Where is your money invested? If you are like most Americans, your answer to that question is some combination of stocks, bonds, money market funds, and savings accounts. But have you ever stopped to think about the size and types of the enterprises your savings are supporting and where they are? Do you know how much of your savings is directly supporting businesses and the economy where you live?
Many of our readers and clients are enthusiastic and conscious supporters of their local economies; it’s hard to resist those local farmers’ market and locally produced pasta sauces. Many keep their cash in local banks, credit unions, and municipal bonds. But as investors in the local economy, there’s still a gap, because most of a typical investor’s portfolio is invested in publicly traded stocks and bonds of multinational companies.
Does it have to be this way, or can we rebalance the outflow and keep more of our investments local?
Certainly, some of the numbers are telling us that sending money from Main Street to Wall Street means missing opportunities for real growth. Over the past decade, small- to medium-sized enterprises (SMEs) have been driving new job growth in the U.S., even as large corporations have shrunk their workforces to achieve cost savings. (And surely it should surprise no one that corporate CEOs have been rewarded handsomely for these cost savings with ever-increasing compensation packages. According to the AFL-CIO, the average CEO of an S&P 500 company made 373 times the salary of the average production and nonsupervisory worker in 2014, up from 301 times in 2003 despite a 100-point drop in 2008 due to the recession.) In Vermont, for example, where the vast majority of locally owned businesses are SMEs, more than 1,500 new food system businesses were added between 2002 and 2012, according to the Farm to Plate 2014 report. Food system businesses also created nearly 5,600 jobs (a 10% increase) during that period, while food system economic output expanded 24% to $8.6 billion. Not only do local businesses create jobs, but a larger percentage of the each dollar spent at that business stays and recirculates in the community.
Maximizing shareholder return, the mantra of Wall Street companies, is the practice of extractive ownership. Most large corporations subscribe to an industrial worldview — linear, predictable, and inflexible. But another economic worldview, influenced by such thinkers as Donella Meadows and David Korten, treats the economy as a living system that is complex, unpredictable, and emergent — but highly adaptable and responsive. In her book Owning our Future: The Emerging Ownership Revolution, Marjorie Kelly discusses the pitfalls of extractive ownership and introduces the concept of a generative economy, “a living economy that is designed to generate the conditions for life to thrive, an economy with a built-in tendency to be socially fair and ecologically sustainable.” An economy designed to be profit making but not profit maximizing would be pursued by analyzing not just the financial impacts of every strategic business decision, but the community and ecological impacts as well.
What if every resident invested one percent of savings directly in their home state, supporting SMEs and the local economy? Where would one start?
There are a variety of options available, depending on the amount of capital available and the investor’s tolerance for risk. One of the easiest, lowest-risk ways to invest money locally is through a community development financial institution (CDFI). CDFIs are private financial institutions dedicated to helping low-income, low-wealth, and other disadvantaged people and communities join the economic mainstream. Two CDFIs serving Clean Yield’s immediate area are the Vermont Community Loan Fund (VCLF) and the New Hampshire Community Loan Fund (NHCLF), each of which has a low, $1,000 minimum investment requirement. (NHCLF currently offers zero to 5% returns on notes ranging from one to over ten years duration, and VCLF, zero to 3%.) Organizations like these provide not just capital, but also technical assistance to the many startups deemed “unbankable” — those that fail to qualify for a traditional commercial loan because of a lack of collateral or lack of credit history. The U.S. Department of Treasury maintains a list of certified CDFIs here.
Investors who can take on more risk can consider making a direct investment in a local business to help it start, grow, or expand. Until last year, it was difficult for all but accredited investors (those who meet high-net-worth or minimum-income requirements) to invest directly in local businesses in Vermont. But with the introduction of the Vermont Small Business Offering Exemption (VSBOE) in June 2014, non-accredited Vermonters can now invest up to $10,000 directly in a Vermont business. Fifteen states have versions of such “crowd funding” laws.
It is important to keep in mind that direct investment in individual companies is risky and that when you invest directly in a company, you should not invest any money unless you are willing to lose it. Clean Yield has helped clients facilitate direct investments in Vermont Smoke & Cure, High Mowing Seeds, Vermont Natural Coatings, SunCommon, and the Northeast Kingdom Tasting Center.
For those whose risk tolerance falls somewhere in between the safety of CDFIs and the riskier but potentially more lucrative direct investments, a pooled investment fund (so called because the investor’s money is combined with that of others), which invests directly in multiple businesses, can help dilute risk. However, these funds tend to be open to accredited investors only.
Slow Money was formed to catalyze the flow of capital to local food enterprises and organic farms, connecting investors to the places where they live and “bringing money back down to earth.” Since 2010, it has helped place over $40 million of capital into over 400 small food enterprises around the country. Slow Money Vermont, one of its 37 local networks and investment clubs, held its inaugural Entrepreneur Showcase in early May, bringing together more than 75 entrepreneurs, investors, and other organizations and individuals. Another resource for those looking to invest in local Vermont businesses is the Vermont Food Investors Network (VFIN), a project of Slow Money Vermont. VFIN in the future will house an online database of deals which members can access to see the latest offerings and work together with other members on due diligence.
Clean Yield has been investing in the Vermont economy since the early 1990s. Currently, Clean Yield has invested over $9 million either directly or indirectly in businesses located in Vermont and neighboring New England states. When considering an investment through a CDFI, a fund, or directly in a business, Clean Yield conducts due diligence on both the financial as well as the social and environmental sustainability of the offering.
Buying and investing locally makes our local economy more resilient. By purposefully supporting local businesses that participate in the generative economy, we help create and sustain a diverse variety of small businesses that are flexible and can, hopefully, adjust or adapt to changing demands and market conditions. By our calculation, if every Vermont household invested one percent of its savings locally, we could finance our homegrown enterprises with over $200 million annually. (And if every American household did the same? $70.5 billion.) How will you invest your one percent?
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Tags: Farm to Plate, High Mowing Seeds, impact investing, local investing, New Hampshire Community Loan Fund, Northeast Kingdom Tasting Center, Slow Money, Slow Money Vermont, Suncommon, Vermont Community Loan Fund, Vermont Food Investors Network, Vermont Natural Coatings, Vermont Small Business Offering Exemption, Vermont Smoke & Cure