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The Supreme Court’s decision this summer to strike down affirmative action in higher education has had a chilling effect on racial equity efforts in the public and private sectors. Long considered a tool to correct systemic discrimination, affirmative action programs everywhere are at risk, advocates worry.  

Now, conservative activists are trying to block programs that prioritize support for Black and brown entrepreneurs and law students. In September, a federal appeals court temporarily prevented Fearless Fund from distributing a grant to Black women entrepreneurs. According to Crunchbase data, just 1% of venture capital funding went to Black-led businesses last year — a disparity that leaders of the fund hoped to reduce.

The gap is also wide for the financial institutions that fund Black-led businesses. According to a Hope Policy Institute analysis of 2017 U.S. Department of Treasury data, white-led community development financial institutions (CDFIs) have six times the amount of assets held by Black and brown-led institutions. 

CDFIs are lenders with an eye toward local economic growth. They come in the form of venture capital funds, community banks, credit unions and loan funds. Unlike traditional financial institutions, at least 60% of a CDFI’s activities must provide services to low-and-moderate income and underserved communities.

Black-led CDFIs play an important role in addressing economic disparities, say industry experts. They are often located in Black communities and deliver products with cultural competence, said Amber Bond, executive vice president and chief operating officer of the African American Alliance of CDFI CEOs

Amber Bond, executive vice president and chief operating officer of the African American Alliance of CDFI CEOs. (Photo courtesy of the African American Alliance of CDFI CEOs)

Founded in 2018, the alliance is a coalition of more than 75 Black-led community development financial institutions. The organization advocates for fair policies and provides training opportunities, peer mentorship programs and funding for Black-led CDFIs. 

The Center for Public Integrity spoke with Bond about the significance of Black-led CDFIs in closing the racial wealth gap, the fear that the affirmative action suit has sowed and how the organization is responding. 

This conversation has been edited for length and clarity. 

Q: What role do Black-led community development financial institutions play in closing the racial wealth gap?  

Black-led CDFIs have historically been better and more effective at reaching minority populations in terms of impact, for a couple of reasons. The first is that most Black-led CDFIs are actually located within Black communities. They also are typically run by minorities as well. 

So there’s cultural competence that comes along with that, which makes it easier for them to develop and administer programs and products that really speak to the populations that they’re trying to reach. And then those specialty products and programs are usually more effective because of that cultural competency component as well. 

Black-led CDFIs are in all spaces within the CDFI industry. So we see [their impact] on the small business side, where they’re empowering entrepreneurs, creating jobs with livable wages and helping those individuals close the racial wealth gap for themselves and their families. Black-led CDFIs are also in the housing space and focus on creating an inventory of affordable housing that’s accessible to Black communities. [And they] are also within the venture capital space. 

We know that roughly 1% of venture capital dollars in 2022, for example, went to Black-led entrepreneurs. The more Black-led CDFIs we have focused on venture capital can help turn that number around. 

And then we’re in the community development space. Some of our members are focused on commercial real estate within Black communities, [where] they are empowering, teaching and funding. All of these things go against the cycle that has established and maintained the racial wealth gap.

Q: What are some challenges that Black-led CDFIs face? 

Black-led CDFIs often face some of the same challenges in terms of access to capital that our communities face. One statistic that supports that is that on average, the assets for white-led CDFIs are six times the size of the average Black-led CDFI. 

And so [Black CDFIs] are largely undercapitalized. That can be for some of the same reasons that Black entrepreneurs are underfunded: not having access to strong networks to go after capital; they could be newer or smaller in size, and that could be perceived as less attractive, especially to larger national investors. They could also have a localized impact, so they can’t post the big impact numbers that our larger counterparts can. 

Q: How has the Supreme Court’s affirmative action ruling impacted your industry?

It’s certainly become a topic that we are watching and following closely. We know that the ruling on affirmative action is just a first step for some of these ultra-conservative firms that are really trying to dismantle the redistribution of wealth, and that’s really what it’s about. It’s not just college admission. 

So it’s a big deal and we are deciding what our defensive strategy would be. Just in our name alone we focus on Black-led CDFIs, so we have a very specific focus. And we’re unapologetic about that because of the statistics that we’ve seen and how racial discrimination has contributed to our underfunding and being under-resourced. So we’re not going to back down in that sense of our charge. But we do know that it could serve as a threat against some of our specific programming. 

For example, we in conjunction with another organization created the African American Equity Impact Scorecard. This is a tool that was designed to help create accountability for investors and practitioners in this space and as a charge for them to operate more equitably within Black communities, but also to be able to show their impact on those communities. 

Because that is a tool to help folks focus on racial equity, it could be targeted. We also started the Black Renaissance Fund. It’s the only fund in the nation that’s specifically focused on Black-led CDFIs and helping to close the capital gap that exists for them. And we recognize that that can be targeted. We want to serve as a beacon for those corporations and foundations that have made commitments to invest in Black communities. We want to create the vessels that can help attract and disseminate those dollars. But that could potentially be targeted because of the specific groups that we’re trying to help. 

I read an article the other day [that] focused on the case against the Fearless Fund as a result of the affirmative action ruling and how it’s shaking things up in the impact investing space and causing organizations like the Kellogg Foundation to rethink how they deploy capital, where they make investments and the programs that they have formulated. It’s one of the many examples where we know that this ruling is causing investors to take a step back and rethink approaches. 

And coming only three years out of the murder of George Floyd and those commitments that were made — the eye-opening moment that many had —  before we can really see the impact of those dollars flowing into those communities, people are having a reason to now rethink those agendas and step back. While we don’t have a quantified number to the dollars that are slowing down or stopping as a result of [the] affirmative action ruling, we know for a fact that it is having an impact on investor behavior.

Q: How is your organization remaining steadfast? 

We are making no changes in our programs, in our stance, in our funding decisions and how we’ve set up the Black Renaissance Fund. Nor are we encouraging our members to make any adjustments in their products, programming or the way that they go about trying to capitalize their organizations. 

We’re working on what that defensive strategy looks like and having discussions in conjunction with other BIPOC-led organizations and intermediaries. But until that time, we’re just continuing to move forward. The work that we do collectively and individually is just too important. 

Years ago, I was a practitioner myself at a CDFI, and I can’t tell you how disarming it was to be able to say to someone who’s struggling to find capital or needs help in their business, “We’re here to help you. We are here for women entrepreneurs. We are here for Hispanic business owners. We’re here for Black entrepreneurs.” To be able to tell them that we exist to make sure that they get the capital they need, it just helps in relationship building, community building and ultimately the success of supporting that entrepreneur.

Those types of efforts and certain specialized services and products are needed in our communities, and we’re not going to stop.

Q: What does the Black Renaissance Fund entail? 

At the end of 2021, we launched the Black Renaissance Fund and we set an initial goal to raise $125 million to support Black-led CDFIs and then also to build operational capacity for the alliance itself. We aim to raise $75 million in low-cost debt capital that we would then re-lend to our membership. 

Members of the African American Alliance of CDFI CEOs. (Photo courtesy of the African American Alliance of CDFI CEOs)

So at this point, we have 76 Black-led CDFIs that are a part of our network. When we conduct surveys annually to better understand what their needs are, one of the things that they told us is that although 80% of our members are also members of other trade associations with active loan funds, the majority of them still say that access to capital is their top challenge. For us, that represented a market failure to support Black-led CDFIs. Instead of trying to team up and collaborate on a solution, we decided to be that solution. 

We want to see those dollars in their hands at below-market rates. Our goal is to lend that money at 3% or less so that they can then in turn make low-cost loans to the businesses or individuals that they serve in their communities. 

The other goal from the fund was to raise $50 million in grant capital. We want to be able to pair debt with grants and equity. One of the challenges that some Black-led CDFIs have in terms of being able to raise dollars is that they’re over-leveraged; debt can typically be a little easier to obtain. But if you’re constantly raising debt, you have very little equity sitting on your balance sheet, and that low equity factor can eventually deter investments. It can negatively impact investor risk assessments. 

And so we don’t just want to be a source of debt, but we also want to be a source of grant capital to help them sustain their programs and put equity on their balance sheet. Because we know [that] some of these balance sheet factors, how long they’ve been in existence or the size of their fund can be challenges, we wanted to make sure that our underwriting criteria really spoke to that: that we’re reframing our discussion about risk or investments in Black CDFIs. And then we’re also helping to de-risk them openly in the market. 

Q: Going back to the affirmative action suit, will you talk about the fear that it sowed and how concerns about legal pressure may further increase the racial wealth gap?

For some of us within this industry that have been doing the work for a long time, we’re no stranger to adversity: whether it’s in a blatant form like this or more subtle legislation that has passed and that has contributed to developing the racial wealth gap. 

But I think for those who are new to the impact investment space, or are taking a more bold stance post-2020 about being committed to racial equity, [that] is where I think the fear factor can cause the most damage. 

They were just able to convince their organizations to get on board and now there’s a legal threat that they have to be able to somehow understand, communicate, prepare for — all of these extra components that were not factors in the earlier decisions. It just makes it more complicated. 

Investing in Black-led or Black-focused initiatives can now be spun [as risky], just as the intent around affirmative action is being turned upside down. We already have started to see this softening in focus on Black issues post-2020, and I think this could add to a faster deterioration of those commitments and what those initiatives look like in terms of their boldness.  

Q: Do you have any advice for organizations or companies that might be strangers to adversity and are starting to back down on their initiatives?

Some of the initial advice that’s coming out from legal teams is around intentionality with language and not being as explicit in the promotion of those opportunities in who they want to impact, and making it a little more universal. 

So if you were aiming to help Black women, now you should say women of color to get around the legalese so that it’s not as pinpointed and specific of a target. I understand the need for some … adjustments so that any pending programs are not stopped altogether, like the grant initiative at the Fearless Fund.

But I think the larger issue and the long-term challenge is where we want to really focus, because we don’t want to see those bold initiatives softened or for you to have to hide who you’re really trying to help. But I think it’s a good strategy to talk closely with the decisioning body to find ways to keep some of these initiatives alive, [such as] talking to a local law organization that can do a quick review and help you to move forward. 

But overall, I think you’ll see the grander pushback that will help keep the fire burning for initiatives. I think it’s just gonna take time as we all huddle together and collaborate on what that strategy looks like.

Q: Is there anything else about Black-led CDFIs that you’d like our readers to know? 

CDFIs in general are a national secret, and then the work that Black-led CDFIs are doing tends to be even less known. And it hasn’t stopped us for the last several decades from doing this work. 

We’re in a really trying moment. This is really a test for all of us in our resolve. And I think you’ll see that all of us are holding the line, as we know those who came before us would do. 

This is our moment to decide not to back down. This is our moment to say, “No, we’re moving forward regardless.” And I just want to encourage all those that are wrestling with what to do next, that this is when it counts. It’s easy when there’s no resistance, but it counts the most when there’s a potential sacrifice of something. And this is that moment.

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Melissa Hellmann is an award-winning reporter who covers racial, gender and economic inequality. Prior...