I was talking to a friend recently and he seemed frustrated by my insistence on making a distinction about the word “investment”. I would like ‘investment’ to only apply to situations where I’m definitely getting money back – I feel it’s been too blurred by people talking about grants and donations as social investments. I was reflecting later and decided that perhaps my friend was annoyed because not that long ago I had more of his perspective. I came back from Good Capital two years ago totally sold on Kevin Jones’s language around our “need to get away from two-pocket thinking” with the investment pocket and the philanthropy pocket, and instead think about the investments we make across that spectrum. The Heron Foundation also has great writings on full spectrum investing that I still respect enormously. So what’s changed for me?
I guess I shifted last year when I delved into PRI/MRI issues for foundations. Background in case you need it: Just over two years ago The LA Times did a beautiful slam on the Gates Foundation for donating tons of money to health via vaccinations in developing countries, but making that money by investing in the polluting industries in those same countries. Ah the juxtaposition! The Gates Foundation is just the most visible and the easiest to shin-kick, every foundation is guilty to some degree because the investments are managed solely to maximize return independently of the mission/grant-making side. So the pressure came on to do Mission Related Investing – align your investments with your mission, or at least try to make sure they’re not undermining your mission. Mission Related Investing is an aspiration, an idea, not a rule defined by anybody. How much return do you need to make? Well, you have to meet the prudent investor rule, and for most foundations that means generating a return of at least 5% + cover any additional costs, since that’s what they have to pay out. (Most foundations are trying to exist “in perpetuity”, so the inflow and the outflow need to balance).
Program Related Investing is an IRS regulation. A foundation can make a Program Related Investment and it must meet 3 conditions: 1) it must serve a charitable purpose; 2) it cannot be an investment you would make solely for the return; 3) the funds cannot be spent on anything remotely political (unlike a grant which can be used for some issue lobbying.) When the foundation gets money back, principal must be immediately re-granted, additional return can be returned to the endowment.
So that experience forced me to get much clearer (which is hardly to say crystal clear) on: what is a market rate return? What return does the investor NEED to get from this investment? I feel like that’s really where we start to get to brass tacks – presumably at some point I’m investing because I’m looking for a return – so what does that return need to be?
The Blended Return perspective (Blended Value is a leader) is that there’s a total I’m aiming for across all my “investments” and so maybe some things return -100% (straight up donations) and some things return 3% and maybe something returns 10%, conversely some things provide lots of social satisfaction, some things provide moderate, and some things provide none (or just add stress!)
As an operations/implementation type person, I began to find it confusing to continue to talk about a donation as an investment – there’s a pretty significant legal difference between creating Accion, Calvert Foundation, Kiva and MicroPlace, but perhaps to the customer the differences are more subtle.
Accion is a donation- you never get that money back. It’s just a 501c3. It’s mission with that money is to invest it, using market forces to do good.
Calvert Foundation is also a 501c3, but they do donor-advised funds so you have more ongoing influence over where the money goes, and they’re working on adding influence over how the money is invested. You still never get it back.
There’s a clear line above – you give money, you don’t get it back. You hopefully get some warm fuzzies. Done.
Kiva is also a 501c3, and to avoid the complication of becoming a broker-dealer they opted to not pay interest. So while you get your money back, you can’t get a return, so there’s an important distinction here, this is not an investment. However, because of how many players have entered the Person-2-Person loan space the SEC is revisiting this issue and at one point suggested that perhaps they could be interpreted as selling a security (perhaps a face-value zero-coupon bond).
So Kiva straddles a fuzzy line, you give money, you can get it back, but they don’t charge you a formal fee (people give “tips”) and you don’t make any money. So this is not an investment in terms of financial return. While I get warm fuzzies back, I want to use the term “social investment” to differentiate among investments where I can get a return, so I don’t like using it here.
MicroPlace did register with the SEC as a broker-dealer so they could pay you interest and so they ARE selling debt securities with low interest. Now this, in my current view, is an investment. We’re getting something back. We can quibble about the rate of return but it’s still an investment.
In all those cases, the end consumer is putting a chunk of money in a place that will make them feel good and hopefully connect them to inspiring stories but won’t do much for their retirement. Some folks will draw the line there – if it’s not doing much for my retirement, then it’s not an investment! Whether or not you can ever get that money back should be a meaningful distinction, but maybe folks are only doing amounts they don’t really care about, in which case we’re not really tapping the full spectrum of investment, we’re just getting more creative with contributions. Perhaps for me, investment implies relationship, where you both have something you need from it and cannot just walk away.