weeks or even days.

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Cost. CeDeFi transactions are, in general, less expensive than traditional transactions. This is because there aren’t any middlemen with the procedure. Therefore, the costs are significantly reduced.

Flexibility. CeDeFi systems are also greater than traditional banking systems. This is because they can be customized to meet the requirements of any customer.

Privacy. Additionally, CeDeFi offers a higher amount of privacy than other financial systems. It is due to transactions being performed on a distributed network, making it harder for third parties to monitor.

In the end, CeDeFi has several advantages over traditional financial systems. As more people are aware of the benefits, It is expected for CeDeFi is likely to continue to increase in popularity.

Bottom Line

CeDeFi is a category of Ethereum-based protocols which aim to provide the similar benefits of Decentralized Finance (Defi) protocols but with more control and central decision-making. While Defi protocols are permissive and available for anyone to utilize, they are usually run by one company or a smaller group of organizations. This means that CeDeFi protocols have greater control over their functions and governance over Defi protocols. CeDeFi has many advantages, and those who effectively implement them will benefit from more management and central decision-making.

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What Investors Need to Know About ESG Investments.

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ESG investing is focused on social, environmental, and governance principles. It has seen a rise in popularity over time.

Sometimes called sustainability investing, impact investing, or socially responsible investment, ESG investing provides a means for investors to think beyond profits and think about the role that companies play in the greater good of society. This is what you need to know about it.

The ESG metrics

There are three primary measures used to judge businesses based on ESG standards. When you look at a company’s performance through an ESG lens can reveal aspects about it that you can’t be able to see when looking at financial statements, which is why it’s essential.

The environmental component of ESG examines how a company’s activities impact the environment, particularly the effects of climate change. For example, many firms contribute to climate change through excessive energy and pollution. You should be aware of this, not just your company’s role in influencing climate change and the impact climate change will have on business and the wider industry shortly.

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The social element examines how a company interacts with its customers, employees, and society in general. It can address questions like diversification and inclusiveness, worker security and security, human rights, data security, how the company invests in the local community, and many more. If you’re an investor, no matter if you’re looking at ESG indicators or not, you must be aware of the position companies are in on these issues, as they could be expensive in the future. Employers who are treated poorly result in fewer top talent being retained, security breaches cost increased costs for security and public relations, and so on.

Governance is how companies operate. It is essential to know this as you’re also a shareholder investor. When assessing companies’ management, institutions can consider the transparency, the quality of financial reporting, and the independents of the boards of directors. If a business has questionable operations, you’ll want to be aware. A few of the most prominent bankruptcy cases in the history of business were shocking to investors simply because they did not know what was happening behind the scenes.

ESG funds

Various funds focus on ESG indicators, which means it’s now easy to invest in investments that meet your sustainability goals. Certain funds have the three criteria components, and others decide to concentrate on only one or perhaps two. Some funds focus on particular topics, such as cybersecurity, clean energy, and climate change-related commitments, and general funds focus on the highest ESG standards.

There isn’t a universal rating within ESG standards, so ESG funds do not constantly evaluate ESG indicators on the same basis. Some assign different weights for each of the three ESG practices, while others may be more focused on subtopics that fall within the category. If you’re passionate about a topic, make sure you review the fund’s mission statement and how the fund’s companies were selected.

Don’t forget the basics.

If you’re planning to concentrate on sustainable investments, which is a good thing to do, utilize ESG knowledge and traditional investing wisdom and guidelines. It’s not a good idea to reach a point where ESG standards are the only criteria you need to use when making decisions about your investments. In the end, investing is to earn money. There are many ways to do this sustainably, ethically, and according to your interests. However, it would be best if you didn’t ignore the primary goal of investing. It is still essential to think about your financial goals, the risk you are willing to take, and other relevant factors.

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How can big-scale Finance be used to boost sustainability?

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The ability to raise vast amounts of money to move towards a low-carbon economy is within the capabilities of the world economy; however, it will require significant adjustments to the way financial markets operate.

The ever-growing climate issue will require the most continuous movement of capital in the history of mankind. The minimum is $100 trillion that must be invested between 20 and 30 years to switch to a low-carbon economy. Moreover, an additional $3-4 trillion in annual investment is required to reach the targets of Sustainable Development Goals by 2030 and stabilize the world’s oceans.

The ability to raise these massive sums and invest them wisely is within reach for the world economy and the financial markets that exist. However, it will require significant modifications to the way these markets function. Mainly conventional financial institutions would require assistance in finding the most suitable projects, easing the process of negotiating and drafting transactions, and raising the capital needed to finance these projects.

A majority of sustainability initiatives are small-scale. This is the nature of innovation in which ideas are developed to be tested, tested, and when they are successful, copied. However, the disconnect between the people developing sustainability initiatives and traditional Finance makes scaling such initiatives not easy.

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Without risking simplifying the issue, sustainability advocates could be wary about “Big Finance” and its track record of funding nonsustainable industries. Investors, however, are likely to be skeptical of a fanciful approach that overlooks the realities of the bottom line and might not be interested in smaller-scale transactions.

With this in mind, How do we grow sustainable initiatives from small investments up to the $100 million range that starts to draw big Finance and billions required to create a world-changing impact?

Three specific steps are required. The first is that securitization methods are an excellent way to combine several smaller projects into one with enough critical mass to make it worthwhile. Securitization earned a bad rap in 2007 and 2008 due to its part in an economic crisis involving subprime loans which caused the entire world close to financial ruin.

If properly controlled, jointly financing many projects lowers the risk of failure, as the chance that each will face similar operational and financial concerns at the same time is very minimal. The resulting total will be available to investors in the interest market. Smaller projects must share standard features so that they can be grouped. This can’t be done in the future.

For example, we must come up with general terms of reference and terms for similar asset pools like what is being done within the US residential solar market. In addition, we must expose the basics of securitization to more local innovators via regional gatherings, which bring together financiers and sustainable project developers.

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The second is to reduce the complexity of transactional terms, making it simpler to create and negotiate the particulars of the instruments used to fund sustainable projects. In the established financial markets, replicating vital elements of successful deals in the past is much simpler than creating a new agreement for every buy. This method works because major financial players have approved many of the conditions and terms for future deals.

Making the most successful innovations more noticeable to investors is crucial. To achieve this, we must create an open-source, high-profile clearinghouse for previous sustainable projects, including those that were successfully funded and those that did not. It would be similar to the currently used databases but is openly accessible and with trustworthy third-party oversight to ensure accuracy.

Thirdly, the variety of sources of financing for sustainable projects must be increased and made more transparent. Because sustainable investments could provide lower returns based on historical market metrics, traditional asset allocation methods, in the context of “efficient markets,” would result in a lower appeal.

But the old benchmarks don’t adequately reflect the growing area of impact investing, which has different return and time requirements and is responsible for around $2.5 trillion in assets. The idea of securing tranches of various kinds of impact investment could become a significant game-changer in sustainability-focused financing.

Therefore, it is sensible to develop an open-source database of investor interest similar to the project database described above, but that can be accessed by designers and innovators of innovative sustainable initiatives. This will make it easier to find investors – whether equity, credit, or a hybrid who are willing to fund. It could also be placed by organizations such as the International Finance Corporation, the United Nations, or the Global Impact Investing Network.

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There are positive precedents. Green bond markets began around a decade ago. The total issuance amount could already reach $1 trillion by the end of this year. In November, the majority of the world’s financial community was present at the UN Climate Change Conference (COP26) in Glasgow. Under the direction of UN Special Envoy Mark Carney, the Glasgow Financial Alliance for Net Zero (GFANZ) has pledged $130 trillion of climate-related commitments.

When he was in 1983, Muhammad Yunus founded Grameen Bank to offer banking services, specifically loans, to those (primarily women) that were previously considered “un-bankable.” By the time Yunus received the Nobel Peace Prize in 2006, “micro-lending” had become an international phenomenon, with traditional financial institutions securitizing the loans.

The financial revolution Yunus began transformed how retail lenders lend and how these transactions are structured and opened up an entirely new source of investment capital. To address the present environmental challenges, the financial markets, as well as their key players, must be more creative and be open to unconventional, sometimes even disruptive, ideas and voices.

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