Zone 9

Financial Assets, Evolutionary

Here we are putting our money where our vision is, seeking out game-changing projects and companies. It’s an exciting quest, where you will encounter some of the world’s most innovative thought leaders and hopeful solutions. Evolutionary financial investments are not just about making the best of today’s global economy; they are about changing the game.

Unfortunately, due to a jumble of laws intended to protect smaller investors, today’s range of evolutionary financial investments is rather limited unless you qualify as an accredited investor (i.e., are rich enough to be allowed to buy into risky new companies). But change is afoot, and there are an increasing number of ways in which nonaccredited investors can explore their evolutionary impulses.

Key areas of Zone 9 focus

  • Impact investing (in new systems and financial structures)
  • Microfinance
  • Crowdfunding, Peer-to-peer lending

Equity crowdfunding off to promising start

In May, the SEC finalized its long-anticipated new rule that opens the door for more investors to take part in the most exciting—and risky—realm in the investing universe: innovative startups.  Previously, only “accredited” investors ($200K/yr income or $1 million in assets) were allowed to take these risks, and thus to reap the outsized rewards that can accrue to early investors in companies that are not yet available in the public stock markets.

Indiegogo announced this week that it will begin allowing small companies to offer equity investments on its platform, rather than just the rewards-based pre-sales that have been the core of crowdfunding up til now.  Many small companies have used crowdfunding platforms to get rolling and prove that there’s a ready market for their new products, only to turn to the super-rich when the time came to scale up for mass marketing their innovations.  Oculus, for example, raised millions from early adopters, but it was equity funders who reaped the windfall when the company was sold to Facebook for $2 billion.

In these early months, the potential is just beginning to be realized.  According to WeFunder, the largest equity crowdfunding portal so far, about 55 companies have successfully raised a combined total of $12 million from small investors.  WeFunder is currently hosting several dozen offerings, which range from

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Investors are responding to climate and societal crises

In the face of continued grim climate news and disturbing societal trends, it is increasingly clear that governments cannot marshall the resources—or perhaps even the will—necessary to the tasks before us. Increasingly, though, forward-looking investors are stepping in to help lead the way forward. Two recent reports offer some encouraging signs that global finance does indeed include many actors who are committed to the changes that we need.

Domestically, a progress report on an impact investing initiative from the White House Office of Social Innovation and Civic Participation shows actual investments to be outpacing and outperforming the initial commitments and expectations. When this private-investment initiative was announced in June 2014, they had $1.5 billion in new commitments to impact investments from private funds, foundation programs and endowments, investment banks, small family foundations, and nonprofit organizations. By the time the dust settled on the first round of planning, that total had grown to $2.5 billion to be invested over the five years from 2014-2019. The recent report followed up and found that in just the first eighteen months, through December 2015, almost half of this total had already been invested, suggesting that in the long run the goal may well be exceeded.  This is especially likely when we turn to the returns coming in on the early investments, which universally have exceeded expectations.  It turns out—no surprise to the SRI community—that investing in projects with strong social and environmental impact is very good business!  So far, about two-thirds has been invested for social impact and one-third for environmental impact, especially climate solutions. 81% has been invested here in the U.S.

financing_sustainable_development_momentum_to_transformation-212x300Internationally, the news is also encouraging. A recent UN report outlines the challenges before us: to meet both the UN’s 2030 Sustainable Development goals and the targets in the Paris climate agreement, $90 trillion of investment is needed over the next 15 years.  This amounts to about 8% of global GDP over this timeframe, a daunting but not unrealistic goal.  But to get there, it will mean marshaling the same power of private financing. As former Secretary of the Treasury Hank Paulson points out in an op-ed entitled How to Raise Trillions for Green Investments:

“The good news is that there is a global abundance of private capital. To unlock these riches, governments must create conditions that encourage private investment in clean technologies and sustainable development. With smart, well-designed and coordinated policies, financing models and instruments like bonds and incentive programs, countries have the potential to solve some of the planet’s most pressing environmental challenges while still maintaining economic growth.”

Paulson is especially enthused about the explosive growth of green bonds, which nearly quadrupled from 2013 to 2015, up to $42 billion.  Of this, 40% is being deployed in China, where the government there has set ambitious green energy and building targets.  The Building Energy Efficiency and Green Development Fund is a public-private partnership that will bring leading-edge technologies from U.S. companies to China to increase the energy-efficiency of new buildings there. (One more reason to NOT start a trade war with China!)

All this investment is still just the first few drops in the $90 trillion bucket, but the rapid ramping up of these and other green investment commitments suggests that the financial powers that be are finally waking up to the scope of our challenge and are ready to put their massive wealth to work making the changes that are needed. Time will tell whether it will be enough, but we’re encouraged that it’s happening on a scale we haven’t seen before.

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Feds tweak rules to encourage social investing by foundations

A new set of regulations issued by the US Department of Treasury opens the door for private foundations to direct more of their investments to socially and environmentally beneficial projects.  Foundations are careful to separate their investment portfolio, used to grow their asset base, from the funds used to further their charitable mission, distributed in the form of grants or loans.  In recent years, many foundations that wanted to support social entrepreneurship or make loans to organizations within the areas of their missions had to treat these as part of their grant-making budget, rather than as part of their investment portfolio.

The new rules clarify that foundations “can factor in how the anticipated charitable outcomes from the investment might further the foundation’s mission in addition to the financial returns that are typically considered.  Thus, a foundation may prudently choose to make investments that provide both a charitable and a financial return without fear of facing a tax penalty.”

For more on this welcome new Zone 8 and 9 development, see this press release, issued by the Director of what sounds like a fantastic place to work: the White House Office of Social Innovation and Civic Participation.

Also, see this recent article from the Natural Investment News, in which our own Michael Kramer discussed the implications of the new rules and related changes at the IRS.

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Is impact investing about market-rate returns—or redistribution and reparations?

In the wake of a recent conference on Finance & Democracy, Leslie Christian highlighted a fundamental tension within the philanthropic and impact investing community: at what point, if ever, do those with extreme wealth begin easing up on the “do well” side of the equation, and start putting more of their resources into the “doing good” mission?  In a brief post titled Confluence…or Collision?, Christian is pleased to see that “the rarefied world of Wall Street investing and its ‘good investors’ is now being infiltrated and questioned by a small, vocal, and growing number of people with wealth who are eager to question and redefine investing.”  She shares a striking moment, when one of the conference participants rose to challenge the underlying mindset of the managers of the Rockefeller Brothers Fund, which has been praised for its decision to divest from fossil fuels:

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World Bank ups climate change funding

The World Bank plans to continue its aggressive funding of climate-related projects over the next four years, gradually increasing its combined total funding and leveraged co-financing from private investors to $29 billion per year, 28% of its total outlays (up from today’s 21%)  and enough to meet nearly a third of the global target of $100 billion per year that was set at the Paris climate talks.  In addition to these funding plans, all World Bank programs will consider climate impacts in future investments.

Projects in the pipeline include quadrupling funding for climate-resilient transport, a project in Mexico to reduce deforestation and forest degredation in an areas the size of Connecticut, and seven solar PV projects in Jordan, and development of an early-warning system for extreme weather events in areas that would help protect one hundred million people.

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Corporate giants collaborating to jump-start the circular economy

The idea  of a “circular economy” has been around since at least the 1970’s—at root, it’s a Recycle Everything vision—but it’s taken on new life in recent years as sustainability efforts have matured within governments, corporations, and academia.  Now, as the EU begins to codify the concept and corporate titans collaborate to fund a rapid ramp-up of recycling capabilities, the linear economy (manufacture-use-trash) may become a thing of the past.

Joel Makower of summarizes the concept succinctly:

The term has no official definition, but at its core, the circular economy is about “keeping the molecules in play.” In such a system, products are made primarily from benign and nontoxic ingredients — “nutrients” that can be returned safely to soil or water or, in the case of more durable components, placed back into service again and again. Toxic ingredients are not verboten; they can be used as needed in products or processes so long as they, too, are continuously cycled back into productive use and kept out of the waste stream. And, of course, as much of this as possible should be powered by renewable energy.

That all sounds like a generations-old greenie dream, but in the past couple of years, it’s gained adherents among corporate giants looking to capture some of the lost value in their products and packaging materials—one accounting found $11 billion of value in trashed U.S. packaging materials alone (see image above).  The 2015 World Economic Forum’s annual conclave in Davos, Switzerland, affirmed its commitment to a 2-year-old initiative called Toward a Circular Economy, which will work with policy makers and the financial community to spotlight and scale current circular economy efforts, especially in the developing world. Makower’s valuable overview continues:

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NZ community buys long-private beach via crowdfunding

It’s an all-too-familiar scenario: a prized corner of your local landscape is suddenly up for sale, slated for houses or a hotel.  Maybe it’s a place where generations of locals have had informal access, or perhaps it’s always been kept tantalizingly private.  Either way, the new plan is a step too far. . . . and it sure would be great if it were saved by a conservation group, or for a state park, or maybe just by a public-minded conservationist.

But nowadays, we don’t have to wish for a savior: a community effort in New Zealand recently made history by crowdfunding over $2 million to purchase an 18-acre beach and open this pristine beauty to the public!  The effort caught wider public attention, thanks both to the novelty of the initiative and its location near a popular National Park, and attracted donations from 40,000 people—along with a modest commitment from the New Zealand government—to outbid nearly a hundred other prospective buyers.

That’s what we call some inspired Zone 4/9 investing, coming together to protect an important tangible asset for the people, using the latest evolutionary finance models! Chalk one up for the power of creative thinking by two locals who organized the crowdfunding effort after a holiday conversation.  “At 10:57 last night we delivered a pristine piece of beach and bush into the hands of all New Zealanders to look after and to cherish and to treasure and enjoy forever,” announced Duane Major, one of the two, after the successful fulfillment of their ambitious dream.


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Root Capital: “Investing in Resilience” for world’s farmers

Root Capital is a well-established nonprofit social investment fund that focuses on small farm businesses in the developing world.  They lend capital, provide training, and build the local market ecosystems that can help these small and growing businesses thrive. Like many others, Root Capital is rallying around the idea of resilience as a practical and powerful way to respond to the uncertainties of our changing climate.  Their new Issue Brief addresses this head-on; it’s called Investing in Resilience: A Shared Value Approach to Agricultural Extension.  As they note in the Executive Summary:

The science is clear: climate change is coming. What is less clear is how climate change will impact specific farmers, supply chains, or countries over different time horizons, and how stakeholders should prepare for these impacts. . .  . This issue brief focuses on scaling the use of climate-smart practices among smallholder farmers by working through local agricultural enterprises, such as farmer cooperatives or processors. Aggregating hundreds or often thousands of dispersed smallholder farmers, these enterprises represent a significant, but often overlooked, channel for delivering “last mile” agricultural extension – that is, services that provide farmers with the information and skills they need to improve their farming practices.

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How would nature design a financial system?

Here’s a biomimicry-inspired vision for creating a global network of community credit organizations as an evolutionary new underpinning for the global financial system, currently centered on huge banking outfits.  It’s by Jamie Brown-Hansen, managing director of Biomimicry Switzerland.  Community Credit: The Next Generation of Financial Architecture

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Put your modest savings to work making a better world

Did you know that Calvert Foundation’s new Vested portal has lowered the entry point for its social investment opportunities to $20?  Social impact investing is one of the best ways to get real bang for your buck, but until recently there were few options for people with modest savings to participate. Most impact investments are risky enough that they’re only available to accredited investors, though local and regional loan funds and Calvert’s Community Investment Notes made it safer by bundling many social-impact projects into a mutual-fund-like packages.  Still, depending on the outfit, minimum investments were generally $1000 or more.

Vested opens these doors much wider, and offers beginning investors a wealth of choices: you pick the amount of your investment, and the term, as well as the type of social impact you’d like to have.  Investments for 3 years or longer pay interest rates comparable to or higher than most savings accounts.  Most exciting, you can choose from an array of targeted purposes, and with the low entry point, it’s easy to spread your money around a bit into several areas of interest.  Familiar themes like women’s empowerment, microfinance, and small businesses are augmented by other intriguing areas of focus, including aging and education in the U.S. or fair trade overseas.  For those who want their money to make a real difference in the world, this kind of direct investment in on-the-ground initiatives has far more impact than buying shares of even a do-gooder company. Your social returns are significant, while your money makes roughly what it would just sitting in your bank.

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O’Reilly sheds light on “WTF Economy” of Uber, AirBnB

Media and conference mogul Tim O’Reilly has been shedding some fascinating light on the future of work and our economy, via a series of essays dubbed The WTF Economy on Medium, in preparation for a November conference billed as Next:Economy (What’s The Future of Work?).  That parenthetical clues you into the tamer version of the WTF double-entendre he’s playing with—one very much in keeping with resilient investing’s core principle of keeping a close eye on the full range of plausible futures.

So far, the richest piece in the series is the second, Networks and the Nature of the Firm; this is a powerful rejoinder to the growing roar that’s pushing back on rise of the peer-to-peer economy, citing concerns about worker rights, fluctuating incomes, and other pitfalls of the new online marketplaces.  O’Reilly doesn’t quite gloss over these issues, but he puts the the old models into a broader context that was new to me.  In particular, he stresses the ways that the new economy is but a variation on the old franchising model, but one that replaces lots of middlemen with nimble technological platforms:

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New investment site lets you create/share targeted “funds” of stocks

The investment world is on the cusp of many disruptive changes, just like the world as a whole.  New online tech, artificial intelligence, and sharing platforms will all shake up the status quo—and the livelihoods of investment advisors like us—far more than the emergence of online brokerages did a generation ago.  There’s no telling which innovations will deliver on their promise, but this article on a new outfit called Motif caught our eye this week.  The idea is that you can put together a group of stocks that target a market segment you’re interested in being invested in:

Walia gave the example of the mobile Internet: How do you invest in that trend? Jim Cramer proposed a mobile Internet index in 2009, but no one seems to have done anything with the idea. Or, say, Facebook. So far, buying actual shares of Facebook doesn’t seem to be paying off as a way to play social networking. Walia’s alternative: Buy the companies with the most likes on Facebook. (Hey, it’s outperformed the S&P.)…Notice how much money you and your friends spend at Starbucks? Buy into a motif called Caffeine Fix. See iPads everywhere? There’s a motif for that: Tablet Takeover.

Motif users will be able to create their own motifs and share them with friends—either small groups of trusted fellow investors or one’s entire Facebook friends list.

The interface is simple (see image above), and of course you can track your results to see if your bright new “fund” is a winner.  Former top executives at eTrade and Bank of America are on board and they are emphasizing keeping trading costs very low, making it an appealing platform for bringing your own values, passions, and interests to bear in your investment approach.  But remember, the past pleasure of your particular passions is not a guarantee of future results!

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