Sunday, April 22, 2007


An investment involves purchasing an asset or obligation with the expectation of future return. The aggregate effect of these investments drives capital flows around our globe. If, as is usually the case, people are investing for financial returns, financial capital will be searching the globe for the best returns. There is a lot of investment capital in this world, and our investment patterns, just like our consumption patterns, can drive significant change.

What happens when people are interested in other types of returns? This has given rise to the field of "socially responsible investment" and there are several types. There are the "negative screens", where you avoid investing in companies that sell certain types of products (cigarettes) or have certain types of supply (extractive mining). Then there are "positive screens" where one attempts to find particularly exemplary companies, with the idea that they will achieve higher returns (perhaps because this is their competitive advantage... in that attracts more customers, sparks greater innovation, or avoids risks). Think Ben & Jerry's or Interface. This is a burgeoning field, one of the faster growing areas of investor interest. Calvert, Pax World, and Domini funds are growing.

For most economists, investing is what one does with savings. If one donates money to a charity, the economists don't treat that as an investment. And if the government takes money from you (any one else just pay taxes?), and uses it for public "good" that isn't treated as investment either. Nor should it be. But back up... what if the reason one provided money to the charity was to seek a non-financial return on an investment? While we may never convince the economists that this is an "investment," there is certainly growing evidence that this is how the people with the money view what is happening. This growing trend falls under various labels like "venture philanthropy" or "social venture capital" or "new philanthropy".

Intriguingly, the investor may look at this "social investment" quite a bit differently than a "charitable donation." Returns in general, while speculative on the front end, are measurable at the back end. So, the investor might want to know what the investment accomplished. They might even want to know that it accomplished a superior return over a similar investment. Hmmmm. Ever compared yields on a mutual fund? Now, what about your "social investments"? Did you get the return you wanted from that United Way gift last year?

The law treats charitiable donations as gifts. Back in law school, we had to learn the difference between a gift and a contract,and it basically hinged on intent and a lack of mutual consideration ("consideration" as with many legal terms, doesn't mean what most people mean when they use the word; here it means money/property/services). If you are an investor, you usually get some form of obligation from the recipient (a share, a note, a deed). With a charity, you used to just get a thank you note and a tax receipt. But this has been changing. These "investors" are bringing some of the discipline of financial capital to this area. They are holding organizations accountable: funding based on milestones, requiring better measurement of results, etc. I think smaller donors (like me) are also beginning to think this way about at least some of our charitable giving.

Am I consistent in how I treat my investments across the spectrum of retirement savings to charity? No. But I do tend to start with a small position, and continue to grow it over time in the more successful ventures. And, I sell if I sense that the venture has moved away from the strategy it had when I invested, or if there has been a significant negative development in their market. I use this approach regardless of the investment. I also look for signs of growing value, whether in cash flow or other impact. I like measurable impacts, not the squishy stuff.

Mutual Funds. One of my tasks this year is to begin to move these funds (largely retirement) from standard mutual funds into more responsible funds. Along these lines, I have recently started a position in the Wilderhill Clean Energy Portfolio (AMEX: PBW). I will dollar cost into this fund over time, as I sense the portfolio companies are "richly valued".

Publicly traded companies: Whole Foods, Novartis, Johnson & Johnson and Toyota. All companies that pass my "positive" screen of being innovative, and having products that improve the world, particularly when compared to their competitors. I also think they will increase in value over time at a faster rate than other companies (a key idea behind an investment).

Private companies: Brighter (carbon offset credit cards), Inviragen (developing world vaccines), Gelazzi (gelato) and CaringFamily (use of communication networks to treat disease). I also own stock in a few companies that I have worked/consulted for in the past. These are my gambles. Investing in early stage companies is foolish, but it is also a way to back teams you think have potentially "game changing" ideas.

Philanthropy: Rotary International, Nature Conservancy, Doctors without Borders, Kiva, Opportunity International, One Acre Fund, Ashoka, One World Health, Envirofit International. All of these have a common theme: all of these use private enterprise approaches to achieve societal value. All also understand that they need to partner with other organziations and governments to get sustainable results.

Looking at it, I feel good about my investments. I know my goals for each, and what my expected return is. I would like to single out One Acre Fund for doing an incredible job this past year, both in terms of results, and reporting. Guess I need to increase my investment in this great start up venture.

1 comment:

Anonymous said...


I found your site impressive and enjoyed your blog. Thanks for mentioning it to me. In particular, I enjoy your approach of having an actively managed portfolio, which seems to take into account both social return as well as financial return. I also particularly like your discussion regarding the distinction between investment and charitable donation. I think it is a bit of a murky area, but I think that by highlighting this murkiness, you are providing a service which is very helpful to the debate.

One of the key differences between a tax expenditure or a charitable donation on the one hand and a social investment on the other hand, is the sense to which we exhibit some control over this cash outflow. In the case of our taxes we have practically none. With respect to charitable donations, I guess we have some control if our contribution is large enough or if the charity is relatively small. What's particularly neat about social investing is the extent to which one has some sense of control over how the money is put to use. I think that that increasingly makes this a very attractive channel, particularly for those people who have made their money through entrepreneurial activity.

Lastly, I would like to make the comments on the group you describe as "publicly traded companies". I think the companies like Whole Foods or The Body Shop when it was listed are quite different in nature from those like Toyota or Johnson & Johnson. The latter two are certainly good innovative companies, but I think that the first group are what I would describe as social businesses in that the social agenda is as important to the management of the company as their financial agenda. Or perhaps I'm being pedantic?

Best regards, Rod Schwartz