Investing

Community Foundations: What It Takes to Become Dynamic Hubs of Local Capital

February 24, 2014

by Don Shaffer

Community foundations—with their deep local ties, significant assets, and community benefit missions—are ideally positioned to play a leading role in solving our communities’ most profound and difficult challenges. Yet many are stuck in a pattern of disbursing only a small percentage of their assets in grants and investing the rest in traditional portfolios that don’t advance (and may even undermine) their mission.

What is preventing these anchor institutions from realizing their potential? What exactly is that potential, and how can community foundations shift to an impact investment strategy that really makes a difference to community success and resilience?

RSF is taking a hard look at these questions. We recently brought together senior executives from 24 of the most innovative community foundations in the U.S. and Canada, along with RSF advisors and other impact investment experts, for “A Field-building Collaborative: Changing the Game through Local Impact Investing,” a conference looking at barriers to place-based investing and how to overcome them, lessons learned, and drivers of change.

The imperative of impact investing

We were pleased that the Jan. 29–31 event, co-hosted with the Arizona Community Foundation in Phoenix, attracted so many community foundation leaders from across the country, representing rural as well as urban communities and holding assets totaling more than $5.5 billion. But we weren’t surprised: a powerful combination of generational change and aspiration is motivating community foundations to explore local impact investment strategies. Foundation leaders are searching for ways to stay relevant to the next generation of donors, who tend to take a hands-on approach and often are entrepreneurs who made their money by thinking big and taking risks. These leaders also aspire to make their institutions drivers of local economic health. They see the opportunity to become dynamic hubs of community capital, deploying a full range of low-interest loans, loan guarantees, convertible notes, and other forms of investment funding to social enterprises.

Kelly Ryan is on her way to doing that in central Wisconsin as CEO of the Incourage Community Foundation. She told the story of how her community lost 40 percent of its jobs overnight when their major employer moved overseas. The foundation rallied, changing its focus to creating jobs and supporting local businesses, essentially saying, “We’re going to be the institution that brings everyone out of the ashes.”

All community foundations have that opportunity right now. The questions we started exploring with “Changing the Game” are, is it possible to make that happen before reaching the tipping point of a massive crisis? And if so, how?

Identifying roadblocks

The motivations and opportunities to invest for local impact are powerful—but so are the countervailing forces. Foundation leaders who take steps toward changing their institution’s investment practices confront a thicket of challenges. Two sets of issues stood out in the presentations and discussions.

Culture. The cultural assumptions of boards, investment committees, investment advisors and even staffs can present significant roadblocks. RSF advisor John Fullerton captured the problem: the people serving on investment committees often have spent their careers living and breathing current models of portfolio theory and investment management. They’re focused on fiduciary responsibility, and in their minds that means making sure the money makes more money—not ensuring that investment has a positive impact on the community. It’s hard to convince a board member who spent their career on Wall Street that financial return is not the number one goal.

Capacity constraints. Most community foundations don’t have the staff expertise to evaluate and manage direct investment in local enterprises, or to develop a cohesive local investment strategy. Even hiring appropriate consultants can be a challenge. Impact investing is relatively new, so the pool of experts is not yet deep. Another challenge is tension between programming and investment—the program staff may feel that impact investments are invading their turf. In addition, the lack of history with direct investment means the opportunities may not be obvious to foundation staff.

Creating space for impact investing to grow

Discussions at the event revealed a big gap between the desire many have to pursue impact investing (“Why wouldn’t we want to do this?” was a commonly expressed sentiment) and the knowledge they need to actually do it. RSF advisors and foundation leaders who’ve started down the path shared suggestions for moving forward.

Work with the board to change investment culture. Private foundations are often created with one large gift that’s expected to last; they are risk-averse and focused on returns because they want to ensure perpetuity. Community foundations, however, are public institutions whose growth and success rest on the number of donors they can continue to attract over time; they should be free to focus on demonstrating their relevance to the community and attracting the next generation of donors. There’s no structural reason for them to be risk-averse and returns-focused—the fact that many are is often a result of board culture.

Brian Byrnes of Santa Fe Community Foundation encountered tremendous board resistance to a shift in investment strategy; to counter that he took the board through an analysis that revealed their level of investment in areas contrary to their mission. Byrnes said the exercise was a powerful force in opening minds. Kelly Ryan reconstituted her board at Incourage so that they could implement a community investment strategy as a central feature of their mission.

Redirect investment expenses. One of the most eye-opening moments for many participants was RSF advisor Leslie Christian’s “do the math” challenge. “How many of you are experiencing a roadblock in that your boards think impact investing is too expensive?” she asked. Hands shot up all over the room. She then did the math: a $100 million foundation paying a typical 0.8 percent fee to its investment advisor is spending $800,000 a year to maintain its portfolio. What if the foundation fired the investment manager and instead put all that money into a Vanguard index fund, which historically has long-term returns as good as or better than investment managers? With a typical mutual fund fee of 0.08 percent, they’d free up $720,000 they could use to hire impact investment experts.

Restructure your organization. Dana Pancrazi of the FB Heron Foundation put forward a structural solution to internal turf battles and mission conflicts: the foundation dissolved its grantmaking and investment teams, replacing them with an operations team that provides administration and support, and a capital deployment team that handles grants and investments—and treats both as 100 percent mission driven.

Pioneers wanted

A few foundations have already made great progress on local impact investing, but it hasn’t been easy—and it won’t be for the next wave of pioneers, either. In addition to inspiring stories, we also heard “it’s not all rainbows and unicorns.” At RSF, we know how hard this is, having spent the last 30 years building up the expertise and insight to invest for impact effectively. There will be failed investments and difficult expectation setting. But as entrepreneurs know, failures teach the lessons that lead to ultimate success. Why not give the non-profit sector the same opportunity to use investments to try out innovative solutions to our communities’ most pressing problems?

We’re hoping to spark this change by inviting the most committed community foundation leaders to join a community of practice that will go deeper into what it takes in terms of personal leadership to shift to impact investing. The group will provide peer support and share everything from in-progress case studies to best practices to credit memos.

We believe the opportunity for change is profound. If a relative handful of community foundations reinvented themselves right now, they could truly change the game for communities across the country.

Don Shaffer is President & CEO at RSF Social Finance

Community foundations conference attendees.

Community foundations conference attendees.

RSF Video: Relationship Matters

January 9, 2014

RSF is transforming the way the world works with money by building relationships within our financial transactions. Our quarterly pricing meetings are a great example of what that process can look like. Each calendar quarter, RSF resets the interest rates for investors and borrowers in the Social Investment Fund community. In keeping with our values of interdependence, trust, and community, we invite our investors and borrowers to take part in a facilitated discussion with RSF staff to help determine what rates will best meet the needs of all stakeholders.

Watch this video, from our September 2013 pricing meeting held in Philadelphia. Learn why relationship matters for borrower – Common Market Philadelphia, and investor – Irma Jennings.

RSF Links Socially-Conscious Borrowers, Investors

December 18, 2013

RSF was recently featured in an article in the The Press-Democrat. Author Cathy Bussewitz interviewed Don Shaffer, President & CEO, and other attendees of the recent Pricing Meeting in Santa Rosa, CA.

It was a strange place for a meeting about interest rates.

On a cold night at the Summerfield Waldorf School in Santa Rosa, while a crowd mingled in the school auditorium munching on locally made hors d’oeuvres under the warm lights of a Christmas tree, a group of borrowers and investors hashed out specifics on the details of their loans.

The event was held by RSF Social Finance, a San Francisco-based nonprofit that provides loans and investment opportunities to socially-conscious enterprises. It was part of RSF’s attempt to make finance more transparent, by bringing borrowers and lenders together in one room.

“Our stated mission is to transform the way the world works with money, and the way we look at it is one relationship at a time,” said Don Shaffer, president and CEO of RSF.

Press-Dem image

Esmerelda Arreola packages tea displays of Guayaki yerba mate at its Sebastopol facility. (John Burgess/ Press Democrat)

“The way I describe our financial system today is as complex, opaque and anonymous, based on short-term outcomes,” Shaffer said. “And what we try to do at RSF is to model financial transactions that are direct, transparent and personal, based on long-term relationships.”

To accomplish that goal, RSF creates an unusual opportunity for the borrowers — companies like Sebastopol beverage maker Guayaki — to meet with investors. In the gatherings, known as “pricing meetings,” the borrowers explain how they’ve been spending their money and how a change to their interest rate would impact their bottom line. Investors have a chance to meet the entities they’re helping to develop, and they also get a chance to chime in on what a change to the interest rate would do for their financial outlook.

“The pricing meetings are so powerful,” said Susanne Karch, owner of Estate Services, based in San Rafael, who has invested about $17,000 in RSF. “After those meetings, I always go home and write another check.”

Read the full article here

 

Remaking the Food System

September 30, 2013

Originally published in Stanford Social Innovation Review

Don Shaffer - DefaultBy Don Shaffer

The food system, and how to fix it or rebuild it, was a hot topic at the recent Social Capital Markets (SOCAP) conference—for good reason. Many of us in the social enterprise sector—investors, entrepreneurs, philanthropists—see the need for an alternative food system that dramatically expands access to fresh food and supports sustainable local food production, and that ultimately helps create more resilient communities. For that to happen, we need to get outside our comfort zones and work together. Collaboration between philanthropists and investors in particular is essential to building an alternative food system.

That’s true both because the challenge is so formidable and because alternative food enterprises by their nature call for a fresh approach to funding. Remaking the food system requires remaking the supply chain, including production, processing, and distribution. Specifically, we need to provide small growers with access to affordable land closer to metropolitan areas; train more people to run farms effectively as businesses; build an infrastructure that enables farmers to sell more food directly and makes it easy for larger institutions to buy regionally produced food; and develop distribution channels that make fresh food a convenient, affordable option for everyone. And while our own expertise is in the United States, similar needs apply worldwide.

It helps that food is a hot investment area in Silicon Valley, especially on the distribution end, where scalable online distribution businesses are attracting substantial capital. But many of the enterprises needed to support an alternative food system simply don’t fit into the traditional venture capital model. They often have high upfront costs and relatively low profit margins—they don’t have hockey-stick growth prospects.

Click here to read the full story

Don Shaffer is President & CEO at RSF Social Finance

Moving Social Finance Forward: An Interview with Ted Levinson

September 12, 2013

Ted Levinson, Director of Lending, RSF Social Finance

Ted Levinson, Director of Lending, RSF Social Finance

Originally published on Social Velocity

Interview by Nell Edgington

Nell: RSF Social Finance is really the leader in the social finance market, you’ve been doing this long before anyone started talking about a “social capital marketplace.” Given that long history, how do you view the current state of the social capital market? Are we where we need to be to funnel enough and the right kinds of capital to social change efforts? And if not, how do we get there?

Ted: RSF has a twenty-nine year operating history, but it’s still early days for the field of social finance. The industry is at the same stage of development as natural food stores were thirty years ago – we’re established, we’re growing, we’re doing good work, and yet we’re still considered a fringe movement. I believe we are on the cusp of mainstream acceptance which will mean a much broader audience of impact investors (especially young people and unaccredited investors) and far greater demand for social capital from the growing number of social enterprises that are just now becoming investment-ready.

There’s been a shift in society’s view of natural food stores – we’ve overcome our fear of the bulk bins and now all grocery stores look more like natural food stores. I expect the same thing to happen with our conventional financial institutions which are just now beginning to pay attention to social finance.

What the field really needs is to expand the financial products available to social enterprises and address some of the existing gaps. Frustrated social entrepreneurs may disagree, but I think the angel capital and large-scale venture capital spaces are meeting the needs of for-profits. Incubators, business plan competitions and seed funds are providing modest amounts of funding to emerging non-profits and for-profits. RSF and some of our friends including Nonprofit Finance Fund, Calvert and New Resource Bank are addressing the middle market market.

The big voids in social finance include:

  • True “risk capital” for non-profit social enterprises. We need more foundations willing to place bets on high-potential organizations.
  • Bigger finance players or (better yet) a more robust consortium of social finance organizations that can band together to meet the $5 million + needs of high growth social enterprises such as Evergreen Lodge, Playworks and other organizations that are reaching scale.

I believe the field will get there but we’re playing “catch-up” now and social entrepreneurs are an impatient bunch.

Nell: RSF does something pretty revolutionary in that you combine philanthropic giving with impact investing, whereas these two sides of the social capital marketplace have not yet really found a way to work together in any large scale or significant way. Why do you think that is? And what needs to change in order to encourage foundations and impact investors to work more closely together?

Ted: We call our approach of combining debt and philanthropic dollars “integrated capital,” and we think it’s going to have a profound effect on impact investors, philanthropists and the social enterprises it serves.

Most non-profit social enterprises rely on a combination of earned revenue and gift money. There’s no reason why a single transaction can’t bridge these two forms of capital. With integrated capital we can leverage philanthropic grants or loan guarantees to push high-impact loan prospects from the “just barely declined” category into the “approved” category. In fact, even some for-profit social enterprises are eligible for this. Our loan to EcoScraps – a fast-growing, national, composting business was made possible by a foundation that shared in some of RSF’s risk.

Integrated capital is possible because RSF works with individuals and foundations that have overcome the prevailing view that how you invest your money and how you give are distinct activities. We’re also fortunate to work with an enlightened bunch of people who recognize that philanthropic support for social enterprises isn’t a crutch or a sign of a failed enterprise.

Our work at RSF is driven by a belief that money ought to serve the highest intentions of the human spirit. Conscientiously investing money, giving money and spending money can all further this goal.

Click here to read the full interview

Ted Levinson is Director of Lending at RSF Social Finance

Nell Edgington is President of Social Velocity, a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively.

Off-the-Grid Investing: Perspectives and Voices of a Transforming Financial System

September 6, 2013

Don-ShafferOriginally published in Green Money Journal

by Don Shaffer

When you are looking for the new or emergent, you usually have to look off-the-grid. In many ways as RSF Social Finance has grown, we too have had to go off-the-grid to develop our unique approach to finance.

In 1984, a school burned down in New Hampshire. RSF organized a group of investors to rebuild it. Since then, we have made over $275 million in direct loans to social enterprises. Our track record has been excellent, with just 2 percent in cumulative loan losses over 29 years, and a 100 percent repayment rate to investors.

The key: bringing investors and borrowers closer together. We have found that if the individual investors who are providing capital and the social entrepreneurs who are borrowing capital can be more visible to each other – if they can understand each others’ needs and intentions, and sustain a personal connection whenever possible – then risk decreases and fulfillment increases.

Participants in a transaction become participants in a relationship. We believe this is nothing less than the antidote to modern finance, and can be applied on a substantial scale. It is the opposite of high frequency trading.

Specifically, four years ago RSF adopted a new approach to loan pricing for our $100 million flagship senior-debt fund. Each quarter, we convene representatives from our staff, our investors, and our borrowers to decide what annualized return rate investors will receive the following quarter, and what interest rate borrowers will pay – a radical form of transparency.

We call it community-based pricing. The response from participants has been overwhelmingly positive – and our interest rate, referred to as RSF Prime, has been very stable. We are now off-the-grid of the global financial interest rate system and no longer directly affected by the vagaries of Wall Street.

But of course the vast majority of all 401(k) programs, pension funds, and endowments are tethered to Wall Street, so it is naïve to believe we are fully off-the-grid.

This circumstance leads to questions many of us in the social finance field think about:

  • What is it going to take for the number of socially and environmentally-focused investors to grow substantially?
  • Can it happen fast enough for those of us who acknowledge the urgency of climate change and natural resource depletion?
  • Are there enough sound investment opportunities for investors who want to go off-the-grid?
  • How will we address the perennial issues of risk, return, and liquidity when there are so few established intermediaries in which to place funds?
  • What are the long-term implications for those of us who anticipate needing funds for retirement and who want to embrace off-the-grid investing?

Click here to read the full story

Don Shaffer is President & CEO at RSF Social Finance

RSF Pricing Meeting: Resetting Rates, Recognizing Interdependence

July 8, 2013

by Jillian McCoy

Inspiration

For many years, we based our investors’ return rate on the 13-week U.S. Treasury Bill.  Each quarter we recalibrated the rate based on this well-publicized benchmark.  In 2006, we shifted to a different benchmark – LIBOR, or the London Interbank Offered Rate – which at the time represented the most commonly accepted barometer for short-term interest rates worldwide.

In 2009, well before the now notorious LIBOR scandal, RSF staff knew that a seemingly arbitrary rate, disconnected from the needs and activities of our community, was not a right fit. During a staff study group of Rudolf Steiner’s lectures on economics, we realized that the community of participants in the RSF Social Investment Fund were best suited to accurately determine a price that meets the needs of all parties.

Innovation

As of October 1, 2009, RSF adopted a community determined rate recommended each quarter through collaborative conversation with representatives of all three stakeholders in the RSF Social Investment Fund – investors, borrowers, and RSF staff.  A 4% spread (used to fund RSF’s operations) is then added to this customized SIF rate to determine RSF Prime, the base rate for borrowers in our Social Enterprise Lending program.

This collaborative process begins at each of our quarterly Pricing Meetings where stakeholders gather to meet one another face-to-face, discuss their needs and intentions, and share how an increase or decrease in the rate might impact them.

To date, we remain the first and only lending institution that has facilitated meetings between investors and borrowers to determine loan pricing.  With RSF staff at the table facilitating the conversations, all three stakeholders are reminded of the impact of their financial decisions. In this environment of direct engagement, the conversation is elevated beyond efforts to pay as little as possible or earn as much as possible. Instead, the stakeholders seek to achieve a balance between the financial and impact needs of everyone present.

Over 100 guests joined us for a community reception following our most recent pricing meeting in San Francisco.

Over 100 guests joined us for a community reception following our most recent pricing meeting in San Francisco.

Impact

In 2012, RSF Prime decreased by 0.25% to 4.75%. This was the first decrease since RSF Prime was first established. Since 2012, the rate has dropped an additional 0.25%. The driver behind the decrease was to ease some of the financial burden of existing borrowers and increase RSF’s ability to attract new borrowers.

Perhaps not surprisingly, at our most recent pricing meeting in San Francisco, there were requests from the investor community to increase the rate. However, over the course of the evening, their understanding of the impact of the interest rate shifted from their natural self-interest to an understanding of the whole system.

As one RSF staff member who attended the meeting commented, “One of the significant moments came when one of the borrowers talked exactly about how an increase in the interest rate would affect her company financially, and prohibit them from making a key hire at a time when her company needs additional staff to support growth. Investors could see in no uncertain terms the consequences of their stated need for a higher return. The resulting recognition of how their interest was directly connected to the borrowers was a transformative moment.”

In fact, although most of the investors noted that they would like an increase in the interest rate, they decided not to recommend an increase after learning how it would negatively impact the borrowers. At one point, one investor became emotional while expressing just how much it meant to her to be a part of this community, and learn more about how each borrower is having a positive impact in the world.

The borrowers were also touched by the conversation. One participant reflected, “It is thrilling to be a participant in the avant-garde of social finance. The current system is broken and we applaud this process where a more sensible and holistic paradigm can be practiced.”

Before the close of any quarter the RSF Pricing Committee, an internal RSF team, meets to discuss and reset the interest rate. The committee considers the input from the Pricing Meeting attendees in addition to reviewing macroeconomic conditions and the competitive market. The committee determined that the interest rate will remain the same for Q3 2013 – 4.5% for RSF Prime and 0.50% for investors.

Jillian McCoy is Senior Associate, Communications at RSF Social Finance. 

7 Tips for Social Enterprises Looking to Raise Capital

July 2, 2013

Originally published on The Huffington Post

Don Shaffer - Defaultby Don Shaffer

Raising growth capital is a challenge for most businesses, but social enterprises face an extra hurdle–they have to show how they’re going to maximize their positive impact and demonstrate the qualities investors generally look for, including a strong management team, a unique approach to the market or problem, and growth potential.

What does it take to succeed? Based on my experience as an entrepreneur and now a social enterprise funder, these seven strategies–a mix of fundamental business building and savvy approaches to fundraising–will put your enterprise in the best position to get the capital it needs to realize its vision.

1. Build a stellar management team. Just as real estate is about location, location, location, raising money is about management team, management team, management team. The first question funders have is “Who is running the business and what do they bring to the party?” Do a ruthless assessment as early as possible. And if you have a gap, say so. Don’t force funders to hunt for weaknesses in your organization–it makes you look bad.

I recently met with a potential borrower that gave us no information about the management team other than their names. They have a couple million dollars in revenue and it’s a pretty complex business for the size–and they botched their financials to us. The business was a perfect fit for us, but it made us nervous that they not only didn’t seem to have a finance person, but also didn’t seem to understand that it was a problem.

2. Ditch the 70-page business plan binder. Funders don’t want to plow through that, and they won’t. Go with a one-pager that focuses on the top questions on the funder’s mind: Are you addressing a real problem? What’s unique about your business? Why you? Is this a growth business or a lifestyle business?

3. Have a practical plan as well as an inspiring vision. This applies to impact growth as well as financial growth. What’s your story about how you’re going to get from where you are now to the next level? Be realistic: if all your graphs zoom up to the right as sharply as possible, a serious funder will think you don’t have a prayer.

4. Seek the right kind of funding for your goals. Social entrepreneurs often buy into the culture of venture capital–they position their enterprise as a growth business, look for a miracle angel investor and start giving away equity. They’re not thinking about how the investor gets their money back. Consider at the beginning what you ultimately want to do. Are you planning to sell this business? Do you see this as a legacy business that you’re building to last?

A long-term, slow-growth plan won’t destroy your chances for funding; you’ll just need to look at different kinds of funding. At RSF Social Finance, for example, we don’t need borrowers to be a rocket ship, as long as they can steadily pay off debt.

5. Search out specialist funders. Dedicated social enterprise funders typically specialize in one or a few areas where they have a passionate commitment and deep knowledge. Look for funders that focus on your sweet spot–they’ll have a better understanding of the market opportunity, and won’t expect your business to compromise its mission in order to grow.

6. Ask for advice–sincerely. Brazenly pitching everyone you meet like a madman is likely to annoy people. Figure out what value you can bring to a discussion, and ask funders for advice. People love to give advice. But as in dating, don’t be desperate. If you’re only pretending to earnestly want advice because you’ve heard this tip, people will see through that.

7. Show that you can go the distance. A funder wants to understand not only why your business is needed and why you’re the one to build it, but also your level of stick-to-itiveness. You could be brawling with your partner and lots of things are going to be a disaster– the point is to tell the funder a couple of things that demonstrate how resilient and determined you are.

Don Shaffer is President & CEO at RSF Social Finance.

 

Good Morning, Beautiful Business

June 26, 2013

This essay was originally published in the Spring 2013 RSF Quarterly.

Judy Wicks Headshotby Judy Wicks

Not long after I opened the White Dog Cafe in Philadelphia in 1983, I hung a sign in my bedroom closet in my home above the shop – right where I would see it each morning. “Good morning, beautiful business,” it read, reminding me daily of just how beautiful business can be when we put our creativity, care, and energy into producing a product or service that addresses our community needs. I would often think of my own business, and how the farmers were already out in the fields harvesting fresh organic fruits and vegetables to bring into the restaurant that day. Business, I learned, is about relationships—relationships with everyone we buy from, sell to, and work with, and our relationship with Earth itself. My business was the way I expressed my love of life, and that’s what made it a thing of beauty.

My new memoir Good Morning, Beautiful Business: the Unexpected Journey of an Activist Entrepreneur and Local Economy Pioneer follows my evolution from a little girl who rebelled against playing with dolls and learning to cook, to a businesswoman who fully embraced her feminine energy to help build a new economy—one based on caring and sharing.  A key turning point in my evolution came when I moved from being a competitive businessperson to a cooperative one.

This story begins when I learned about the cruel and unhealthy treatment of pigs in the industrial system, where sows are crammed into small crates in windowless factories for their entire lives.  I was aghast that the pork I was serving at the White Dog must come from this barbaric system, as most of the pork in our country does.  The next day, I went into the kitchen and announced, “Take all the pork off the menu. Take off the bacon, the ham, and the pork chops. We cannot serve pork again until we find a humane source.” Our chef asked farmer Glenn Brendle, who was bringing in free-range chicken and eggs, if he knew a place that raised pigs in the traditional way.  It wasn’t long before he was bringing us two pigs a week.

Next I discovered the plight of the cow—herbivores confined in barns and crowded feedlots and fed subsidized grain. So we found a local source for grass-fed beef and dairy. After much work on our chef’s part to find humane sources for all our animal products, I looked at our menus and thought, At last! We’ve done it! All of our meat, poultry, eggs, milk, yogurt, and cheese come from farmers who treat animals kindly. No product comes from the industrial system of factory farms. And we were the only restaurant in town that could make this claim. So this was our market niche. Our competitive advantage!

Then my transformational moment came. I said to myself: Judy, if you really do care about the pigs and other farm animals that are treated so cruelly; the small farmers who are being driven out of business by factory farms; the environment that’s being polluted by the concentration of waste and unhealthy practices; the workers in these ghastly slaughterhouses and factories; the rural communities that are being destroyed; and the consumers who eat meat that’s full of antibiotics and hormones, then rather than keep this as your competitive advantage, you should share your knowledge with your competitors.

Up until this point I had always felt that my highest calling was to model socially responsible practices within my company, but it was no longer enough. After all, there is no such thing as one sustainable business, no matter how great our practices are, we can only be a part of a sustainable system. I had to move from a competitive mentality to one of cooperation in order to build that system—an entire local food system based on the values I upheld.

I was ready to roll. We needed to expand the small network of local farmers supplying the White Dog to a much larger network of farmers supplying as many restaurants and retail markets as possible. I asked farmer Glenn if he would like to expand his business.

“Yes,” he replied.
“What’s holding you back?”
“I need thirty thousand dollars to buy a refrigerated truck so I can deliver to more restaurants.” I loaned Glenn the thirty thousand dollars, and he bought the truck.

It takes a lot of capital to build a new economy. The type of low-interest loan I made to farmer Glenn for his refrigerated delivery truck is needed across the country. Yet most people, even those who want to bring social change and see the need for a more nurturing economy, invest their savings in the stock market where it perpetuates the old exploitive economy. My own experience in learning how to invest differently began in 1999 when I suddenly became a stockholder. After my mother passed away, I inherited a stock portfolio comprised of holdings first purchased by my grandfather and kept in the family for over fifty years. I wasn’t quite sure what to do with it all.

At first I hired a broker to trade my stock for what was considered “socially responsible investing,” a concept where stock is “screened” to eliminate companies involved with such things as weapons, tobacco, and animal testing. But when I looked at my new portfolio, I was shocked to see Wal-Mart, a company known to destroy local economies and underpay its workers. How could I support such a company—even if it had passed through the screens created by brokers for socially responsible investing?

That’s when I realized that I did not want to participate in the stock market at all. These are single-bottom-line companies, who by law are directed toward maximizing profit for stockholders above the interest of other people and our planet. Instead, I wanted to invest in companies that passed through a different screen, one that could filter out all companies who are not independently owned and triple bottom line.

So in 2000 I sold all my stock. That’s when I first became an investor in RSF Social Finance and a local investment vehicle called The Reinvestment Fund (TRF), where I knew my money would be used to build the economy I envisioned. To the surprise of my investment-savvy friends, over the long term my investments at RSF and TRF outperformed their stock market returns.

When I discovered that the wind turbines bringing renewable electricity to Philadelphia were capitalized by TRF, I coined the term living return. The return on my investment was not only paid in dollars, but by the benefit of living in a healthier community. I began receiving a living return, and with it the happiness and satisfaction of knowing where my money was—doing good right in my community.

Naturally, I also saw living returns from direct investment in my supply chain. My loan to farmer Glenn improved my menu and supported local sustainable farming.  I made another supply chain investment in my coffee source helping Zapatista revolutionaries in Mexico export organic fair trade coffee.  Previously, the growers were forced to sell to local representatives of giant coffee corporations for such a low price that it kept them in poverty. After learning of the violence and oppression waged against the indigenous people of Mexico, I organized a group of coffee importers and investors to assist the pro-democracy struggle by developing direct fair trade routes between an indigenous cooperative and two coffee importers in the U.S.  A fellow investor and I each made a $20,000 low interest loan to the two U.S. fair trade importers who then pre-paid the cooperative so they had enough money to buy the coffee from their members.  Once the coffee was shipped to the importer and sold to coffee roasters around the country, my loan was repaid. After the second year’s loan, the indigenous cooperative had enough capital to pay their members for their coffee without a pre-payment from the importers.  Again the pay-off for me for investing in my supply chain was not only financial but in having access to organic fair-trade coffee grown by people I knew and trusted.  And, importantly, it was also an experience that helped me envision a new global economy—one comprised of a network of local economies self-reliant in basic needs and connected by fair trade.

Building a new economy, I came to realize, rests on a simple quality: our capacity to care—followed by our willingness to do what is necessary to defend and nurture what it is that we truly care about. Change begins in the heart of the entrepreneur. And for that matter, the hearts of the investor and consumer as well. It’s the power of love and compassion that can bring transformative change and build an economy that is prosperous and strong, yet one where loving relationships matter more than profits.

Judy Wicks is an entrepreneur, author, speaker, and mentor working to build a more compassionate, environmentally sustainable, and locally based economy. In working toward this vision she founded Fair Food, the Sustainable Business Network of Greater Philadelphia, and co-founded the Business Alliance for Local Living Economies, BALLE.  As an entrepreneur, Judy is best known for Philadelphia’s landmark White Dog Cafe, which gained national recognition for community engagement, environmental stewardship, and responsible business practices. With Chelsea Green Publishing, Judy recently published Good Morning, Beautiful Business (from which this essay was adapted). For more information or to purchase a copy of the book, please visit www.judywicks.com.

Impact Investing: The Challenge of Job Creation

June 14, 2013

This is the third post in a series by Morgan Simon on the trends, challenges and opportunities of impact investment, focusing on an exploration of the mechanisms which allow affected communities to lead and shape investments.

What is impact investment? This might be the most important, and simultaneously, most overplayed question of our industry. Forgive me for repeating it; however, it is critical we return to the conversation to consider how communities can better engage in, and benefit from, impact investment.

What should count or not count, and who gets to make that decision? What types of activities deserve subsidized capital in a capital-constrained universe, and which financial institutions should receive your investment dollars? So far, impact investment has been largely defined by investors themselves—the Global Impact Investment Network (GIIN) has put out a general definition, “the intention to generate measurable social and environmental impact alongside a financial return.”  There exists a myriad of investment activities that attempt to generate such impact and return.

One of the primary impact investment activities pursued has been job creation to address worldwide poverty. The World Bank estimates we will need 600 million jobs by 2020 to keep up with population growth globally—and 200 million of these jobs will be needed in developing economies.[i] Small and Growing Businesses (SGBs) , the preferred instrument of impact investors to encourage job creation after microfinance, have been shown to be critically linked to GDP growth and overall poverty reduction in developing countries.[ii]

SGB growth is therefore supposed to help poor people through two mechanisms—it creates jobs, which provide much-needed income, and it encourages GDP growth, which, in theory, supports the overall economic health of a country and reduces poverty.

These arguments have a few fatal flaws that need to be addressed before we can wholeheartedly support job creation as a strategy for global poverty reduction:

  1. We live on a planet of finite resources. By design, GDP cannot grow infinitely.  While in the short-term it’s nice to show impact investors graphs that trend up, you can’t rely on short-term fixes for long-term global solutions. This is particularly important for those of us with a regional agenda, given that one country’s success may mean another’s ruin in the context of a global race to the bottom on wages and environmental standards. It’s imperative that people focused on poverty reduction rethink GDP as a benchmark. It simply doesn’t take in to account all of the variables for truly positive social and environmental impact.

  2. GDP and poverty reduction might grow in tandem; but evidence is inconclusive on its correlation to inequality. Certainly, there are many examples of countries like India and Brazil, whose miraculous growth in GDP did not change the fact that they are ravaged by inequality and host the greatest number of poor people in the world.To take the extreme case, the US has the highest GDP in the world—and in 2012, the top 1% of the US population received 93% of the income growth. Often, SGB development is ultimately an attempt to replicate the US model of a free-market economy internationally. Should we promote a model that enables such extreme inequalities? As one International Money Fund economist commented recently in the New York Times, “When a handful of yachts become ocean liners while the rest remain lowly canoes, something is seriously amiss.”[iii] Indeed, focusing on job creation without an equal focus on equality just reinforces this dichotomy.

  3. Most importantly, poverty is not caused by a lack of jobs; it’s primarily due to the proliferation of low-paying jobs.  Gary S. Fields provides several striking statistics in the great book Working Hard, Working Poor. He notes that globally, 85% of the poor are in fact working.  The International Labour Organization defines a “working poor household” as one in which at least one member is working but the household lives on less than $2 per person per day. The working poor constitute 39% of total employment in the world, and 80% of total employment in South Asia and Sub-Saharan Africa.[iv] Millenium Development Goal data for 2011 shows that 61.2% of people in developing regions were working—and that 18.2% of those working people were still earning less than $1.25 a day, with percentages as high as 38% of workers in sub-Saharan Africa and 35% in South-Eastern Asia.

    Is this employed person better off than his self-employed, equally poor counterpart? Or does he run a higher risk of income uncertainty given that he’s more likely to be an economic migrant with limited access to productive means such as land? I will leave this question to the statisticians, but let’s just assume for the sake of argument that living under $2a day is quite challenging whether you have been paid that $2 or generated it yourself. And I would assume that in both scenarios, your opportunities for advancement are minimal. To borrow a phrase from Fields, indeed, we don’t have a global unemployment problem—we have a global employment problem; in that the jobs we create are precisely what are keeping people poor.

    This is why organizations like the Aspen Network of Development Entrepreneurs have put an emphasis on defining “quality” jobs—and others argue that we should not focus on jobs at all. Recently I sat on a panel with indigenous leader Winona LaDuke—who shared with us, “Lots of people come to the res[ervation] to talk about job development. We don’t want FTEs. We don’t want to leave the res to work for Walmart. We want the preservation of our historic ways of generating our livelihood.”

  4. Employment and assets are very different and critically important. Assets (items of ownership convertible into cash) are based on a variety of factors beyond employment, such as inheritance, home ownership, and education.[v]  While a job may provide a short-term income boost to a household, it would take generations to make up for the asset short-fall that family is facing. Furthermore, assets are better indicators of inequality, including limits to economic, social, and political mobility. For example, the average wage for an African American man in the US is 25% percent lower than their Caucasian counterpart—but the more frightening statistic is that African American families in the US have twenty times less assets than Causasian families. So while a job may provide a short-term income boost to a historically disadvantaged group, it would take generations to make up for the asset short-fall that family is facing; even if incomes are relatively equal in a society. In this context job creation might help address income distribution, but would do little to address asset distribution.

 

Let’s take a step back from job creation to consider what it means to be poor. I define poor as a lack of choice to live life in a way that respects your physical needs, cultural values, social and political context, and familial obligations. This of course varies country by country, region by region, which is why as impact investors I invite us to rethink how we consider poverty reduction to be more than just a simple economic equation.

Let us consider:

-     Rather than income, what if we focused on asset-building for individuals and communities?

-     What if we focused on culturally-appropriate livelihoods, rather than limiting our viewpoint to wage employment?

-     What would it look like if we focused on equality just as much as growth?

Perhaps we would still consider job creation to be an important cornerstone of impact investment. My hope would be that we feel a greater level of confidence that our impact investment dollars were really leading to global poverty reduction and more autonomous communities.

I’d like to offer two of examples of organizations addressing these job creation challenges. First is Liberty and Justice, a West-African company which has a strong focus on livelihoods and asset-building. Co-founder Chid Liberty, a Liberian who largely grew up outside of the country, came home as an adult wanting to address poverty, and the 90% unemployment rate in Liberia. He then built Africa’s first fair trade factory—a clothing manufacturing facility employing 60 women.  These women not only have access to high-quality jobs—they own 49% of the factory, and are being trained to one day run the factory themselves. Investors (including several Toniic members) participate in a US trading company, which partners with the factory and ensures it complies with global quality standards. Chid’s vision was not only to create good jobs for women, but to help close their asset gap.

Another company that has similarly worked to level the playing field for its workers is Namaste Solar, a profitable Colorado-based solar company led by CEO Blake Jones. Their 100 employees are given the option to buy a share of the company, and have an explicit salary scale where the highest paid employee cannot make more than 4 times the lowest paid employee. This activity created a company of co-owners, which has significantly reduced turnover and helped drive profitability. Their recent investment round was oversubscribed. ­­

Who are the others like Chid and Blake? What projects have you seen that create high-quality jobs, livelihoods or grow assets while also creating viable returns for investors?

Morgan SimonMorgan Simon is the co-founder of Toniic, a global network of early-stage social investors. Toniic members share deal flow, due diligence and monitoring on global investments in this action-oriented community looking to move $100 million into global social enterprise. She is also the co-founder of Innovacion Investments, the first community development venture capital fund in Texas, and was the Founding Executive Director of the Responsible Endowments Coalition, leveraging the $400B managed by US colleges and universities. In all her work, she emphasizes community empowerment, leadership and ownership.

Thank you to Allison Basile, Grassroots Business Fund, for her contributions to this post.

 


[i]  IFC Job Study Report: Assessing Private Sector Contributions to Job Creation and Poverty Reduction; January 2013 http://www1.ifc.org/wps/wcm/connect/d3b612004e3468c783d5ab7a9dd66321/IFC_FULL+JOB+STUDY+REPORT_JAN152013_FINAL.pdf?MOD=AJPERES

[ii] Poverty Reduction through Job Creation and GDP Growth: Understanding the Potential for High-Impact Entrepreneurship http://www.endeavor.org/blog/fight-poverty-move-the-gdp-needle/

[iii] http://www.nytimes.com/2012/10/17/business/economy/income-inequality-may-take-toll-on-growth.html?pagewanted=all

[iv] ILO, Global Employment Trends, January 2011

 

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