Shaulablog

Someone asked me today what kind of return “social” investors are willing to settle for. I hear that question often asked aloud.

-100%: I think I first heard this at SRI in the Rockies, or maybe it was from the Heron Foundation, but I’ve seen a few characterizations of donations as essentially being a social investment with a -100% financial return. From there, we can consider everything more substantial on the spectrum as long as the return discussed doesn’t involve body parts.

0%: That’s what folks get financially from Kiva. They also get photos and a story (which is often told dynamically in multiple parts). That puts them ahead of “adopting” a distant child or buying a flock of geese from Heifer where they also are getting a photo and a story but the -100% return.

1.5%: I find myself thinking of a focus group for a non-profit financial fund. When they suggested they’d be paying 1.5% most folks in the focus group were unimpressed. My feedback was that at that point you just can’t call it an investment – it’s not even keeping pace with inflation. To me an investment is a joint venture – it’s either win-win or lose-lose. The “I’ll invest but only something I take as seriously as I’m taking you, which is relatively low” sucks just as much as the VC Fund model of “I rake it in on the management fee no matter what happens and my percent on the backend is bonus”. In this case, I did take them seriously, and I did find their social return highly motivating, so I invested and the amount I invested was totally uninfluenced by the interest they offered, I would have invested at 0%. It’s also an amount I can afford to lose completely.

1.93%: What Shorebank informed me I’m earning on my Online Savings Account as of November 2009. They tweak it around periodically but the number remains uninspiring. The money sits there because I am instead inspired by their history of transforming marginalized African American communities and their continuing current mission of “building wealth for all in economically integrated communities, promoting environmental health, and operating profitably.” But again, we’re still in the part of the portfolio I can afford to lose completely, so this is, at some level, mildly sexy charity. Though in cases where the risk is low enough, at some point in life folks don’t need a return, they can plan to spend down their corpus and shift more dollars into investments like these.

0-3%: You pick when you invest with a Calvert Community Investment Note. I picked 2.5%, their target cost of capital at the time I made the investment.

2.6%: the change in CPI for the San Francisco Bay Area in 2009, also known as the local inflation rate for that area. I have done one PRI out of my family foundation. We were both inspired by Muhummad Yunus’s vision of “no return to capital” (from A World Without Poverty and the purported terms of Danone’s investment in Grameen Danone). However, we wanted something that there was a chance of folks replicating in the US. So we settled on a variable interest rate pegged to the inflation (change in the Consumer Price Index) of the region where the social enterprise was doing business. From an investment perspective, I can now argue that this investment is a capital preservation investment (ignoring the significant unmitigated risk elements this investment also included). Charging interest might seem to exploit the business for the benefit of the capital provider, but our thinking was that it actually helps: by giving this service business an incentive to grow its own revenues at inflation (or better) rather than not paying attention and slowly losing ground to inflation. The first year, the business raised its rates by inflation. One customer complained. However, another customer used that as an opportunity to raise quality issues about the service. Thus the business got important feedback that gave them necessary information to make internal changes and maintain a high quality level. I’m still pretty jazzed about that idea. I also got a great deal of “social” return on this investment – it supported a worker cooperative that includes lots of personal development around financial literacy, an asset-building component, and a replication strategy. I visited one of the cooperative meetings; spent hours restructuring their forecasting spreadsheets; and hours kicking around theories on worker empowerment and socially just economics with someone who is thoughtful and kind. It wasn’t just about the interest rate.

4.44% : The Applicable Federal Rate for a long-term loan in February 2010. Want to borrow some money from me? If I charge you less than the AFR for interest the IRS will consider that delta a taxable gift.

5%: The historical annual dividend payout (with a couple deviations in each direction) to preferred shareholders of Equal Exchange. It’s not a public offering so you won’t find it on their website and they’re not always fundraising. (mmmm, chocolate. Hey thanks to A.W. for recommending I try the Panama chocolate bar – it definitely hits my spot). You CAN invest in Equal Exchange by purchasing a 3-year linked Certificate of Deposit from Wainwright Bank. At the time of this posting it has an interest rate of 2.47%. While the “link” means it’s still risky, the money supports EE’s debt and so has a guarenteed interest payment vs the equity shares which have an optional dividend. Should the company go out of business the debtholders will be ahead in line to get money back.

7.5%: The full interest rate Mondragon Cooperative Corporation worker-members will earn as interest on their retained-capital accounts when business results (IE profits, which they call “the surplus”) are enough to pay it (which seems to generally be the case). Mondragon did do a bond raise in 2008 where outsiders could buy in, but it sold out quickly and worker-owners got priority.

With the exception of Shorebank, everything I’ve described so far is either a non-profit or a worker-owned-cooperative. As Alistair Williams from Equal Exchange puts it: “You won’t get rich, we won’t get rich, but together we can change the world.” From an investor perspective all of these things could be called “community investments”. My community investments (some of which are among the list above) represent less than 5% of my total portfolio. Additionally, I have investments in social mutual funds, a social bond fund, and some index funds that are set up to follow Risk Metrics Social Proxy recommendations (though with Risk Metrics for sale I’ll have to keep an eye on that) and those returns I judge by their asset classes and I don’t cut them bonus slack for being “social”. Private equity is its own can of worms and will need another post.