Slow Money: Radical Redesign of Investing for the 21st Century
By Woody Tasch
Issue 10 Winter 2012
Armed with decades of experience in asset management and venture capital, Woody Tasch outlines the failures of our current modern industrial economy and presents a palatable argument for a new restorative economy founded on the principles of Slow Money. He prompts us to consider every investment we make as a statement of intention, a statement of purpose, a speculation about the future of man and his role in the scheme of things, not merely a financial speculation. In our world of special interests, policy debates, subsidies, and regulatory nightmares, the emergence of for-profit social entrepreneurs, who seek to build independent companies that integrate private enterprise and public benefit, need support. Woody Tasch lays the groundwork for a radical redesign of investing in the 21st century.
The idea behind Slow Money is wildly fundamental: we need to take some of our money, a tiny fraction of it to begin with, of course, out of the accelerating, increasingly volatile, abstract, and complex global financial marketplace, where we can never fully know what it is doing or who it is doing it to, and put it to work in things that we understand, closer to home, starting with small enterprises.
If I look back through the lens of history, this small story of Slow Money may in fact follow a natural pattern of inventions. Every 200 years or so, it seems, we arrive at a threshold moment in the history of capital and culture.
In 1600, two men in Amsterdam stood on a bridge over a canal, designing the joint stock company, minimizing risk to capital, and galvanizing the flow of investment in exploration, conquest, and export. The outline of the New World was as yet undefined and the notion of limits to growth unimaginable.
In 1800, two men in New Amsterdam stood under a tree on the cow path that would become Wall Street, designing a stock exchange that would create hitherto unknown degrees of financial liquidity and, so, galvanize the flow of capital in support of exploration, extraction, and manufacture. Corporations were small, continents were large, industrialization was incipient, the Prudent Man and the Invisible Hand about to enjoy their considerable time in the sun, and the notion that the resilience of natural systems had limits was about to suggest itself- but only briefly, and only to be swiftly discredited and debunked.
In 2000, we are entering a period of urgent postindustrial, post-Malthusian reassessment and reconnoitering. We find ourselves on a new threshold, signals of systemic unsustainability proliferating alongside those of ever accelerating capital markets and technological innovation. Consumerism and global markets are ascendant, carbon sinks are overloaded, and the idea of limits to growth calls for radical reconsideration.
Somehow, in this transgression, we designed a system where stocks and bonds matter more than the product or the work itself, with little reference to how greatly it could serve the public benefit. Ironically, the corporation as an entity, though floated and financed by scientific algorithms, has attained equal rights to people in the eyes of the law. By prioritizing markets over households, community, place, and land, the modern economy does violence to the relationships that underpin health and that give life-sustaining meaning- family relationships, community relationships, relationships between consumers and producers and between investors and the enterprises in which they invest, relationships to the land and soil. Such relationships are attenuated, or, in the extreme, deracinated, by the modern, global economy.
The extent to which the modern economy depends on broken relationships was revealed by a story told a few years ago during a small retreat of business leaders. Going around the table to introduce one another, a young entrepreneur of Middle Eastern descent told a tale of broken relationships:
“My most recent software company had its offices in the World Trade Center. On 9/11, we were pretty much wiped out, most of our records gone. When we started trying to put some of the pieces back together, I made the rounds to my directors. These were many of the leading investment bankers on Wall Street, individuals with whom and for whom I had made many, many millions of dollars in my previous ventures.
One of them said to me, ‘Why don’t you have Osama fund your re-start?’ At that moment, I realized that I had no relationships with these people. I realized that there had been nothing but commercial ties between us. The money connections were not real relationships.”
As he spoke, it became clear that while many of us had been aware for some time of the manner in which the modern economy depends on and produces broken ecological relationships, we had not been fully cognizant of the corollary damage done to social relationships. Although we understood the concept of ecological footprint, we did not fully understand the footprint of broken social relationships.
Attempts over the past few decades to restore civility in our modern industrial economic system have brought new ideas and practices to the foreground, such as the field of Socially Responsible Investing (SRI). However, as it has been practiced and understood, socially responsible investing (SRI) can do little to address root issues of consumerism and intermediation. SRI is confined largely to damage control: an exercise in improving corporate governance and minimizing damaging “externalities,” while not affecting core elements of a company’s activities, culture, and mission. At its worst, SRI seems an exercise in fueling a bulldozer with biodiesel: We are greening our fuel, but are we preventing subdivision of the farm?
Fundamental systematic change via broadly diversified portfolios of mature public companies is difficult to attain. Financial returns and performance benchmarks are defined by extractive or destructive economic activities, which forces SRI brokers and advisors to compete with the very same issues that SRI aims to reform. Therefore, SRI can be challenging, despite successes of shareholder advocacy campaigns and occasional spikes in public awareness.
To look at some of the growth statistics provided by the Social Investment Forum, you would conclude that SRI is making substantial inroads into the capital markets. From 1995 to 2005, assets under management using one or more of the three core socially responsible investment strategies, screening, shareholder advocacy, and community investing rose from $639 billion to $2.29 trillion. During that same period, the number of socially screened mutual funds rose from 55, with assets of $12 billion, to 201, with assets of $179 billion.
Despite the dramatic increase in the number of socially screened mutual funds, however, the overall increase in the SRI assets is far less impressive when viewed against the increases that occurred in total investment assets under the processional management in the United States from 1995 to 2005- from $7 trillion to $24.4 trillion. Even if one considers SRI’s percentage of total assets, roughly 10 percent, to be impressive, and even if one takes at face value a recent study by Mercer Consulting indicating that three-quarters of all money managers think that social investing will pervade the financial sector within a decade, the imperfections inherent in SRI cannot by ignored.
Critics of SRI point out that its pursuit of competitive returns leads inevitably to watered-down screens resulting in the fact that some 90 percent of the Fortune 500 companies make it into an SRI portfolio. For instance, a fast-food company or an oil company or a mining company may be deemed “best of class” for some of their corporate governance practices, but this does not address the basic problem that Paul Hawken identifies: “If you are going the wrong way, it doesn’t matter how you get there.”
The core issue that the SRI industry is not confronting is the macro problem of economic growth, which manifests itself at the micro level of individual portfolios and individual investments as the problem of competitive returns. Professional managers are measured on their financial performance, and it is no different for those who incorporate social and environmental criteria. The result: elaborate strategic machinations and metrics designed to demonstrate that you can “do well while doing good,” which in other parlance might be called “having your cake and eating it too.”
“The industry has hooked people on the idea,” Hawken wrote in a controversial 2004 critique, “that SRI funds should do as well as or better than other mutual funds, and then they have to demonstrate it, which leads to portfolio creep- the dumbing down of criteria and the blurring of distinctions between what is or is not a socially responsible company.”
To fully consider the social and environmental responsibility of a company, qualitative distinctions and exogenous factors must be considered with respect to its business. Is a company promoting conspicuous consumption? Is it furthering a global brand at the expense of local enterprise? Is it directly or indirectly exacerbating rural-urban migration? Is it benefiting from the utilization of natural resources at an unsustainable rate? Is it reducing cultural and biological diversity?
The answers to some of these questions paint stark pictures when we begin to trace the flow of capital. For instance, the U.S. Census data shows that 60 to 80 percent of net new jobs are created by small businesses. Yet the provision of capital is skewed to high-tech start-ups, on one end of the continuum, and microenterprise in developing countries, on the other. Less than 1,000 venture capital firms steer roughly $20 billion into 3,000 or so companies per year in the United States; more than 200,000 U.S. angel investors steer roughly the same amount into another 50,000 high-tech companies. At the other end of the continuum, financially and geographically, is the micro-finance industry, which provides loans of between $100 and $1,000 or so to micro-entrepreneurs among the world’s poor in developing countries. Micro-finance intermediaries are growing at what Forbes calls a “fever” pace, with 40 new funds started since 2005 and some $17 billion in loans outstanding worldwide.
Micro, small, and medium-sized enterprises (MSMEs) are widely recognized as critical to overall economic health. In The Soul of Capitalism, William Greider heralds the importance of “thousands of small and independent enterprises pursuing the new ideas and naturefriendly products” that will shape the future of the economy…Paul Hawken echoes Greider’s sentiments: “Ecological restoration can probably be carried out more naturally and surely by smaller enterprises, than by larger unwieldy corporations. The diversity of the small business sector must be encouraged… [We must] liberate the imagination, courage, and commitment that resides within small companies.”
Perhaps the economic activity that comes closest to the spirit that Paul Hawken is invoking is Community Supported Agriculture (CSA). Compared to the rest of the industrial food system, CSAs are simple, small, diversified, direct, and local, balancing financial, social, and natural capital in ways that are beyond, or below, the capacity of most commercial enterprises.
However, in the country that has gotten used to being called “the world’s breadbasket,” the category “small food enterprise (SFE)” does not exist. Capital markets seem ready to leave SFEs unrecognized and languishing, neither fish nor fowl in the territory between investing and philanthropy, between developed global economy and developing local economies.
What is needed is a new form of financial mediation- intermediation whose ultimate goal is to empower investors, entrepreneurs, and farmers as agents of restoration and preservation in their local communities.
It will require experimentation with portfolio design: For instance, can the risks of investing in small food enterprises be mitigated by investing in farmland? What about sustainably managed timberland in the region? What are by traditional investment criteria disparate sectors become elements of an integral strategy for investing, or, what Paul Muller calls “reinvesting”- in fertility and health.
We are turning a compost pile. The following design questions are emerging:
• Can we design ways for regional investors to invest in regional food enterprises? Could there even be Slow Money Bonds, similar to municipal bonds, but investing
in local food systems?
• Can portfolios of SFEs deliver positive rates of return to investors? Is public or private subsidy required?
• What is the difference between “local” and “regional”?
• If Denmark has a single CSA that is as large as all of those in the United States combined, what does this say about the entrepreneurial opportunities to connect
U.S. farmers and U.S. consumers?
It falls to us to undertake a new project of system design: the creation of new forms of intermediation that can catalyze the transition from a commerce of extraction and consumption to a commerce of preservation and restoration.
Within and beyond the world of food, there is an increasingly robust wave of entrepreneurial activity around such principles and concerns. Hundreds of mission-driven early-stage companies every year seek capital through the Investors’ Circle (www.investorscircle.net). Scores of cities are organizing chapters of the Business Alliance for Local, Living Economies (www.balle.org); BALLE is incubating the concept of local stock exchanges. B Lab is incubating legal guidelines for B corporations and formulating an entrepreneurial strategy for accelerating the growth of a B sector (www.Bcorporation.net). The Fourth Sector Network is exploring the development of “for-benefit” organizational forms and governance structures.
In order to enhance food security, food safety and food access; improve nutrition and health; promote cultural, ecological and economic diversity; and accelerate the transition from an economy based on extraction and consumption to an economy based on preservation and restoration, we do hereby affirm the following Slow Money Principles:
I. We must bring money back down to earth.
II. 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.
III. 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 and non-violence.
IV. We must learn to invest as if food, farms and fertility mattered. We must connect investors to the places where they live, creating vital relationships and new sources of capital for small food enterprises.
V. Let us celebrate the new generation of entrepreneurs, consumers and investors who are showing the way from Making A Killing to Making a Living.
VI. 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?
A movement where investors redesign capital markets by steering new sources of capital to small, local, and sustainable enterprises that value sense of place, social well-being, environmental sustainability, economic diversity, and soil fertility.
The current system of finance that values monetary gain as the sole fiduciary responsibility of business, sending the flow of capital to businesses successful strictly in the pursuit of making money.
Restorative economy An economy built on the promise of business to increase the general well-being of humankind and the environment through service, creative invention, prosperity, meaningful work, and true security.
STRATEGIES IN ACTIONS:
>> Bring money back to earth
>> Slow our money down
>> Design nurture capital built around principles of carrying capacity
>> Connect investors to the places where they live
>> Celebrate the new generation of entrepreneurs
>> Re-build our economy from the ground up
About the Author:
Woody Tasch is chairman and president of Slow Money, a 501c3 nonprofit organization, founded in 2008 to catalyze the flow of investment capital to small food enterprises and to promote new principles of fiduciary responsibility to support sustainable agriculture and the emergence of a restorative economy. Tasch has a long history as a pioneer of asset management and philanthropic purpose. He is Chairman Emeritus and former CEO of Investors’ Circle, a network of angel investors, family offices, social purpose funds and foundations that since 1992 has invested $146 million in 225 early stage sustainability-promoting ventures and venture funds. During much of the 1990s, he served as Treasurer of the Jessie Smith Noyes Foundation, where, as part of an innovative mission-related venture capital program, a substantial investment was made in Stonyfield Farm, now the world’s largest maker of organic yogurt. He is the author of the recently published Inquiries into the Nature of Slow Money: Investing as if Food, Farms, and Fertility Mattered
Slow Money Conference www.slowmoney.org
Inquiries Into the Nature of Slow Money, Woody Tasch
Investor’s Circle, www.investorscircle.net
The Fourth Sector Network, www.fourthsector.net
Benefit Corporation www.benefitcorp.net