MicroPlace

In a recent article, columnist Subashini Ganesan notes that "according to Coinstar (a national business that distributes and maintains coin-counting vending machines), the American household has an average of $99 in spare change lying around the house!

"While you might want to lavish yourself, there is another way to use your 'small change' to drive big changes, globally. In fact, globally, $100 is often all it takes for a poor person to work themselves out of poverty. And MicroPlace, a subsidiary of eBay, has created a powerful tool for us to aid the world’s working poor while still receiving modest interest on our investments."

You might recall the previous post on microfinance and the discussion of Kiva in particular. NextBillion writer Rob Katz took some time to outline the differences between the two organizations last October. Here's an excerpt:

"As P2P Lending News explains, [t]he big difference between MicroPlace and Kiva...is that loans will be securitized (and therefore potentially trade-able), and lenders will earn interest. Unlike Kiva, lenders on MicroPlace invest in microfinance by purchasing securities. Funds generated by these sales are then invested in microfinance institutions around the world. MFIs, in turn, solicit clients, make loans and collect payments - they do their normal day-to-day business.

"Once client payments are in, the institutional investors receive their loan (plus interest) who can then pay back their investors - people who purchased those original securities. It's not as simple a model as Kiva's, but its differences are very important.

"First of all, Kiva is a non-profit. As Matt and Jessica Flannery have explained, it's very difficult to become a SEC-registered broker/dealer - even more difficult when you're running Kiva from your living room on the nights and weekends. MicroPlace, on the other hand, had the institutional and financial backing of EBay, allowing it to go through the complex regulatory application process and to put up the necessary money for the SEC to sign off. Upshot: Kiva wanted to be for-profit, but had to stay a NGO because it was a regulatory nightmare to register with the SEC. As a result, lenders on Kiva only receive their loans back - without interest. MicroPlace, as a broker/dealer, can pay interest to lenders - thanks to its ability to navigate the aforementioned regulatory maze.

"Secondly, MicroPlace adds a level of intermediation that Kiva doesn't have. With Kiva, lenders provide capital to MFIs, who then lend to clients. MicroPlace is a market for microfinance securities, not just requests for loans. Sure, it takes away some of the intimacy, but for the microfinance industry, it's a big step. Securitizing loans helps diversify risk, and allows microfinance investors to reach into the second and third tier MFIs that are having a hard time raising non-donor money."

Quaker Quotes VIII

In his book Signs of Salvation Quaker author Ben Richmond calls us to "a faith in God that implies rejection of the sway of mammon over our lives."

This can be taken in a couple of ways. One is to see mammon itself as evil, but another is to see the love of mammon as evil and instead look for ways to use the resources at our disposal toward positive ends and achieve the "freedom from anxiety" mentioned by Richard Foster.

Along these lines, John Schneider echoes William Penn when he writes in his 2002 book The Good of Affluence that "Christians ought to have a view of modern capitalism that is 'world affirmative' and 'world formative' rather than mainly negative and prone to strategies of separation and withdrawal."

CFA releases ESG guidelines

The Chartered Financial Analyst Institute, a "global, not-for-profit association of investment professionals," recently released a manual for investors on environmental, social, and governance factors, or ESG (I discuss ESG in this earlier post). The manual includes a list of key ESG issues along with organizations, principles and research central to the ESG movement.

Here is an excerpt:

"This manual aims to help investment professionals identify and properly evaluate the risks and opportunities ESG issues present for Investors in public Companies and in the process clarify the relatively sparse and inconsistent information provided in current financial statements."

The manual "focuses on the legislative and regulatory, legal, reputational, and operational ESG risks and opportunities Shareowners will need to consider to fully understand the Companies in which they invest."

SRI jitters

In an earlier post, I discussed the question of whether SRI is more or less a fad that may quickly fade if the market turns sour. It seems that others are beginning to ask this question, particularly in light of the decision by the board of Calstrs, the California State Teachers' Retirement System, to reconsider its exclusion of tobacco stocks:

"Unlike some socially responsible funds that banned tobacco companies for health-related reasons, Calstrs said it divested in 2000 because numerous lawsuits against the industry and the specter of government regulation made the stocks too risky. It now says those risks have diminished.

"Calstrs also indicated that missing out on a 'market weighting' in tobacco stocks these past several years cost the fund more than $1 billion in lost investment returns.

"Calstrs wouldn't be the first pension fund to reverse a ban on tobacco shares. The Florida Retirement System voted in 2001 to overturn a similar ban after divesting from tobacco stocks in 1997. Still, Calstrs's decision 'will be watched closely,' said Amy Borrus, deputy director at the Council of Institutional Investors. 'At a time when pension funds are under tremendous pressure to boost returns, they are rethinking the costs of divesting from a whole class of shares.'"

In a recent article in the New York Sun, columnist Liz Peek wrote that "The reality is that the performance of these funds is skewed by their relative exposure to various industry groups. Good works today simply don't measure up to oil prices of more than $130 a barrel. Investors may (and possibly should) choose to support firms they consider highly ethical, but they may well have to accept lower returns to do so."

Not all are quick to suggest that SRI is either financially unsustainable or likely to experience an exodus, though.

"Research by Julie Hudson, analyst at UBS, suggests the SRI sector could shrink in the short term as 'firms under pressure may go into survival mode, de-emphasising anything that is not relevant to immediate survival'. Hudson counters this with a long-term view that SRI issues such as climate change, resource constraints, food scarcity, the energy challenge, and corporate control are driven by politics, public opinion, and consumer behaviour rather than market volatility.

"Hudson said: 'SRI investors don’t abandon their values in a downturn. When markets are volatile and visibility is clouded, all investors cast around for other inputs to help them understand companies better.'"

Short break

Hello and thanks for stopping by! I will be away from a computer for a couple of weeks, but will return to updating the blog as soon as I get back.

Best Buy launches recycling program in response to shareholder proposal

[Liedtke, Michael. "Best Buy testing free e-waste recycling program," San Francisco Gate, 2 June 2008.]

Here's an interesting story on how shareholder engagement can impact corporate policy without even bringing a resolution to vote:

"Under pressure to help dispose some of the electronic waste it helped create, Best Buy Co. is testing a free program that will offer consumers a convenient way to ensure millions of obsolescent TVs, old computers and other unwanted gadgets don't poison the nation's dumps.

"The trial announced Monday covers 117 Best Buy stores scattered across eight states that will collect a wide variety of electronic detritus at no charge, even if the Richfield, Minn.-based retailer didn't originally sell the merchandise.

"The pilot stores are in Best Buy's Northern California, Minneapolis and Baltimore markets, as well as parts of North Dakota, South Dakota, Iowa, Wisconsin, Virginia and Washington, D.C.

"Depending on how the test goes, the nation's largest electronics retailer may expand the recycling program to all of its 922 stores in the United States. As it is, Best Buy's test is believed to be the most extensive free electronics recycling program to be offered by a major retailer so far.

"Best Buy agreed to set up the recycling trial after a social responsibility group, As You Sow, submitted a proposal that would have asked the company's shareholders to endorse an electronics recycling program. As You Sow withdrew the proposal after Best Buy indicated it was already exploring ways to expand its existing recycling programs."

Faith and Practice

In earlier post, I mentioned the importance of Faith and Practice to Friends. According to Britain Yearly Meeting, Faith and Practice "is an attempt to express Truth through the vital personal and corporate experience of Friends. It is largely composed of extracts from Friends' writings: a fitting way of expressing the breadth of Quaker theology." Most also include a brief history of the Society of Friends and the roots of their own branch of that society, as well as the organizational structure and business practice of the meeting.

Many of these texts are available online and are searchable. Here is a listing:

- Australia Yearly Meeting
- Baltimore Yearly Meeting
- Britain Yearly Meeting
- Canadian Yearly Meeting
- Central and Southern Africa Yearly Meeting
- Evangelical Friends Church Southwest
- Illinois Yearly Meeting
- Intermountain Yearly Meeting
- Iowa Yearly Meeting
- Mid America Yearly Meeting
- New York Yearly Meeting
- North Carolina Yearly Meeting
- North Carolina Yearly Meeting (Conservative)
- North Pacific Yearly Meeting
- Northwest Yearly Meeting
- Ohio Valley Yearly Meeting
- Ohio Yearly Meeting
- Pacific Yearly Meeting
- Philadelphia Yearly Meeting
- Southeastern Yearly Meeting
- Western Yearly Meeting
- Wilmington Yearly Meeting

Investing in vice

Since 2002, at least one counter trend to the SRI movement has been the Vice Fund. This fund seeks to track down rewarding investments in four sectors - alcohol, tobacco, gambling and defense. In a recent interview, co-Portfolio Manager Charles Norton talks about the fund's outlook and strategy:

"We’re focused on four sectors that have exhibited unvarying demand regardless of economic activity and that have key fundamental strengths that help explain why they’ve been around for hundreds of years. The inherent demand of people to smoke, drink and gamble and of nations to arm themselves is clearly strong and long-lasting. The businesses are typically quite profitable, combining low production costs with tremendous pricing power, especially in tobacco and alcohol.

"It’s also important that governments tend to be large beneficiaries of these businesses, through the collection of billions of dollars in tax revenue. That essentially makes the government a partner, with the financial incentive not only to see that the business stays around, but that it also does well."

The existence and success of the Vice Fund ("the Vice Fund has earned an annualized 20.2% over the past five years," according to the above article, "vs. 11.3% for the S&P 500") should give SR investors at least some pause. It is consistent with Alicia Munnell's comments in Pension Fund Politics on the economics of SRI when she observes that "boycotting a stock is unlikely to have any impact on its price, because the demand for a company’s stock is almost perfectly elastic. In other words, a relatively small change in quantity demanded for a stock – which has been shown to be the case with social investing since it accounts for an extremely tiny portion of total assets – does not significantly alter the price of that stock or the success of the targeted company." Indeed, "Boycotting tobacco stocks may result in a temporary fall in the stock price, but as long as some buyers remain, they can swoop in, purchase the stock, and make money."

Now, this is not to say that SRI has zero impact on the market, but it does suggest that investors should be aware of the limitations of screening alone. Even major divestments such as South Africa achieved debatable impacts on targeted companies. If you see screening as less a matter of corporate change and more one of integrity, then it becomes easier to reconcile oneself to the outcome. As mentioned in previous posts on more active engagement, there may be more effective means to shift the marketplace.

Socially responsible...government

[Kostigen, Thomas M. "Everything You Know About Water Conservation Is Wrong," Discover, 28 May 2008.]

The above article on water conservation provides an interesting jumping off point for a discussion of business and government social responsibility and the role of investors and citizens.

"Proper management and use of the world’s virtual water already save almost 5 percent of the water used annually in global agricultural production, according to Unesco. This follows a simple logic: Places with less water gain access to foods with high water requirements by importing them from areas with high rainfall or substantial water supplies. This allows water-scarce regions to use their own water resources more efficiently for other purposes—and create water savings. For instance, areas of southern China that have more water and are better equipped to grow certain water-intensive agricultural products can send them to northern China. This frees up northern water supplies for other uses, such as drinking and sanitation. Jordan saves 60 to 90 percent of its domestic water supply by importing water-intensive products."

What is striking about this paragraph (and the entire article) is the almost complete absence of any discussion of subsidies and trade restrictions. Perhaps too often, by focusing on the social responsibility of corporations, we miss out on the impact the government has on corporate behavior and the world economy. Agriculture is an excellent example of this.

As far back as Adam Smith and David Ricardo, economists have been making the case that it makes sense for areas with an advantage in one industry to supply the needs of another area, and vice versa. This is called the principle of comparative advantage. And, it is how markets would tend to operate if left to their own devices. These signals become distorted, however, when policymakers subsidize the production of a good or prevent the importation of another good into a region.

In the U.S., this means producing crops like sugar and rice in volumes that would be inexplicable in an unregulated setting. "The single largest check in 2003 ($69 million) went to Arkansas’s Riceland Foods," writes William Shughart in a recent column. We produce so much, in fact, that the rice industry even promotes its programs to dump excess rice on the world market. There are numerous resources on the role of subsidies and trade restrictions in agriculture - Wikipedia has a good entry on the total amounts, for instance, and the Environmental Working Group breaks down those totals to show how many of the richest agricultural producers receive the greatest aid.

These are important considerations in weighing the matter of water conservation in the U.S. and around the world. And they speak to the overlap between SRI and public policy. This is an important reminder that while SRI advocates should not lose their focus on corporate behavior, it is just as vital to maintain a broader perspective on the sometimes behind-the-scenes influences that play into the decisions companies make.