CDFIs could draw institutional capital for climate projects

A new report released on April 6 found that community lenders could play a larger role in attracting institutional investment for climate and infrastructure projects, despite longstanding concerns around risk, scale and liquidity.

The report, “Bridging Institutional Capital and Community Climate Investments,” published by Ceres and the Justice Climate Fund, argues that community-based financing institutions offer a viable pathway for investors seeking stable returns while supporting local economic resilience.

Community lenders, including community banks, credit unions and green banks, have historically been underutilized by institutional investors due to perceived constraints such as small loan sizes, limited aggregation mechanisms and a lack of standardized reporting, the report said.

In a conversation with HousingWire, Holly Li, program director, Ceres Accelerator for Sustainable Capital Markets, Net Zero Finance, as well as an author of the report, said that there is a strong desire from both the institutional investor side and the community development financial institution (CDFI) side to work together.

“What we are seeing is a mismatch between institutional capital and community-scale investment,” Li said. “The projects are there, and the performance of community projects is very strong, but investors need scale, they need liquidity, they need standardized products. They also need to understand the CDFI market a little bit more.”

Steven Rothstein, chief program officer at Ceres, agrees with Li. “I think there is a lot of interest, but there needs to be more knowledge on both sides; Big institutional investors don’t always know who all the local CDFIs are or who to reach out to.”

At the same time, demand for financing in underserved communities is rising, particularly for housing, small businesses, infrastructure and climate resilience projects. These investments can help mitigate risks tied to extreme weather events such as flooding, wildfires and drought, while also generating long-term returns.

Researchers found that institutional investors are primarily seeking competitive risk-adjusted returns, predictable cash flows, diversification and clear exit pathways. Community lenders, the report said, can meet many of those expectations by offering asset-backed loans, historically low default rates and access to public incentives and co-investment opportunities.

“I think the question is, what is stopping the investors from working with CDFI? One thing that we hear over and over again is perceived risk, because a lot of CDFIs don’t have standardized rate ratings and they have very limited reporting capacity, so the risk of their projects is often misunderstood,” Li said.

To bridge the gap between investor expectations and current market barriers, the report outlines four primary strategies. Both Rothstein and Li said that solutions like aggregation products and securitization can bridge these gaps.

The first strategy involves traditional financing tools such as insured deposits, certificates of deposit and promissory notes, which offer stable, predictable returns and are widely understood by investors. The second strategy focuses on innovative financing models, including loan securitization, equity-equivalent investments and loan participation structures.

A third approach highlights the use of first-loss or low-cost capital, typically provided by philanthropic or public entities, to absorb early losses and reduce risk for private investors. Such structures are designed to attract additional capital into sectors like clean energy, affordable housing and community development.

The final strategy emphasizes cross-sector collaborations between community lenders, corporations and philanthropic organizations, which the report says could form partnerships that support broader economic goals such as workforce development, infrastructure improvements and job creation.

“I think all financial institutions, CDFIs, credit unions, banks…need to do this. And if you look at the largest banks, they’re all investing enormous amounts in New Energy,” Rothstein said. “And in fact, in the last year, those large banks made more fees on the new and emerging and green energy than they did on the fossil fuel. So that’s a growing area, but the CDFIs know their communities, so they understand the needs better.”

The report concludes that the gap between institutional capital and community investment is narrowing as new financial structures emerge, offering investors a way to achieve both financial returns and measurable climate and social impact.