2017: Our Financial Interconnectedness is the Big Story
by Don Shaffer, president and CEO of RSF Social Finance
In 2017, we’ll hear a deafening roar from investors:
• “Are screened mutual funds the best I can do?”
• “Why is my ESG portfolio filled with technology and big bank stocks?”
• “Can you please find me more direct investments?”
We’ll hear the following demands:
• “I get it now – investing in publicly-traded companies is just swapping paper shares anonymously with another party in hopes that I can buy low and sell high for my own financial gain. It’s not bringing any new growth capital to the businesses (unless I’m participating in the IPOs). I want to find more opportunities to support entrepreneurs and workers directly.”
• “I want to learn more about, and ideally meet, those entrepreneurs and workers – the people who are on-the-ground working for social enterprises – to learn more about how they are balancing their mission/values with the need to return capital to shareholders/debt holders.”
• “I recognize that there are risk-return and liquidity trade-offs associated with having a much larger percentage of my money in private companies/direct investments. Help me understandexactly what those trade-offs are, because I may decide to embrace a completely different approach to why I am investing, how I am investing, and what outcomes I am hoping/planning for!”
Let’s get real – individual investors have no sway in the public markets. The place where individual investors can have the most impact – by far – is in providing direct growth capital to private companies and social enterprises.
Instead of giving investors an (arguably) false sense of doing good through ESG funds, we need to get serious about how to create the conditions for a revolution in how people relate to money altogether.
What needs to change, specifically?
• Investors need fresh ways to think about their money
Many people are working on ways to present different options for investors based on their passions and their financial needs, with clear frameworks that answer questions like how to achieve diversification and liquidity in a portfolio of private investments. This will help us move from unconscious post-WWII expectations of clocking 10 percent annual returns in our public stock portfolios to a more nuanced understanding of 21st century realities. There’s no panacea or better mousetrap here – just a way to shift expectations from a mindset of “It’s my God-given right to get 10 percent annualized returns on my retirement money, hopefully without doing harm” to “I really want all of my money to be working for good in the world; a blended 4 percent financial return would be wonderful and I’m willing to forego some liquidity”. Let’s keep in mind: all the theories about investing are less than 100 years old. They are not ordained by a higher power.
• Investors need options
Accredited investors have many more options for impact investing, relative to ten years ago. Thankfully, the numbers of impact investors and social entrepreneurs seem to be ratcheting up in parallel at a healthy rate. This appears to be a long-term megatrend. Networks like Toniic and Confluence are doing a great job publicly spotlighting examples of diversified 100 percent impact portfolios, for those who ask, “Where is the menu?” And of course there are many more venture and private equity funds proliferating. For mainstream investors, there was the passage of Title III of the JOBS Act last May, which makes it possible for smaller investors to participate in direct equity investments via crowdfunding. We’ll soon see more direct public offering-style options like what Equal Exchange and Organic Valley offer today. And there are diversified loan funds like RSF’s Social Investment Fund with $1,000 minimums for non-accredited investors. Understandably, many financial advisors are limited by (good and well-intentioned) regulatory constraints like fiduciary duty and the “prudent man” rule. With that said, I believe we’ll see more roadblocks being removed for direct impact investing in 2017. For example, a year ago the Obama administration gave new ERISA guidance making it clear that institutional investors are permitted to invest in companies like B Corporations with expanded fiduciary duties. You’ll be on the wrong side of history to believe developments like this will be rolled back, no matter what the upcoming administration decides to do in the short-term. Today, there are excellent options around which to build a 100 percent direct-invested impact portfolio. I hope 2017 is a big year for bold action in this regard.
in the rest of Don's article he looks at several other solutions including how - Advisors need to develop new skills & capacities; Funders need to support field-building activities; and All of us need to dig deeper, all here - http://www.greenmoneyjournal.com/december-2016/2017-our-interconnectedness-is-the-big-story