Social Finance

Some Reflections on Interest

September 21, 2009

By Siegfried Finser

In my book, Money Can Heal, I mention discussions on the subject of “interest” by the early founders of RSF Social Finance. Perhaps it would be helpful if I shared the gist of those founding conversations.

At the time, we (along with other Rudolf Steiner-inspired banks around the world) read an interesting pamphlet by Margrit Kennedy. The author described the consequences interest has had on all of us, and instead pictured an interest-free world. Interest is charged by those having means, or at least by those who had enough wealth to lend to others; as a result, the costs of almost everything everybody needed – electricity, water, fuel, transportation, and machines – increased. One statement in the article was that about 90% or more of the cost of all those things was debt service. From her perspective, all of humanity was being charged an interest that benefited only those who already had enough resources to lend. The conclusion was that “interest” was bad since it burdened everyone to support the few who were wealthy.

I remember us pondering that issue. We considered how the Islamic world viewed interest. Was charging interest inherently evil regardless of whether it was usurious or not? Would the world be better off if we did not charge interest and simply loaned money to those who could make better use of it? Should RSF Social Finance offer investment accounts that paid no return – only the satisfaction of knowing the money was doing good work?

The GLS Bank in Bochum, Germany actually offered certain socially constructive accounts that paid no interest. We might have continued examining different schools of thought and discussing the question of interest for months had we not engaged in some practical transactions.  Presented with the task of financing our first project, we needed capital and so we began conversations with prospective investors.

One potential investor wondered whether his investment would gradually diminish and eventually disappear due to inflation if he received no return whatsoever. The reality of this situation suggested maybe some interest was necessary to protect the investor.

Another one of the earliest investors was a retired Waldorf school teacher. He wanted his savings to help Waldorf schools as well as other worthwhile projects. Being of modest means, he needed the interest income for his daily expenses. If we did not charge interest, he could not afford to invest in our worthy causes. We wanted to make sure that people with various levels of income could invest in good work.

These examples influenced our ultimate decision. We began by charging and paying modest interest based on an accepted U.S. federal benchmark. Even though zero interest might be better for the world in the long run, we opted for “freedom.” We felt the question of interest needed to be decided by each person depending on his or her situation and motivation.

If we left it to the individual, then we were counting on something altruistic developing in each person which, in time, could possibly lead to an interest-free world. We supported individual freedom and trusted in the unfolding consciousness in every human being.

We wanted RSF Social Finance to offer every individual the opportunity to act of their own free will for the benefit of others. In other words, we needed to make visible opportunities for giving as well as lending/borrowing.

RSF would pay a modest return to every investor, charge a modest interest to borrowers, and make transparent a modest fee to support operations.  As RSF grew in size and complexity, we replaced the fee with a more traditional spread between the interest rate paid to investors and the interest charged to borrowers in order to keep the organization financially sustainable.

To achieve our long term mission of advancing human consciousness, we decided that we would use every lending/borrowing transaction and every giving/receiving transaction to transform how the world viewed and worked with money. This required continuous work to educate our clients about the way that we functioned.

Sure enough, over time, some investors needed their interest for daily living expenses, while others just took it for whatever reason; still others let it accumulate in their accounts, or phoned or wrote us that they wanted some or all to be given to a special project that seemed important to them.

That was how RSF was conceived as a threefold organism: to make transparent the social/spiritual nature of (1) every lending/borrowing transaction and (2) every giving/receiving transaction. A third aspect of our work was advisory and educational activity that would encourage the development of humanity toward social altruism.

Is interest good or bad? Like most things in life, interest (and money in general) can contribute to both good and bad depending on what is done with it. In those early days of RSF, we decided our task would be to facilitate meaningful transactions and to educate investors and borrowers on the social and spiritual consequences of their financial activity. Twenty-five years later, this impulse remains at the core of our mission to transform the way the world works with money.

Siegfried Finser is a Trustee and Co-founder of RSF Social Finance.  He is the author of the book Money Can Heal.  To read a recent Reimagine Money blog post about RSF’s current thoughts and practices around interest rates, click here.

Social Enterprise, Exits, and Liquidity Events

September 7, 2009

By Elizabeth Ü

True Confession: while studying toward my MBA in Sustainable Management, I was baffled by the concept of an “exit plan.” I just couldn’t understand why a social entrepreneur – especially one who poured her heart and soul into building a mission-driven business – would ever want to leave that business in the hands of others… others who probably did not share her passion, commitment or values.  Wouldn’t the founder’s exit lead to a dilution of those values?

Since then, I’ve gained a better understanding of the need for exit plans. Of course there are several reasons why a social entrepreneur might want to move on from a company she birthed and nourished: she might be ready to retire or turn her energy toward other projects. She may be called to take care of herself (or family) in the event of illness. Or perhaps the founder is truly an entrepreneur at heart, and navigating the waters of a mature business just isn’t as exciting to her as starting up a brand new social enterprise.

In order for there to be enough cash on hand to repay the exiting founder for her investment in the business, a succession plan requires some kind of liquidity event. If there are outside equity investors involved, the liquidity event is when they would see their return as well. (See Terri Spath’s recent blog post: rsfsocialfinance.org/2009/08/revenue-participation-notes, which outlines the benefits and drawbacks of traditional loans and equity financing, and what RSF is doing to offer alternatives.)

Historically, a social entrepreneur has had two choices with regard to liquidity events: 1) Offer up the business for sale to another business (in this transaction, known as an acquisition, the purchaser provides the liquidity), or 2) raise cash through a public offering (also known as the IPO, or Initial Public Offering).

Both of these events can be problematic when it comes to maintaining the values of a mission-driven business. There’s no guarantee that the acquiring company will honor the environmental or social practices of the original social enterprise; there’s also the possibility that the smaller company’s offices may be shut down altogether, with any remaining jobs moving to the acquirer’s headquarters. In the case of taking the company public… well, suddenly there are quite a few shareholders who can exert their voting power in whichever direction they please.

Whether you believe that the sale of Odwalla, Ben & Jerry’s, Stonyfield, Tom’s of Maine, or Burt’s Bees to much, much larger — and in some cases, multi-national — corporations has had a positive or negative effect on the social responsibility of the acquired (or acquiring!) companies, we consider it part of our mission at RSF to champion new and meaningful options for community ownership, wealth creation, and social impact. Here are a few examples for social entrepreneurs seeking alternatives to the usual exit or liquidity events:

One option is to transfer ownership of the social enterprise to its employees, rather than to another company or to the public. When employees have played key roles in developing and implementing the company’s social mission, they can be well-positioned to steward that mission over time; there are also tax benefits to this plan. (For more information about employee stock ownership, read this article by Esther Park, RSF’s Director of Lending: rsfsocialfinance.org/2009/06/employee-ownership-for-social-enterprise.)

Another promising model is that of Upstream 21, which is essentially a holding company for small, independently owned companies with products or services designed to benefit their employees, communities and environment. Upstream 21 does more than just talk about values; its founders have written them directly into its corporate charter, mandating that the “best interests” of the company include consideration of employees, the environment, and both the short- and long-term interest of customers, suppliers, and the communities in which the company and all subsidiaries operate. In other words, the risk of mission dilution usually associated with acquisition is extremely low! Focusing within the Pacific Northwest, this is an example of a truly place-based approach.

If you’d like to learn more about the truly innovative work of Upstream 21, visit their website (www.upstream21.com) and watch this video featuring Upstream 21’s chair (and member of RSF’s investment advisory committee) Leslie Christian, from last year’s Summit on the Future of the Corporation.

Finally, it should come as no surprise that Judy Wicks, chair and co-founder of the Business Alliance for Local Living Economies and inspiration to countless social entrepreneurs, blazed a new path when she decided to transition leadership of her iconic White Dog Café in Philadelphia. Rather than sell the business outright, she drafted a detailed social contract for the new owner. She also retained ownership of the name White Dog Café, which she licenses to the new owner. If the social contract (which details operational standards such as the procurement of local ingredients and equitable pay scales, and requires ongoing leadership in socially responsible business practices) is breached, she can revoke the license. A passionate advocate for all things local, Wicks of course drafted the contract to stipulate local ownership of the Café. (Read more in this GreenBiz.com article, written after Judy spoke at the Investors’ Circle conference last spring.)

If you have experience with either traditional exit plans and liquidity events or their alternatives, we’d love to hear your stories in the comments section below.

Elizabeth Ü is Manager of Strategic Development at RSF Social Finance.

RSF’s First Annual Borrower Gathering

August 24, 2009

By Ted Levinson

Steiner wrote that in the acts of lending and borrowing “human mutuality or ‘give and take’ enters the economic process in a striking way.”  On July 24th, 15 RSF borrowers and 11 RSF staff experienced this firsthand in San Francisco.

RSF’s first ever borrower gathering was an eye-opening experience that made apparent a gap in our efforts to foster strong relationships.  Although we experience the “give and take” daily with our borrowers, until this July meeting we have done little to foster that same human mutuality between our borrowers.  We have been missing out.

The day-long meeting revealed personal connections, business opportunities, and shared challenges amongst a fair trade tea company (Numi Tea), a performance arts center (Napa Valley Opera House), a gluten-free cracker company (Mary’s Gone Crackers) and  a major network of innovators (Bioneers).  Jeff Mendelsohn from New Leaf Paper left the meeting with a prospective customer for his recycled papers and Robin Brown of Erbaviva may have a new outlet for his line of organic body lotions.  This provided a glimpse into the world of possibilities that could result from our whole community of borrowers (upwards of 80 organizations) connecting with each other.

In my mind, Napa Valley Opera House board member Bob Muh provided the best concrete suggestion for nurturing and expanding these connections amongst borrowers.  He proposed an online platform for borrowers to “give and take” between themselves.  In a twist that perfectly reflects RSF’s spirit, Bob proposed that all the borrowers offer what they can give, rather than what they want.  We’ll be working on putting this valuable idea into action in the coming months.

Steiner’s “human mutuality” ran deeper than simply the business connections that were formed.  There were also lengthy discussions about various issues that we all face, including one in particular: social impact.  Our borrowers share a commitment to deep social impact, and we spent a good portion of the day talking about how to foster and measure this amorphous concept.

There’s no doubt that social impact and financial health are often in conflict.  The most environmentally-friendly packaging is oftentimes the most expensive choice, just as a refusal to compromise on the treatment of workers throughout a supply chain may very well mean a compromise on sales growth.  Nonprofits need to balance the goal of their mission and the path they follow to get there as well.  Hearing our borrowers struggle with this challenge will influence our underwriting moving forward.

Stepping back from the agenda of our gathering, it is worth reflecting on just how unusual and refreshing it was to convene a room full of borrowers with their lender.  I imagine this is a rare event outside of a class-action lawsuit (and much more pleasant).  For me, the day was a tangible example of how RSF is transforming the way the world thinks of and works with money.  The “give and take” bond between a buyer and a seller or between a lender and a borrower is an obvious one.  Less apparent and less mentioned, but no less meaningful, are the bonds that we can promote between our borrowers.

Ted Levinson is Senior Lending Manager at RSF Social Finance.

Revenue Participation Notes: What are they, and why are they an innovative social finance tool?

August 10, 2009

By Terri Spath

Traditionally, enterprises receive capital in one of two ways: they get a loan, or they sell equity in the enterprise. Sometimes, however, neither of these options provides the right fit for an enterprise’s needs and goals, which is where revenue participation notes can provide an innovative solution. But before diving into what revenue participation means, let’s look at the benefits and drawbacks of traditional loans and equity financing.

Traditional loan

With a loan, an enterprise receives cash, and enters into an agreement to repay that cash with interest. The tradeoffs for a loan:

Less Expensive Financing: It is generally less risky for someone to lend money than to extend equity. With a loan, there is usually a valuable asset (a guarantee, a piece of land, or machinery, etc) that the lender could legally take if the loan isn’t paid back. Since lending is less risky, it usually carries a lower price than equity, thus being a less expensive choice for financing.

Promise to Pay: With a loan, there is a legal obligation to pay the money back with interest. Also, lenders will only provide so much – at some point there aren’t enough assets to secure the loan and/or the ability to pay the interest.

Equity financing

By selling equity, an enterprise can raise cash by offering the investor some ownership of the enterprise. There are tradeoffs with equity financing, too:

No Short Term Cash Flow Constraints: In exchange for a cash investment, the investor owns some of the enterprise and the investor’s return is expected to come through the growth of the enterprise. Generally, there are no cash interest payments, and no legal obligation to ever give the money back.

Ceding Some Control: Since the investor now owns part of the enterprise, they have a right to some amount of control over the investment – and, therefore, a voice and frequently a vote about business decisions. The investor’s point of view may or may not align with the founder’s. This ownership gives the investor control over the enterprise that a lender does not have.

“Exit” Requirement: The new owner will want their money back plus handsome profits. This generally involves selling the enterprise to a new party, who will want to run the show (usually without the original founder).

An alternative – Note (i.e. loan) plus “Revenue Participation”

The traditional options don’t always fit for emerging social enterprises, entities built to grow profitably around an important social vision.

Case study: A Great Beverage Enterprise (GBE) that has created a healthy beverage to sell in the U.S. that supports sustainability in the Amazon rainforest.

GBE could sell more product if they had more money to spend on marketing (sales people to get into more stores, creating more products to put on more trucks for delivery, free products at sporting events, etc). However, the founders’ vision does not include the eventual transfer of ownership to a Big Giant Corporation that may dilute GBE’s mission in a drive for high profits (e.g. by creating cheaper formulations that no longer support the indigenous farmers of the Amazon).

Equity providers don’t have a clear way to recoup their original investment (no “exit strategy”), and are therefore hard to attract. GBE can try to borrow money, but the risk for the loan is high – many lenders are unwilling to lend as much money as GBE needs. What should GBE do?

One great solution is a note (typical loan with a coupon) plus revenue participation. With this structure, GBE gets a loan and is responsible for the interest and repayment of that loan. Revenue participation is attached to the loan, and defined as a percentage of the sales. As the revenues of the enterprise grow, it is in a stronger position and its revenue participation payments increase (the percentage stays the same, but the total dollars grow). The note plus revenue participation structure gets capital to the enterprise without affecting its ownership, goals or mission. At the same time, the lender/investor is properly compensated for the risks involved.

The RSF Mezzanine Fund is using this innovative tool to meet the needs of social enterprises, while earning a solid return for its investors. Ensuring that mission-driven companies can retain ownership and continue to have a high level of social impact while expanding their business was the key consideration for RSF in creating the Mezzanine Fund. We hope to see this type of financing become more common as an alternative for triple-bottom-line social enterprises whose priorities are not just profits, but people and the planet as well.

To learn more about the RSF Mezzanine Fund, click here. To find out how you can apply for financing from the RSF Mezzanine Fund, click here.

Terri Spath is the Managing Director of RSF Capital Management.

It’s Happening Right Now

August 3, 2009

By Don Shaffer

Mortimer Zuckerman, editor in chief of U.S. News & World Report, wrote an opinion piece in The Wall Street Journal three weeks ago (July 14, 2009) entitled “The Economy Is Even Worse Than You Think.”

Mr. Zuckerman outlines 10 reasons why we are “in even more trouble than the 9.5% unemployment rate indicates.”  He states that job losses are now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

We can read accounts like this and crawl into a shell; we can hope for the best.  Or we can apply as much ingenuity as we possibly can to address the root causes of our present crisis.

I’d like to propose a “What if” exercise.

What if we create a groundswell around the country where each of us shifts 50% of our investments to within 50 miles of where we live?  This is a challenge introduced by Woody Tasch in his recent book, Inquiries into the Nature of Slow Money.  It’s a provocative idea.

What would be the effect on job creation?  What long-term financial returns would be generated?  How much risk would be involved?  If all the companies and organizations receiving investments used triple-bottom-line standards to measure their success, what would be the effect on community health and ecological well-being?  Is this just a romantic throwback to a previous era?  Would it crimp our global competitiveness?

Picture a regional economy like the San Francisco Bay Area.  What if we stitched together a set of financial vehicles designed to match investors from the Bay Area with small- and medium-sized, privately held, triple-bottom-line, community-based enterprises in the Bay Area?

What if you believed you could earn a consistent rate of return (e.g. 5%) on your portfolio investments, with relatively low volatility, while keeping a much more significant percentage of your money circulating in the regional economy?  What if you lived in the San Francisco Bay Area and you had access to all of the following options addressing the full range of investing, lending, giving, and day-to-day purchasing?

  • Community banks and credit unions (for checking/savings accounts, CD’s, etc): New Resource Bank, OneCalifornia Bank, and Exchange Bank are a few examples based in the Bay Area
  • Direct lending models (for making direct loans to small companies), such as a regional version of Kiva
  • Community credit and loyalty cards (for supporting local merchants and nonprofits) like the following which have implemented in several regions:  GoLocal Rewards and Locals Care
  • Angel networks (for regionally-based, triple-bottom-line equity investing) that might operate like regional versions of  Investors’ Circle or Golden Seeds
  • Direct philanthropic models (for making gifts to local nonprofits) similar to DonorsChoose.org or Portland’s ChangeXchange
  • Community development venture capital funds (for early-stage equity investing) like Pacific Community Ventures
  • Regional stock exchanges (for investing in mature, community-based businesses), such as a regional version of the Social Stock Exchange being developed in the U.K.
  • Regionally-focused holding companies (for helping mature, community-based businesses with leadership succession and liquidity) like Upstream 21
  • Complementary currencies (for encouraging local purchasing) like Time Banks or the BerkShares system in Massachusetts.

Imagine this is possible, because it’s happening right now.  In sectors like sustainable agriculture, renewable energy, zero-waste manufacturing, independent retail, and green building, there are a growing number of excellent companies in which to invest.  With financial vehicles like those listed above, there are more and more viable ways to keep your money closer to home, supporting your neighbors while they support you.

Instead of having all your money tied up in a financial system that has become increasingly complex, opaque, and anonymous, based on short–term outcomes, you can now help create an alternative that is direct, transparent, and personal, based on long-term relationships.

Here at RSF, we are finding ourselves at the center of these developments.  Please contact me to learn more about what you can do to get involved.

Don Shaffer is President & CEO of RSF Social Finance.

The DNA of Social Finance

July 20, 2009

By John Bloom

DNAThe course of social finance is enlivened by transparency and trust. These essential elements of agreements between people are central to the value of financial transactions—and are in many ways inseparable from each other. What I mean by this is that transparency leads naturally to trust and vice-versa in a constant dance through time. I would add that the healthy circulatory system of money, even on a global scale, is built or carried by the dynamic present in transparency and trust. Consider the opposite where they are not present—circulation stops, economies falter, wealth is extracted, self-interest reigns, poverty results. This may seem a stark contrast, but a poignant one given the current state of the economy in which unemployment and foreclosures are rising while investment houses proclaim huge profits.

Transparency and trust emanate from human experience, and are therefore quite individualized in their practice or find expression in the behavioral patterns of a particular culture. They are also deeply connected to the need for accountability and dependability. Most people want to know that whatever motivated a transaction in the first place will be recognized and respected by the other party to it. For example, if I agree to lend money to you, I need to know that the money will be used as expected and returned as per the understanding. I also need to know that if the scenario does not play out as planned and there is significant change, you would come back to renegotiate the agreement or return the funds. This epitomizes the tandem connection of trust and transparency, and is a measure of a healthy financial transaction—one that frees the lender to focus on other activities and the borrower to progress with the planned project while remaining connected through the lender-borrower partnership. If you cannot find out where the money you loaned went to, or the borrower feels no responsibility to the lender, something is broken in the flow of both money and human relationships. Accountability has both a human aspect in the context of relationship, and a financial one in the context of tracking and measuring the movement of the money itself.

The salient characteristic of social finance is that these two threads, the human and the financial, are recognized and worked with as inextricably linked. Every financial transaction has an effect on human beings, and every human being affects the quality of the world through how he or she works with money. This is a fully rounded concept of interdependence as it includes the perceptual and behavioral dynamic along with the more traditional economic one of interchange and efficiencies in the production and consumption of goods and services.

If trust and transparency are central to the vitality of financial circulation, and serve a bridging function between the social and the financial, then what actually is the deeper motivating force that begins, sustains or augments that circulation? What if we could consider that social finance has the double helical structure of DNA, with the major strand being human actions and needs, and the secondary strand, the creation of money in its many forms. That they come into a dynamic relationship is inevitable in economic life and is epitomized by the tension between self-interest and community-interest. Add to this, movement through time and place. In this imagination, the pulsing dance between transparency and trust bridges the two strands and naturally gives rise to a vortex-like spiraling movement. But what of the motivating force? I would argue that the prime mover is human intention. It is the element that moves with the currency, the flow of money. It represents the energetic investment of people into the circulation, the rhythmic movement of value as it is generated, destroyed, and recreated anew within the whole economic process.  Of course, one can make the case for the shadow side, the adverse effect of bad intentions or unethical practice. But, if we can understand social finance from the perspective of the elegant architecture of DNA with its life-building capacity, we might also see how social finance can serve as a restorative and healing force in economic life.

John Bloom is the Director of Organizational Culture at RSF Social Finance. If you enjoyed this post, read more of John’s work here: transformingmoney.blogspot.com.

RSF’s Lending Process As Inspired By Rudolf Steiner

July 6, 2009

By Esther Park

At a recent RSF board meeting, I was asked to provide some detail on how our lending process is inspired by the work of Rudolf Steiner.  In RSF’s early days, board members were often intricately involved in our lending process, so they never had to wonder how we imbued our values into our work.  But today we operate under policy governance, which means that the board is less involved in our day-to-day operations.  While we strive to wear our values on our sleeves, I thought readers would benefit from a glimpse into how we operate differently than other lenders.

1.  Because we seek two levels of impact – direct impact of our borrowers and our own impact – educating prospective borrowers about the structure of our loan fund is an important part of our work.  There is a unique and distinct story behind our pricing (it’s based on the return we provide to our 900+ individual investors) and our loan products (some specific products are meant to intentionally build community behind a project) that we like to share with potential clients.

2. With regard to our borrowers’ social impact, we believe we hold a high bar for what qualifies as a “social enterprise.”  For example, it’s not enough for us if a company gives away a percentage of their revenues or profits to charity.  While we consider this activity to be admirable, we insist on seeing social values embedded in all areas of the operation, from what is publicly seen, to what happens behind the scenes.  This is the first hurdle for us, before we even go down the path of financial analysis.

3. Further to the previous point, we find that mission alignment is an important part of our discussion in credit committee, and sometimes we spend more time on that than on the financial feasibility of a project (though the latter is always given rigorous review).

4. We have adopted a “work-through” policy for when loans become troubled.  For many traditional lenders, this is otherwise known as a “work-out” policy.  We named our policy thus in order to better reflect our intention of working through problems with borrowers instead of just trying to find the fastest way out.

There are also a number of other unique practices that are close on the horizon.  Some examples include:

1. Pricing – Our medium term goal is to convert to a “community-based” pricing model that would be driven collectively by our investors and borrowers.

2. Social Covenants – Just like financial covenants, social covenants would be hard-baked into loans, which means that non-compliance could trigger a default.  A handful of our loans currently have these, but as we progress on the social impact work, we hope to institute these covenants broadly across the portfolio.  These are not meant to be aspirational, but would be intended to act as minimum thresholds.

3. Peer-driven social impact goals – We hope to address the aspirational part of improving an organization’s social impact by offering our borrowers a carrot rather than a stick toward achieving greater social impact over time.  In the future, this will likely be done collaboratively through a peer-review process, and outstanding work may be financially rewarded via a borrower’s interest rate.

4. Creating more community among our borrowers – Some recent ideas that have surfaced include a peer learning network, online bartering/advantageous sale platform, a closed listserv.

Although it may not always be explicit, each of the above ideas and practices is directly influenced by Rudolf Steiner’s insights and teachings on economics – many of which are rooted in the theory that money and finance are ultimately meant to connect people in relationships of service.  As a result, we seek to carefully assess the impact that we and our borrowers are having at every step of the lending process, and to create opportunities for partnership and collaboration with our borrowers.  We also place great importance on Steiner’s core belief that economic processes should be transparent, and hope that our actions in lending reflect these values on a daily basis.  In that spirit, I invite your questions and comments, and look forward to continuing this dialogue.

To find out more about how RSF is inspired by Rudolf Steiner, visit: rsfsocialfinance.org/values/inspiration/

Esther Park is the Director of Lending at RSF Social Finance.

Resources on Program Related Investing

June 29, 2009

By Elizabeth Ü

Deep RootsI spent most of last week in Greensboro, NC, attending the Sustainable Agriculture & Food Systems Funders Annual Forum: Deep Roots (you can check out the agenda here: safsf.org/documents/DeepRoots_D4.pdf). This annual event is an excellent forum for foundations and government funders (such as staff from the USDA and Risk Management Agency) to discuss trends, identify collaboration opportunities, and challenge each other to do more to support local and sustainable food systems; the conversations continue throughout the year via the SAFSF listserv, and I highly recommend joining as a member if you are an individual or institutional funder interested in food issues. As is so often the case, the value of the collective consciousness is so much more than the sum of its parts! To learn more about membership, click here.  Readers seeking grants for projects that contribute to sustainable food systems may be interested in the list of funder members here.

In preparation for a presentation that Kathleen Fluegel (HRK Foundation), Jeff Rosen (Solidago Foundation) and I gave on program related investing (PRI) at Deep Roots, I compiled the short list below of resources that I have found most helpful for foundations interested in learning about how they can more effectively activate their assets toward strategic goals with PRI. (See also my previous blog post on the topic: rsfsocialfinance.org/investing/pri-doing-more-with-less/)

PRI MAKERS NETWORK
The PRI Makers Network seeks to strengthen the capacity of grantmakers to affect change across diverse program areas. It is an association of grantmakers that use program-related and other investments to accomplish their philanthropic goals. The organization provides a forum for networking, professional development, collaboration and outreach to funders, including those not currently making PRIs or other social investments. The network’s website (www.primakers.net) includes regularly updated links to various resources and articles (including the ones listed below). It also facilitates a variety of workshops and discussions – ranging from one-day briefings to sessions at regional and national affinity group conferences – and maintains a database of PRI activity. Certain features are accessible to members only.

PRI ARTICLES
These three articles, from the law offices of Brody, Weiser, and Burns, provide general overviews, definitions, legal information, and key considerations for foundations considering PRI.

1. Should We Consider a PRI? Basic program-related investment criteria for foundations and nonprofit organizations, Christa Velasquez and Francie Brody, 2002; www.brodyweiser.com/pdf/shouldweconsider.pdf

2. Current Practices in Program-Related Investing,  Francie Brody, Kevin McQueen, Christa Velasquez and John Weiser, 2002;
www.brodyweiser.com/pdf/currentpracticesinpri.pdf

3. Matching Program Strategy and PRI Cost,  Frances Brody, John Weiser and Scott Miller. Phyllis Joffe, editor.
www.brodyweiser.com/pdf/matchingprogstrategy.pdf

As you can see from these articles, direct PRI requires staff skilled in:

•         Finding and evaluating eligible PRI projects,
•         Drafting investment term sheets,
•         Administering investments,
•         Monitoring projects, and
•         Providing technical assistance as necessary.

Intermediated PRI models, such as the RSF PRI Funds (www.rsfsocialfinance.org/pri), make PRI accessible to a wide range of foundations. Whether your foundation is just getting started with PRI, or does not want to go through the challenge and expense of starting up an in-house program, or wants to leverage the experience and systems of an intermediary, there are many reasons to consider this approach. For more information on PRI intermediaries, visit: www.primakers.net/intermediaries.

MISSION RELATED INVESTING
Mission Related Investing (MRI) is another powerful concept foundations can consider to allocate a greater percentage of total assets toward their strategic goals. There is still a lot of confusion around what constitutes MRI compared with PRI, and this article is quite helpful in breaking down the differences:

Capital with a Conscience: Private foundations must distinguish carefully their investments’ purpose, character and strategy, Jane M. Searing,
www.primakers.net/files/Capital_With_a_Conscience_-_J_Searing_-_JoA_Jul_08%5B1%5D.pdf

***

This is of course only a partial list of the resources available online and otherwise, and I’d be happy to point you in the right direction if you have specific questions. Please also feel free to list your own favorite resources in the comments below!

From Transaction to Transformation: Spirit Matters in Lending

June 22, 2009

personalBy John Bloom

It is one thing to say that money has a spiritual dimension, to speak of it as energy or a force. It is another matter to recognize and understand how important and practical this perspective is as we act within the economy. A brief inquiry into the presence of spirit in our financial transactions is a risky venture. Nonetheless, I am compelled to take the risk because of the upside potential for transforming how we see and work with money.

Consider looking at experience this way: there is what we perceive with our senses, for example, a color or texture, which we could call “matter”; then, there is our interpretation of that sensation, our sympathies and antipathies, which we could call “soul” activity; then, there is recognizing within that experience something of its lasting essence, such that we might recognize another occurrence of it though it may be in a different color or form, which we could call “spiritual” activity. For example, how do we know that a loan is a loan no matter whether it is called credit or investment? Given this architecture of experience, might there be a tripartite view that clarifies and integrates matter, soul, and spirit in the realm of financial transactions? What place does each of the three take in the transactional process?

For this essay, I have chosen to focus on loans and the lending-borrowing transaction, though one could equally apply the approach to purchases and giving. What gives rise to lending is a combination of a lender’s available capital coupled with a need for that capital to realize an economically viable idea. One could say that the lender recognizes a borrower’s entrepreneurial capacity to make good use of the money. The money passes hands, a material matter in auditing terms, as a result of an agreement, with the transaction accounted for in debits and credits, assets and liabilities. However, the process that led up to the agreement, that is, how enough trust was established between the lender and borrower to make the agreement possible, is not such a simple one. The lender and the borrower each have their conditions for trust, their deeper purposes and intentions. Of course, transparency is a critical part of this discovery process, as are intuition, character, and social impact. The reality is that the lender and borrower are bound in relationship over the period of the loan; they have to take and maintain a long-term interest in each other, and support each other’s success. This mutual trust, formalized in the loan agreement, is something of the soul aspect of the loan. Imagine, lenders have made loans because the constellation of people and intentions around the loan project felt right, even if the numbers didn’t quite justify the transaction.

What is the spiritual aspect of a loan? The money makes possible entrepreneurial initiatives that would not have been possible otherwise—this is the essence of a healthy capital economy. The entrepreneurial initiative itself is framed upon ideas, which, though they may be inspired by material circumstances, are not dependent on them. And within the structures of those ideas, the entrepreneur recognizes and serves the presence of others’ economic needs. This capacity for perceiving what is, and what is not yet, (anticipating need) demonstrates creative, imaginative, and in some cases intuitive, capacities, and is also why enterprise so often leads to cultural transformation.

In economic thinking the spiritual world of ideas is made practical through the world of physical matter. How we find value in the world of lending is a matter of the degree to which the lender’s feelings and perceptions are tuned to the intentions and capabilities of the entrepreneur. The loan transaction becomes a vessel for the shared purpose and vision of lender and borrower. Transforming how we work with loan money is catalyzed when we embrace these interpersonal relationships and recognize how the entrepreneur’s work brings spiritual activity into the world.

John Bloom is Director of Organizational Culture at RSF Social Finance.  If you enjoyed this post, read more of John’s work here: transformingmoney.blogspot.com.

Dialogue on the Banking Crisis Continued

June 15, 2009

By Ted Levinson

Federal Reserve BankIt’s ironic that one contingent of society rails against big government and that another camp curses big business, and few people recognize that each is a threat since with extreme size comes extreme power, and extreme power leads to ruin.

E.F Schumacher warned of the “almost universal idolatry of gigantism” and we are now paying a dear price for our devotion to General Motors, AIG and Chrysler.  There is certainly cruel justice in the fact that our punishment for letting these companies grow so big is to become unwitting taxpayer-owners of these businesses as they shrink.

I’ve read James K. Galbraith’s statement that Don recommends in his recent blog post, but my attention was drawn to different parts of Galbraith’s testimony.  The first was the simple statement that “credit is a contract,” and the second was his view that the world “trusted the transparency, efficiency and accountability of the U.S. financial system…” Both are historically true, but our response to this financial crisis has cast doubt on both claims and this is what worries me the most.

Rudolf Steiner advocated a threefold social order where the economic sphere was separated from the state.  He would have likely rejected the political influence of lobbyists, government subsidies, and tax breaks as vehemently as he would have rejected our response to propping up businesses defined as “too big to fail.”  We have addressed the current financial crisis by forgetting that credit is, indeed, a contract. We have also threatened the transparency, efficiency and accountability of our financial system by abrogating the laws that permit credit to flourish and by creating artificial and perverse incentives for lenders to withhold the very credit that could extricate us from our situation.

Credit is built on trust. Our willingness to trade our money today for a piece of paper promising repayment later is undermined when the rules of the game can change for the most powerful. Without consistent laws regarding private property and bankruptcy, and without confidence in the stability of money, credit cannot exist.  This is why credit cards work in California and farmers in Nigeria are unable to borrow to finance a tractor.

In the past year, we have responded to the outrage of outsized bonuses, inflated ratings on murky credit derivatives, and corporate collapse by altering the rules by which the largest companies play.  We have bailed out big banks by using taxpayer money to buy preferred shares at inflated prices while simultaneously discouraging them from using that capital to make new loans.  We have trampled on secured lenders’ rights in our rush to shepherd Chrysler through bankruptcy with concessions that are not afforded to most.

As the line between big business and big government becomes more blurred, the conflicts of interest and self-dealing multiply.  Shouldn’t AIG become the preferred insurer for HUD homes? Shouldn’t GM become the sole provider of cars to the government? Governments owning businesses is as unwise and unfair as businesses running governments.

Steiner’s countryman, economist Joseph Schumpeter remarked that, “Rational as distinguished from vindictive regulation by authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.” How then can we solve the challenge of consolidated power in our largest banks and corporations?  At RSF we aim to do so by working with small businesses and nonprofits that measure their impact in more meaningful ways than sheer size.  We also aim to restore humanity to lending – it’s not an abstract transaction, but a meaningful relationship built on understanding the contributions, needs, and long-term intentions of all parties. By bringing together investors and borrowers in a culture of spirited inquiry and dialogue, RSF is creating a community too invested in one another to fail.

Ted Levinson is Senior Lending Manager at RSF Social Finance.

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