By Don Shaffer
I've been talking to a lot of people lately about RSF Social Finance's decision to walk off Wall Street, and urging others to consider doing the same. The obvious question that comes up is, OK, but where do you go? What are the investment and banking options beyond the Wall Street-centric institutions? Can you really get off that grid?
It's not easy--we are painfully aware of that--and we can't give specific investment advice because we are not financial advisors. But yes, you can unplug. We've nearly completed that process by cobbling together a collection of excellent, best-available options. For us, the process took longer than we would have liked, but new investment options are emerging all the time, and I think walking off Wall Street is getting easier fairly rapidly.
What that means to you or your organization depends on your goals. Our goal is to transform the way the world works with money, so we approached unplugging with a related set of questions: How can we move from a financial system that's complex, opaque and anonymous to one that's direct, transparent and personal? What underlies modern portfolio theory, and are there other ways to structure investment portfolios that are more appropriate for the 21st century? What does it mean for investors if economic growth is much slower in the years and decades to come than it's been since World War II?
You may share some of those questions (I'd love to hear your answers), and you will certainly have others. There are plenty of paths to pursue for people and organizations who want to use finance and business as a way to drive meaningful, positive change in the world, and who are willing to roll up their sleeves to support new ideas.
What's next
There's a need for transformative finance organizations at every level--banking, advising and all areas of investing. There's also room for a broad variety of approaches to serve the full spectrum of investors. Following are just a few ideas in the investment area that could expand the range of options.
Integrated capital. Integrated capital is the coordinated and collaborative use of different forms of capital (equity investments, loans, gifts, loan guarantees and so on), often from different funders, to support a developing enterprise that's working to solve complex social and environmental problems. Integrated capital addresses the funding challenges social enterprises face in a number of ways. It allows for longer development times by including some types of investment that don't need to make a large return. It gets enterprises through the "valley of death," where they have a promising business model, technology, product or service, but need additional capital to realize its potential and don't qualify for traditional financing. And when community foundations and local investors participate, it creates a community commitment to the enterprise's success. (See more on the concept in this post.)
Evergreen investments. I'd like to see more evergreen investment approaches that rely on dividends and other forms of steady return, similar to what Equal Exchange has done. A worker-owned cooperative selling fair trade and organic foods, Equal Exchange has raised growth capital through periodic sales of nonvoting shares (it's also an RSF borrower). Purchasers must hold the shares for at least five years, and there's no real secondary market. Shareholders who bought in 19 years ago have averaged 5 percent returns every year. Shares don't increase in value, and there is no capital gain--gains accrue to the family of stakeholders.
Redefining risk. We've been working with financial advisor Leslie Christian on developing an alternative to modern portfolio theory, a framework based on many assumptions and conditions that no longer hold true. As Christian has said, "Rather than trying to measure the riskiness of a particular asset within the framework of a growth economy that looks a lot like the past century but with more players, perhaps we need to consider the riskiness of the global growth economy itself." Doing so not only reveals hidden risks in the dominant model, but also leads us to opportunities that can mitigate those risks. (I'm dramatically simplifying here; I recommend reading Christian's white paper on the topic.) This new approach naturally requires an education process for investors, and social finance firms need to take that on.
I don't want to be sanctimonious when I describe who we are and what we're doing at RSF relative to Wall Street. I am just doing my best to call it like I see it. There's the classic Einstein rule: We can't solve problems with the same kind of thinking we used when we created them. We're now experiencing a window of opportunity in the history of finance--fresh imagination needs to come from the periphery, from new networks of collaborators.
The essence of our thinking is simple: Only when each financial transaction is direct, transparent and personal will it be possible for an economy based on love and mutual respect to emerge.
Don Shaffer is president and CEO of RSF Social Finance, a pioneering funder of social enterprises based in San Francisco, and a B Lab board member.