A Recent Trend in LIHTC: Environmental, Social and Governance Investing

At the 2023 Professional Executive Development (IPED) Conference, panelists Emily McKinney, partner at Nixon Peabody LLP, Maurice Coleman, senior VP at Bank of America, Matt Barcello, managing director at CohnReznick LLP, and Justin Rotundo, vice president at R4 Capital LLC, sat down to discuss the status of the tax credit equity market in 2023 and beyond. One of the major topics included recent trends in the Low-Income Housing Tax Credit industry. 

Over the last several years, capital flows into ESG-focused investments have rapidly increased. This is a trend that was accelerated by the pandemic, as well as the rising social injustice and civil unrest that has been brought to light over the last few years. This has brought more attention to socially conscious investing from both domestic and foreign investors, especially in the affordable housing industry. Let’s take a dive into what ESG, environmental, social and governance, is all about. 

At its core, ESG is about doing business responsibly and promoting ethical policies, practices and behaviors that address a wide range of topics, such as sustainability, diversity and equity and inclusion.  ESG is about taking actions that investors or stakeholders find admirable and want to support. 

Environmentally, investors are examining the investee’s efforts on reducing its carbon footprint.  A focus on sustainability can drive down operating costs through installation of drought tolerant landscaping, low flow toilets and grey water systems, LED lighting, motion lighting, smart HVAC thermostats and solar panels to reduce utility costs. 

Socially, investors are looking for investments that include an increased push for activities and programs offered to residents and partnerships with community organizations.  Investors are also assessing the investee’s impacts on other social issues such as access to healthy housing, food and water, income equality, racial and gender equity and much more. Recently, Bank of America and Enterprise Community Partners developed an Equitable Path Forward Fund to help facilitate racial equality in affordable housing real estate development by increasing access to LIHTC equity and debt financing for Black, Indigenous People of Color (BIPOC) Developers.  This initiative is designed to create sustainable, intergenerational wealth amongst BIPOC for-profit developers while having a positive, transformational impact on low-and moderate-income communities. 

Governance, the “g” in ESG, concerns standards and recommended practices for operating a company, including business ethics, risk management and assessing the purpose of an organization and how it impacts society. 

For banks, investing in low-and moderate-income communities is the most important factor due to the Community Reinvestment Act Credit (CRA). The most important factor for nontraditional investors is ESG.  The two are not in conflict.  The primary goal of ESG investing is to invest in low-and moderate-income communities because they also see it as an opportunity to increase community development tax incentives. Although ESG initiatives are just getting started, growing investor appetite for ESG investing is driving changes to the lower tier investments, directly impacting LIHTC developments across the country. 

As ESG investments increase, companies’ performance in these areas is becoming a predominant factor in determining where investors decide to place capital. The need to track, measure and report on performance growth, and it is expected that industry groups are working toward standard measurements that could be implemented in the next two years.