Our investments shape the world we live in. That’s why I don’t like the term “impact investment” – all investments have impacts!
In the last couple of years, I felt the need to create an alternative investment taxonomy to clarify the impacts investments have out there in the world and the extent of investors’ awareness of the nature and extent of those impacts.
I call it the TANHI investment classification (TANHI stands for toward aware and no-harm investing).
Let me start with a question.
Do you own HII?
OK, prior to April 2022 it was known as Huntington Ingalls Industries.
Ring a bell?
HII is the largest military shipbuilding company in the US.
HII belongs to the S&P500. So, if you own a broad US market index fund or ETF thereof, you are benefiting from every Gerald R. Ford – class aircraft carrier, every Virginia-class attack nuclear submarine, every America-class amphibious assault ship or every Arleigh Burke-class destroyer (don’t you love the names?) HII sells to the US military.
If your portfolio benefits from HII sales of advanced weapons and you did not know about it, then you have an example of an unaware investment, the first terms in the TAHNI investment classification.
TANHI Investment Classification
Unaware (Extractive) Investing
- The vast majority of investing especially via mutual funds and ETFs
- ESG and SRI mutual funds are a marginal improvement but they mostly still fall under the rubric of unaware investing
- Most publicly traded companies tend toward extraction
- Individual stocks or bonds
- If investing in mutual funds it requires full awareness and transparency to the ultimate components of those funds
- Requires full awareness and transparency to the ultimate components of one’s investment
- Requires knowledge of no-harm as opposed to lack of knowledge of harm
- Hard to achieve for global multinational corporations and most publicly traded companies
- Municipal bonds, CD of trusted financial institutions (e.g. credit unions, regional banks), project-based bonds, peer to peer lending, municipal and state bonds, Treasury securities, Agencies securities could be considered no harm
- A no-harm investment that is creating positive outcomes either environmentally or socially
- Most likely requires concessionary capital (below market rate)
- Some of the compensation for risk comes in the form of social or environmental returns
- Positive risk-adjusted return
Restorative Investing ™
- At the intersection of investing and philanthropy
- The primary/exclusive motivation for investing is non-financial (“return agnostic”)
- Positively addresses a social or environmental problem
- Strongly relates to your personal values
- Negative risk-adjusted return
- Should be viewed as a spending decision
- Similar to a recoverable grant
For the purpose of this blog, I want to talk about restorative investing and what distinguishes it from philanthropy.
You are already familiar with the concepts of investing and philanthropy.
Investing is the deployment of money with the expectation of receiving your money back at a future date and then some, if all goes well. Most investments carry risks so there is very often the possibility that you would lose part or all of your investment but you would not make an investment if you did not have at least the expectation to get your money back and a positive return on top of that.
In philanthropy you are using your money to support an initiative you value for non-financial reasons – art, music, your church, the alleviation of poverty, the protection of endangered species, the protection of the environment, the empowerment of women in the third word etc.
Notice that, if you were to look at your charitable donation through the lens of conventional finance it would be a -100% return investment (at least before tax) in that, you don’t expect any of the money to come back. Notice also that anything you consider an investment would provide a positive return (possibly small in case of very short-term CD for example).
You might have noticed that there is a missing section of the chart. That’s where restorative investing lives!
An example will help.
West Oakland in the San Francisco Bay Area is defined as a food desert by the USDA and it has been one from the mid-1990s until June 2019 when Community Foods Market, a full-service grocery store opened to serve its 28,000 inhabitants, mostly low-income minorities and people of color.
Community Foods Market is the brainchild and labor of love of Brahm Ahmadi, a community organizer and activist who has worked tirelessly and creatively to improve the lot of the people in West Oakland, a sacrifice zone created by decades of institutional discrimination and racism (to get just a flavor for it you can check out this book or this article).
When I learned about Brahm’s work two decades ago, I was excited to participate in the public offering of CFM, which raised $2M from its community, and to join the Board when invited.
Of course, starting an independent full grocery store in an entrenched food desert is a very risky proposition. The investment terms reflected the typical low profit margins of even a successful independent full-grocery store – each preferred equity share could only be redeemed at its original price of $2 and, if the store was successful, it would return the capital to investors plus an accrued simple annual interest of 3% starting 7 years after the store opening.
Having a front-row seat to the incredible journey of the store from its initial ideation in the early 2000s to its excruciating funding efforts from the early 2010s to its frustrating search for a suitable location in the mid-2010s to its rocambolesque opening in June 2019 to the wild rollercoaster of the COVID-19 pandemic and to its untimely demise in early 2022 was both a privilege and a challenge to the health of my telomeres! Unfortunately, Community Food Markets joined the more than 3 million small and medium businesses that failed during the pandemic.
Of course, I knew about the risks from the get go.
When I looked at an investment in the preferred equity of Community Foods Market, I estimated that there was at least an 80% chance that I would lose my entire investment, a risk clearly not properly compensated by the expectation of a 3% return in the unlikely case of success.
This was a perfect example of a restorative investment. I invested in CFM because I wanted to help repair the injustices the West Oakland population had suffered regardless of the financial return I would get.
This example of a restorative investment gives me the opportunity to highlight the difference between philanthropy and restorative investing.
How would you solve the problem of the West Oakland food desert through philanthropy? Can you imagine supporting a sufficiently large food bank for a population of 28,000 people for years on end through philanthropy? After how many years would the donors become exhausted?
Clearly, the only way to address the West Oakland food desert in a durable way is to create a for-profit grocery store that eventually reaches profitability and is able to support itself for years to come while serving its community.
Yes, the chances of success are small, let’s say a 1 in 10, yet there was, and still is, a nonnegligible chance that a restorative investment could solve the problem of the West Oakland food desert for good. Alas, Community Foods Market was not it, but I am still proud of the valiant multi-decade effort to address this thorny issue.
Wishing you the peace of mind offered by a personal portfolio that is 100% aware and no-harm.