Money in Place: Catalyzing Local Impact Investing

What follows is Adam's chapter from the forthcoming book Conscious Investing, edited by Christian ter Braak-Forstinger.You can buy the book here: https://www.harriman-house.com/consciousinvesting

My work is impact investing, both taking care of clients at Arjuna Capital, and creating and managing impact investing products at New Summit Investments. We deploy impact capital across the four quadrants of investing: publicly traded stocks and bonds, as well as private market investments in debt and equity.

Impact investors want to see their money lead to tangible positive change in the world. The UN sustainable development goals articulate some of the most pressing global objectives that are of interest to impact capital: absence of poverty and hunger; affordable, clean energy, water and sanitation; climate action, sustainable cities and communities; decent work, good health and well-being; healthy life below water; quality education; reduced inequalities in general and the achievement of gender equality in particular.

Yet these vexing problems can be difficult for investors to address through traditional channels. This is not particularly surprising, in that the existing global money architecture has been central to the creation of a good number of these challenges themselves. Plus, global investing in large, established entities is now very easy. The most liquid investments to make are in large corporations and governmental entities, available through stocks and bonds which trade in virtually every country around the world. These well-lubricated channels are where most investment capital flows, reinforcing the status quo.

Money is a form of energy that catalyzes activity in the real world. In most cases the consequences of investing are generally unknown to stock and bond buyers deploying assets through conventional pathways. In fact, the full impact of money beyond the observed financial return is rarely even discussed, let alone calculated. And if somehow a typical index fund had an impact report attached to it, the data would simply describe the world that modern finance underwrites, from healthy foods to hot dogs, from modern factories to strip mines and sweatshops – the good, the bad and the ugly.

Global investing is in many ways an abstract exercise, with the money system seemingly separate from the reality in which it invests. Technological innovation has given conventional finance the characteristics of a computer game, often played with no obvious implications beyond the game itself. Investors, even small ones, can with a few clicks deploy capital all over the world. Stock and bond positions are valued in real time, with the gyrations at times subject to wild speculation and the madness of crowds. Securities are easily sold and converted back into cash, with such extreme liquidity that day trading and other forms of short-termism resemble casino gambling, as opposed to the deployment of savings to form and transform our world. In sum, most asset owners have no idea what the real-world influences of their investments are beyond the monetary value of their accounts going up and down.

Local, distributed and smaller investment opportunities are the potential antidote to impersonal and unsustainable big-business global investing. But for the most part these types of investments are not easily accessible to the average individual or institution. On the US stock exchanges, a company is still considered ‘small’ if it has a market value of $1–2 billion. The large size of most securitized entities dwarfs both the local businesses that we interact with daily, and the smaller, inspiring sustainable enterprises that give hope for the future.

Local investing was once the only form of investing, but now is largely disconnected from the modern global money system. Local investments such as real estate and small business expansion are generally illiquid, requiring significant resources for research, due diligence, and deal structuring. Local finance is generally a small and intimate affair – illiquid, inefficient and long term. But once investing locally there is the benefit of directly observable implications. What we can see, touch, hear, taste and feel provides for obvious connections to the real world, along with a relatively transparent stream of financial, environmental and social impacts.

Put simply, local investing is people investing in the places where they live and work. We all are local investors in some form – starting businesses, buying property, supporting local non-profits, raising children – and these activities operate largely outside of the global financial system. Where local investments do connect to global finance, such as with mortgage securitization, the results have been at times disastrous, outside of the control of the localities themselves.

Local impact investing forms connections to larger social and environmental themes, such as reducing greenhouse gas emissions or providing opportunity at the bottom of the economic pyramid. What if these types of local impact investments could be more easily identified, with efficient implementation structures comparable to global investing? What would such a system look like, and what are the key challenges that will need to be overcome to create it? How can we embrace the diversity of local cultures, geographies and economies? What would define the common elements of a robust local impact investing architecture, such as shared platforms and systems, good governance practices, and feedback loops documenting both financial and non-financial impact?

Global investing: easy to do with your eyes closed

As an investment advisor with a practice in impact investing, I serve as a connector or conduit, managing the flow of money as a form of catalytic energy. Individuals, families and institutions are looking for a home for their investments, seeking financial returns, positive social and environmental impact, diversification and liquidity. Our job is to channel this money into funds, companies, and institutions seeking capital for impact. We search for opportunities providing competitive financial returns to compensate for risk. Once assets are invested, we report to clients not only on the money that they are making but also the positive difference that their assets are making in our world.

There are few places more touched by technology and globalization than finance. It is now possible for virtually anyone to invest in a diverse set of companies from South Africa to Canada, from Norway to Indonesia, and just about everywhere in between. While opportunities for investment are available in virtually every country, they are generally not locally focused on regions, states, cities or towns.

It was not always thus. Investing was once a local affair financing one project at a time. It is now about as personal as buying a toaster on Amazon.com. A few clicks and the portfolio arrives in the investor’s account. In a busy world filled with busy people, this kind of convenience and value is almost irresistible. Hence Amazon may one day be the first company with a $1 trillion market valuation. The steady growth of commodity-like financial index products is the investment equivalent of one-stop internet shopping.

Yet, as with internet shopping, these easy and cheap transactions can seem lacking. While the personal financial impact of investing in an index fund is obvious in real time, the human and environmental consequences are largely unknown. These transactions also lack the personal interactions and local flavor that can make market activity so satisfying and enjoyable. Buying something from someone you’ve gotten to know in a local business that you enjoy being a part of has its own flow of rewards. So does knowing the full impact of one’s actions.

Consumers interested in the broader consequences of their buying look both backward and forward, seeking to understand where goods come from, who makes them, how many miles they traveled to get to their door, and ideally the full lifecycle accounting of the transaction including disposal or recycling. Often, income doesn’t have to rise much before consciousness about the impact of market activity expands beyond pure use value. For both market-based consuming as well as investing, the broad consequences spill over into not only the local community but also the wider world.

Investing is oriented toward the future, looking ahead at the likely consequences of money deployed. Over time, the personal financial benefits or costs of investing are obvious, but the broader implications of saving and investing are often obscured by the distance and diversification that national and global investing entails.

Globalization and its discontents

My interest in local investing has been a long time coming. My life has been built on the freedom to migrate, to travel, to import, to export, to consume and to invest all over the world. Our family does not have deep regional roots. My grandparents were immigrants to the United States, fleeing the oppression they faced in Eastern Europe and seeking a better life. With my mother’s life-long support, my father became an academic physician. We remained unmoored geographically, our family moving with my father’s work: from Philadelphia where he was born and raised, to Tennessee, to Maryland, to Texas. My studies took me from Texas to Boston, my work from Boston to London, and I currently live in northern New Mexico. My work, my family, my life itself is a product of globalization. For a number of years I was a global investment strategist, working for several of the world’s largest investment managers, moving money around the globe at the speed of electricity, which is the speed of light.

The free movement of capital and labor are central elements of the global money system. Science, industrialization, globalization, market capitalism, migration and urbanization are all inextricably linked, and have transformed our world for more than two centuries. We have all been born during this unique industrial era. Modern humanity has reaped the benefits, particularly with respect to rising life expectancy and radical reductions in absolute poverty. Many of the world’s communities have seen transformational improvements in education, housing, health care, and access to information.

Global migrants move through communities with rich local cultures. Everywhere I have lived there are deeply rooted families, connected to ethnic groups that have lived in the same place for generations. And for locals committed to a specific place, globalized capitalism is often a mixed blessing. Small businesses owned by locals are vanquished by large chain stores. Long-standing export industries are abandoned when markets shift or cheaper labor is found elsewhere. High-wage jobs with good benefits evaporate, seemingly overnight. And in prosperous places, gentrification drives up housing prices, forcing young families to move away from the communities in which they grew up, or to stay and struggle. Those that stay often bear the highest cost of these transitions and transformations.

The dynamic as well as the disruptive aspects of globalized capitalism are apparent everywhere, and have led to two thorny and unsolved problems. The first is an ever-widening distribution of income and wealth. The second is a set of environmental problems not in the control of localities or even nations, including global warming and the health of the oceans.

Global vs. local investing

Today’s ubiquitous stock and bond investing is often a broad-based activity focused on diversification. Venture capital and other forms of private investing are generally not available to the average investor. These require understanding of specific markets, localities and people. Before investing in a young company that has yet to reach profitability, or in a successful company looking to scale, it is necessary to have a deep understanding of the market opportunity, the business plan, and the people responsible for executing the strategy.

Local investing requires this kind of understanding, which can be expensive and time-consuming to gather. Localities generally lack institutions to support the sourcing and vetting of investment options. Consider how easy it is to invest far afield, say in emerging market companies in Africa, Asia, Latin America and Eastern Europe. There are dozens of stock and bond funds investing in these markets. After reading an article or two on the best of these funds, with a few clicks you can own a diversified, professionally managed investment providing access to dozens of companies diversified by country and industry. Local investing in smaller entities does not allow for this kind of efficient, easy and diversified implementation.

The everyday nature of local investing

Despite these obstacles, local investing is pervasive. It is certainly the oldest form of capital deployment, starting with the self-sufficient tribe. Local resources invested locally create a flow of future benefits either to the investor, their community, or both. While few people may think of themselves as such, almost everyone is a local investor. Buying a home or an apartment is a local investment, often leading to follow-up investments to maintain and enhance the property. We often think of investments as purely monetary, but like money, time is a scarce resource. Time spent with children or doing volunteer work is a form of community investment with flows of rewards both personal and local.

All around us we see local business entrepreneurs providing services that the internet has not been able to fully replace, often because of their local flavor: shops for food, clothes, furnishing and home building; services ranging from law to medicine, from therapy to personal care; entertainment, bars, restaurants and tourist businesses; and locally-based companies oriented toward the broad export of goods and services. Some of this local activity is created by outside investors and chain stores. Yet it is the commercial institutions owned and operated locally that often make a place not only more distinctive and memorable, but also more resilient and sustainable.

Public infrastructure is another crucial aspect of local finance, creating the context in which private local investing can thrive. A healthy local economy takes root in the context of good governance, enforceable contracts, safe environments, public spaces, schools, transportation and information infrastructure, anchor public institutions such as medical schools, hospitals and universities, attractive tourist destinations, smart zoning, and other public goods.

The challenges of local impact investing

Historically, local finance has centered upon community banks, the traditional lenders to small business. However, at least in the United States, the number of community banks has been in decline since the 1980s. Following the financial crisis, increased regulation and the subsequent tightening of lending standards has caused a significant decrease in small business lending by banks. Small businesses cite the limited access to credit as their biggest impediment to growth.¹

‘Enterprise Lenders’ are stepping in to fill the financing gap, raising funds and using online platforms and big data analytics to increase access and efficiency in local lending. However, small business alternatives to bank lending remain in their infancy. In comparison to point and click global finance, investing in a business on your town’s main street is time consuming and complex. No matter the business, from day care centers to shops and restaurants, the risks of failure can be significant and hard to discern. Reasonable due diligence on these deals would include reviewing the business plan, understanding the risks of failure, having a full understanding of the people involved, including their background, character, skills and experience, and reviewing the investment documents in detail. Even when unearthing a promising local investment, the funds required might be a significant and perhaps too-high portion of investable wealth. And the investment might be highly illiquid with little transparency on the timing of any income or capital gains.

To further complicate matters, just because an investment is local, doesn’t make it an impact investment. I am a principal in New Summit Investments, which creates and manages impact investment products. One of the first questions we often get is, “What is impact investing, really?”² For us, impact investing begins with sustainability, which is a scientific concept. Sustainability is rooted in biology and physics, and describes the limits within which a society can grow and prosper over time. These limits, when understood and applied, provide an invaluable metric to parse investment activity. We see a world of significant opportunity and commensurate restrictions, each being the mirror of the other. These constraints can either be gateways to new industries, products and processes, or limiting factors to economic prosperity.

Impact investments create new opportunities, fill important social gaps, and provide valuable products and services for underserved populations. From a systems perspective, environmental and social opportunities and challenges are inextricably linked. Innovative and profitable solutions are best analyzed through an integrated impact lens across multiple dimensions.

As we define it, impact investing is not a specialty area but simply a better, more satisfying way to invest. Impact investing means deploying capital to seek not only financial return, but to create true prosperity within the opportunities and limits created by sustainability. Important trends threaten the natural capital which is our collective inheritance and the human systems that Earth supports. Investments that intentionally create products, services and innovative processes that heal the planet and meet human needs will in the long run be the only truly sustainable, prosperous allocations of money.

A positive impact investment thus requires a net sustainability benefit. At New Summit we organize our impact investing around three broad themes: Economic Empowerment, Green Innovation, and Conscious Commerce. Each of these link to our overarching sustainability philosophy as stated above. Within these themes we define a set of sub-themes such as the Stewardship of Natural Capital, Gender Equity, and Food and Human Health. It is not yet possible to have full transparency on the impact of every investment, but ideally the sustainability impact of prospective investments can be fully mapped along with the financial prospects.

In comparison to global investing, six things make local impact investing difficult:

1. lack of sourcing and vetting infrastructure,
2. no standards for contracting or terms,
3. lack of diversification,
4. lack of liquidity,
5. lack of infrastructure for determining social and environmental impact, and
6. the general absence of securitization and market exchanges.

Despite these challenges, we are seeing a growing number of successful local impact initiatives.

Inspiring local investment initiatives

Slow Money Keying off the Slow Food movement, the mission of the Slow Money Institute is “to catalyze the flow of capital to local food systems, connecting investors to the places where they live and promoting new principles of fiduciary responsibility that bring money back down to earth.”³ Through national gatherings, regional events and local activities, over $55 million has been invested into more than 600 small food enterprises around the United States. Seventeen local networks and 11 investment clubs have formed. Slow Money events have attracted thousands of people from 46 states in the USA and seven countries. Slow Money investing has begun in Nova Scotia, Switzerland, France and Belgium.

“Imagine the impact of a million people investing 1% of their assets in small food enterprises,” says Slow Money founder Woody Tasch. “A few years ago, the idea that there is such a thing as money that is too fast or securities that are too complex might have seemed far-fetched. Today, people are hungry for real alternatives to faster and faster, bigger and bigger, more and more global. Investing in local food systems is a way to begin fixing our economy and our culture from the ground up.”

Over 30,000 people have signed on to the six Slow Money Principles:

1. We must bring money back down to earth.
2. There is such a thing as money that is too fast, companies that are too big, finance that is too complex. Therefore, we must slow our money down – not all of it, of course, but enough to matter.
3. The 20th century was the era of Buy Low/Sell High and Wealth Now/Philanthropy Later – what one venture capitalist called “the largest legal accumulation of wealth in history.” The 21st century will be the era of nurture capital, built around principles of carrying capacity, care of the commons, sense of place, diversity and nonviolence.
4. We must learn to invest as if food, farms and fertility mattered. We must connect investors to the places where they live, creating healthy relationships and new sources of capital for small food enterprises.
5. Let us celebrate the new generation of entrepreneurs, consumers and investors who are showing the way from Making a Killing to Making a Living.
6. Paul Newman said, “I just happen to think that in life we need to be a little like the farmer who puts back into the soil what he takes out.” Recognizing the wisdom of these words, let us begin rebuilding our economy from the ground up, asking:
   •  What would the world be like if we invested 50% of our assets within 50 miles of where we live?
   •  What if there were a new generation of companies that gave away 50% of their profits?
   • What if there were 50% more organic matter in our soil 50 years from now?

LION

The first Local Investing Opportunity Network (LION) was formed in Port Townsend, Washington as part of the Transition Towns movement. They have now been launched in other communities in the United States, including New York, Oregon, Massachusetts and California.

Investing is a regulated affair, and most local networks do not have the capacity or the scale to create investment vehicles such as regulated, securitized funds. Rather, they generally are information networks that build community, creating connections and facilitating matches between local businesses and potential investors. With respect to LION:

The LION is designed to create opportunities for local businesses, individuals, and local investors to network and develop informal relationships. The U.S. Securities and Exchange Commission [SEC] has created some very specific laws about how one can ask for money. These laws limit any kind of public offerings of shares/interest in a company (i.e. securities), unless there are proper filings and the people investing are considered accredited investors. There is a general exemption that the SEC does not regulate where the investors are friends with the people they are investing in. The LION hosts informal gatherings with the idea that friendships would form and the SEC guidelines would not be violated when any investments occur. The LION also documents who attends the gatherings as a means of creating a paper trail proving that the individuals involved in an investment had the opportunity to form an informal relationship.

The LION does not facilitate any dealings, nor does it allow businesses to make pitches soliciting investments to the group. All investments that might occur as a result of the LION meetings would occur outside of a LION meeting and be wholly arranged by the individuals involved in that business dealing.⁴

For the investor, the attractiveness of the local investment club comes in part from the direct and human interactions. Investors get to know each other and meet with a range of entrepreneurs and businesses within their communities looking to finance projects or expand their operations. This forms a more traditional and personal bond between the sources and uses of capital; one that is visibly absent within the typical securitized global investment world.

Local investment is connected and interactive, often absent any professional intermediation or investment product structure. Investment clubs can be very satisfying for those willing to commit the time and effort. However, local impact investing clubs are usually volunteer efforts that are difficult to maintain and to scale. When the initiatives grow and develop infrastructure, they are often dependent on ongoing philanthropic support to survive.

Community Sourced Capital

Community Sourced Capital (CSC), based in the Seattle area, is an internet platform facilitating zero-interest community loans.⁵ Local investors, or “squareholders,” invest in $50 increments. To date, about 100 loans have been made, at an average of $20,000. This is a form of efficient local crowd funding, with loan campaigns reviewed by CSC for financial integrity, appropriate size for the need, demonstrated history of sales, and community connection. To date, 98% of campaigns are in good standing and being repaid on time. In order to ensure its own sustainability, CSC has reformed as a non-profit entity.

One of the great debates in local impact investing is whether the financial returns can be competitive with conventional investing. The economics of local food systems are such that most loans in the Slow Money Network are at relatively low yields relative to other market investments with comparable risk. At CSC, the loans are zero-interest, in part because of the regulatory and operational ease of crowd-funding versus interest-rate lending. LION is focused more on information flow and match-making across a variety of potential sectors, thus investments can be debt or equity, and market-rate or below market.

I personally believe that to scale, impact investing will require structures for both what Slow Money calls accumulation capital (market-rate risk-adjusted returns) as well as nurture capital (below-market rates of return). What is required is that all potential impact investments have a transparent accounting of expected risk and return. Some impact investments can be placed on the ‘efficient frontier’, providing an expected market-rate return for the given level of expected risk. Other high-impact investments may be offered with financial returns that are below the efficient frontier, while seeking a valuable stream of non-financial social and environmental returns. All investments have their own set of opportunities, risks, constraints and impacts, and can be evaluated as such.

One of the commonalities of the local examples above is the emphasis on building and nurturing community, moving away from the anonymity of global investing to build networks of local investors who are themselves often customers, friends and neighbors. Rather than depositing money in a bank or brokerage, local impact investors are directly investing in entities they admire, often filling gaps in access to capital and providing a satisfying stream of financial and non-financial returns. This is the connection to people and places that modern investing often lacks.

Money in Place: designing a scalable local investing infrastructure

I was asked recently to contribute to a series of online pictorial essays commissioned by Berlin-based Energies United. These essays consider energy from multiple perspectives. In writing my essay Money Energy,⁶ it struck me that the existing institutions for money management are unlikely to be transformed, and that the large-scale redirection of money requires new systems and structures. This raises some very big questions for local impact investing:

• How can communities take back power and alter the course that globalization has set?
• How can financial capital grow the regenerative capacity of places?
• What principles will catalyze the future of place-based impact investing?
• What structures would support the scaling of local impact investing?

To engage with these questions, my friends at Energies United and I are convening a diverse group of systems thinkers, localists, technologists, philanthropists and impact investors. Our intention is to develop a joint understanding of what it will take to scale local impact investing, define the first steps on that journey, and secure commitments to take it forward.

What I hope comes from this effort is an infrastructure for local impact investing that is both global and local. We hope to develop a network that provides information on local investment opportunities, access for a broad base of investors, due diligence, transparency, strong governance systems, authentic community input, and impact reporting on the flow of social and environmental benefits.

We refer to our initiative as Money in Place. While every place is different, we can learn from each other and seek out best practices for local impact investing, discovering practical ways to route money through local impact networks. We want to use information technology to help identify investment opportunities across localities, and map how they connect to critical global goals such as women’s empowerment and the radical reduction of greenhouse gas emissions.

We are not sure precisely what will emerge from our Money in Place convening. We hope that a diverse but focused group can break down silos and learn from each other, and that what is created over time will catalyze resilient, scalable structures for local impact investing. From my perspective as an impact-oriented financial advisor, there are important fiduciary elements that will be required: First, there must be an effective governance system to ensure local impact investing is as free as possible from corruption and fraud. Second, there must be effective information flow, so that both the financial and impact aspects of potential investments can be understood and evaluated. Third, there must be structures that allow for efficient contracting between asset owners and the underlying debt and equity opportunities. Fourth, there must be appropriate diversification and risk management. Fifth, there must be monitoring and reporting on both the financial and the impact performance of the projects that are funded.

We want to make local impact investing easier for investors of all types, catalyzed through systems, structures and information systems mapping local opportunities to broader impact themes. As money flows through these systems, it will empower local investors and give them the opportunity to contribute to the healthy regeneration of their communities.

The globalized money system is entrenched and powerful. The ease of investing in stocks and bonds directs most financial wealth into large corporations. These corporations are themselves the key clients of Wall Street banks and other mega-financial institutions. A local investing infrastructure would provide a source of countervailing power to these institutions, redirecting money flows toward local projects, focused on both financial opportunity and positive local impact linked to critical global challenges.

I hope that Money in Place grows to become a viable conduit for a substantial portion of the world’s financial assets. However, it is important that the network resists the concentrations of wealth and power that have been a consequence of global financial markets themselves. A resilient, distributed community of investors connecting to local investment opportunities should be able to thrive with a minimum of centralized effort. Each locality should have the power to shape its own Money in Place, while conforming to consistent standards of governance, fiduciary duty and reporting. The network itself should not be yet another opportunity for wealth concentration by armies of financial professionals, but rather an efficient and transparent conduit connecting investors to promising local impact investments.

Can restorative impact investing be modern, efficient, diversified, connected, transparent and local all at the same time? Money in Place is an invitation to create something new, rechanneling investments to build community for positive local impact. It takes a new system to replace the old, and a globally connected local investing best-practice network is a key piece of the transformational puzzle. It’s a big idea. We will need many co-creators, supporters and champions. Please join us! With success, virtually every investor will be empowered to define and help finance the world they want to live in.

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¹ Community Investment Management, LLC. ² Excerpted from Adam Seitchik, ‘American Impact Investing’, New Summit Investments (June 2017). ³ Quotes and data from www.slowmoney.org. ⁴ en.wikipedia.org/wiki/Local_Investing_Opportunity_Network. ⁵ www.communitysourcedcapital.com. ⁶ Adam Seitchik, ‘Money Energy: a personal history, a necessary future’, www.energiesunited-thegradient.com (February 29, 2016).

About Adam Seitchik

Adam Seitchik, Ph.D., CFA is a co-founder of sustainable wealth manager Arjuna Capital. He is also a principal in New Summit Investments, creating and managing impact investing products.

A thought leader in sustainable investing, Adam Seitchik was the co-CEO and CIO of responsible investment specialist Trillium Asset Management and founder of the Sustainable Investment Research Center. A frequent writer and speaker on sustainable investing, Adam is the author of ‘Money Energy’ (The Gradient) and ‘Climate Change from the Investor’s Perspective’ (Civil Society Institute). Adam holds a Ph.D. in economics and early in his career was an assistant professor at Wellesley College. Adam served as the Chief Global Strategist at Deutsche Asset Management in London, as a Portfolio Manager at Wellington Management in Boston, and is a Chartered Financial Analyst. He is on the faculty of Presidio University, a leader in sustainable business education.