For centuries, impact investing—deploying money in pursuit of measurable societal benefit alongside potential financial return—has helped jumpstart budding American community initiatives and business opportunities that sufficient conventional funding did not reach. The practice reaches back to early community investors, including Benjamin Franklin. 

As a young man, Franklin borrowed money through friends to open his printing business in Philadelphia. Recognizing later in life that this foundational loan had been crucial to his future success, Franklin established in his will two revolving loan funds. He stipulated that the funds be lent to young tradesmen to help them start businesses. Borrowers’ repayments into the fund were recycled into new loans.  

Franklin realized people may lack a network of close contacts wealthy enough to invest in a new business. It’s a financial limitation that persists for many lower-income communities. 

“When a social entrepreneur has an idea, the first capital typically comes from friends and family. But in many poorer communities, that friend and family wealth often doesn’t exist,” said Otho Kerr, director of strategic partnerships and community impact investing at the New York Fed. “Social entrepreneurs and community development leaders need to know what other sources of capital are available. Banks and community foundations are part of it, but impact investment is an equally important tool for turning an idea into an enterprise that delivers results.” 

Finding new ways to draw in and supplement larger sources of conventional capital is increasingly important for community initiatives. These projects often rely on a complex combination of funding sources such as public program dollars, bank loans including those made under Community Reinvestment Act obligations, community development financial institution (CDFI) capital, and philanthropic grants. Such funds are limited and don’t flow to all communities and initiatives equally.

“There are these missing markets in the middle that commercial capital won’t touch, and traditional philanthropy is insufficient to deal with,” said Tracy Palandjian, chief executive officer and co-founder of Social Finance, a national nonprofit that has partnered with the New York Fed on impact investment convenings. “We’re trying to unlock a new supply of capital, because people need more forms of capital to make their initiatives work.” 

Taken together, the largest federal place-based programs that fund community development projects totaled $60.7 billion in 2024, before subsequent reductions in several of these federal programs. CDFI assets totaled $446 billion in 2025. Depending on a project’s location, state- and municipal-level programs can also provide modest public funding. These vital community development capital sources are subject to shifting policy priorities. Researchers find that demand and need consistently outstrip supply. 

Considerably more capital is parked in investments and endowments. In 2024, $68.9 trillion was invested in US capital markets, but community initiatives perceived to be financially risky may struggle to attract conventional private and public capital. Traditional investment managers have a fiduciary responsibility to secure a financial return on investment in the best interests of their clients and to avoid losses. The higher-risk, lower-return nature of some community development projects may not align with that requirement. 

Private US foundations held assets totaling $1.9 trillion in 2026. At least five percent of this capital must be dispersed through charitable expenditures, such as grants and donations. In many cases, the remaining 95 percent of foundation assets, known as the corpus, largely is invested in capital markets to sustain and grow the foundation’s endowment. While community development projects may secure some funding through a foundation’s grant allocations, such funding is limited relative to the corpus.

Impact investments often lie toward the center of a spectrum of capital, with philanthropy and public grants on one end and mainstream investments on the other. This spectrum spreads from concessionary capital, which requires no repayment or below-market-rate return on investment, to commercial capital, which expects a risk-relative return near or at market rate.  

“One of the biggest misunderstandings is that impact investing is replacing grantmaking,” said Kseniya Benderskaya, assistant vice president and community affairs officer at the Dallas Fed. “The idea is that these loans are happening side by side with healthy grant giving. In general, grantees understand that grant dollars can take you so far; you can do a lot of capacity building, piloting, and experimenting. But to get work to scale, you need dollars that are beyond that five percent.”

Two distinct types of impact capital, impact-first investing and catalytic capital, may be best positioned to help jumpstart a wide range of community projects. The two terms are sometimes used interchangeably, but the investment types have distinct aims: 

• Impact-first investments prioritize measurable social or environmental benefit over financial return. Investors accept concessionary returns and financial tradeoffs in exchange for greater social impact. Early impact-first investments can also help an initiative show that it is not as risky an investment opportunity as may be perceived, thereby attracting larger sources of more conventional capital. 
• Catalytic capital resembles impact-first investment, and the two types often overlap. But catalytic capital is explicitly intended to draw in larger, more risk-averse sources of funding. Investors of catalytic capital also consider it a way to establish and grow new markets that might not otherwise take hold. 

Impact-first capital can play an important role in a capital stack—the layered combination of funding sources many community development projects need.  

“There are times when a project might be able to access mainstream financing, but at a price that doesn’t enable the project to work,” said Bugg-Levine. “An impact investor can come in and either take higher risk or a lower rate that makes the overall capital stack work.”  

Because impact-first investment tolerates greater risk and is less focused on financial return, it often can sit in the junior layers of the capital stack. Securing capital to occupy that crucial, more loss-exposed position can help a community development project attract more risk-averse capital into the larger, senior layer. 

Community development financial institution (CDFI) capital often steps into a similar role in the stack to leverage larger funding sources. 

“CDFIs are important intermediaries in the impact investing ecosystem,” said Brian Walsh, founder and managing director at investment advisory firm Human Nature and a leading expert in impact investing and sustainable finance. “They are the capillaries, getting allocations from banks, philanthropists, and others to then deploy into communities.”

Impact-first funding isn’t a replacement for CDFI funding. There simply isn’t enough CDFI capital to meet the significant demand for it. Some impact-first investments flow through CDFIs deeply familiar with communities’ needs, growing the pool of money CDFIs can direct into promising, community-informed initiatives.  

“We believe that we could be a supplier of capital to CDFIs,” said Social Finance’s Palandjian. She added that her organization values CDFIs as key partners in identifying potential impact-first investment opportunities. 

Potential investors also seek stronger evidence of what impact means and concrete ways to quantify that impact through trackable, comparable results.  

“To make this market scale, we need data and insights about where there are investable opportunities, and reporting systems and clear norms,” Walsh said. “If we’re saying that impact investing is about intention to generate non-financial returns, how do we measure that easily? I think that’s a big piece of what’s holding it back.” 

In response to this demand for more consistent ways to standardize and measure impact, newer tools like IRIS+ and Impact Frontiers aim to provide investors and advisors with comparable definitions and metrics.   

The field also lacks a central clearinghouse of searchable impact-first investment opportunities.  

“One of the biggest challenges is that it’s a highly fragmented marketplace,” Bugg-Levine said. “I can’t send someone to a single place where they can type in all the details of their project and it spits out four of the highest potential leads. That makes it really hard for the people who have projects that need financing to find investors.”

Impact-first investing is still relatively new. Further establishing the field will require learning and skill-building opportunities for both investors and capital recipients. 

Hearing the call from community partners and funders for opportunities to share knowledge, ask questions, and develop new ways to put capital to use, the Federal Reserve is leveraging its convening power to bring stakeholders together.  

The New York Fed’s Making Missing Markets initiative convenes community development practitioners and investment innovators with the intention to redeploy capital where they believe it can more efficiently and sustainably address community needs. The theory is that proactively investing in affordable housing, early childhood education, and workforce development, for example, may help avoid the need for expensive solutions to crises of homelessness and unemployment later on. Impact-first investments are one vital tool to help shift capital toward upstream interventions, particularly those that are newer and yet untested.  

“It’s not that there aren’t already people investing in upstream, place-based work,” said the New York Fed’s Kerr. “In the Purpose Built Network, for example, community leaders are braiding resources and attracting philanthropic dollars. But we’re trying to uncover business models that can attract more private capital, in part to take the place of some of the public funding that has disappeared.” 

As part of the New York Fed’s initiative, 20 design teams are exploring potential challenge areas for investment, including community broadband access, rural development strategies, and building nonprofit capacity. Additional teams are strategizing around interventions in a selection of specific communities and identifying aligned capital sources with which to address them. 

At the Boston Fed, connecting communities with capital has been a focus for more than a decade, from the Working Cities Challenge to the 2016 Capital and Collaboration initiative. Today, the Bank’s Working Places initiative is pursuing a regional strategy to help larger, more diverse capital streams reach all of New England’s communities.  

 “In 2024, we mapped capital flows across all six New England states, and the picture was clear: philanthropic, impact investing, and federal dollars are largely bypassing our small cities and rural communities,” said the Boston Fed’s Joseph. “That’s not a reflection of the quality of ideas in those places. It’s a gap in the plumbing, and it’s one we think can be fixed.” 

In 2025, the Boston Fed hosted a regional convening and a series of virtual learning sessions to better understand the disconnection between communities and capital. This year, the team is launching a cohort-based model to work directly with communities on connecting their priorities to capital, starting with small business and housing. 

In Texas, the Dallas Fed hosted five “impact investing bootcamp” sessions to help Texas investors, CDFIs, and community organizations understand how these investments work. The team also conducted a landscape analysis of Texas impact investing gaps and opportunities. As in New England, the landscape scan found that smaller and more rural communities in Texas received comparatively little community development initiative funding. 

After the fifth training session, 18 funders expressed interest in establishing a statewide collaborative to help align and deploy investment capital to address community-defined needs. They created the Texas Impact Capital Alliance, which launched in summer 2026 as the 20^th statewide impact investing coalition in the country. The Dallas Fed serves as the Alliance’s research, learning, and convening partner. 

“Investors want to understand the economic development vision of these underserved communities and how funders can help support a whole pipeline of initiatives,” said Benderskaya.  

These explorations of community-informed investment opportunities focus on understanding regional interests and conditions, helping to ensure capital streams and investment outcomes align with what each community seeks. 

“Our investment strategies, processes, and procedures must be built around representation and the voice of the community,” said Avivar Capital’s Richter. “What do communities want? Who speaks for them? Who will steward the dollars once they’re invested in the community? Where will wealth accrue on these dollars invested, and how will we ensure that the communities our dollars hope to support aren’t displaced or undermined?”

Impact-first investing also has the potential to lift communities brimming with ideas for local economic growth but short on the funds to fuel them.  

“At the end of the day, communities need more capital to move their most innovative ideas forward,” said Joseph. “Advancing a single project is great. But if you start to understand impact investing as a tool, its use cases, and how it fits into your broader vision for where you want your community to go, you can demonstrate a track record and start buying down risk.”  

“Helping communities understand how to draw on all of these tools to invest in a different future and tell a different story about their value,” he said. “That’s the conversation we’re looking to have.”