SOCIAL TOPICS (Archive): COMMUNITY DEVELOPMENT INVESTING

Published, December 1995

       To remain a vital force for social change, socially responsive investors will need to transcend their often simplistic screening methodology and take a broader view that evaluates corporations as stakeholders of the community. Turning on its head the traditional concept of stakeholders as constituents of the corporation, this new paradigm could be described as “community-centered investing.” It defines the community, rather than the corporation, as the pivotal institution; the corporation becomes a stakeholder in the community. This model is an underlying assumption in the Principles for Global Corporate Responsibility, recently unveiled by the Interfaith Center on Corporate Responsibility.

       The first task of community-centered investing is to define the characteristics of a healthy community. Those in the loan fund community who have struggled with this question concluded that sustainable communities cannot be built solely on external capital such as government transfers, corporate investment, foundation grants or even loans from socially responsible investors. Sustainable communities are undergirded by good jobs providing living wages, safe working conditions and equal opportunity. Good jobs offer stability, economic security and freedom from having one’s wages constantly pitted against cheaper labor in other regions. Community-centered investing embraces environmental quality, including the sustainability of life for all creation.

       Given the choice, most social investors would choose safe streets, strong communities, and world peace over 15% annual stock market returns. Yet few relate these choices to one another. We have all been indoctrinated to seek the highest returns on our portfolios and the lowest costs in our shopping basket. The message of community-centered investing is that such behavior has adverse impacts on what people truly value.

       Community-centered investors need to take a hard look at the source of profits. They need to recognize the costs of building a world of reduced poverty and increased peace, inclusivity and democracy. While some of these costs can be offset through changed priorities (e.g. spending less on defense and more on human development), others may have real effects on corporate profits and the market value of financial assets.

       Though the world has grown increasingly complex, many social investors continue to make investment decisions based on simplistic binary social screens. For instance, snack manufacturer Tasty Baking (maker of Tastee Cakes, a snack equivalent of a Hostess Twinkee) would be excluded from many social portfolios based on the nutritionally dubious quality of Tastee Cakes. In contrast a community-centered investor would embrace Tasty Baking because the firm has retained its principal manufacturing facility in economically devastated North Philadelphia, an area long abandoned by major industrial firms. It has done so without asking for wage concessions or government subsidies.

       A community-centered approach also requires investors to come to grips with “dirty industries,” typically absent from social investment portfolios. Community-centered investors should consider whether a company’s product is beneficial to the community. Materials like steel, aluminum, even coal would qualify as essential goods, while gambling and tobacco likely would not. Community centered investors should be willing to own stakes in companies producing essential goods in order to have a voice in the way these firms run their business.

       Beyond understanding the role of corporations as stakeholders, community centered investors must re-examine their own relationships to communities. In pressing for social change, social investors are not the saviors that marketing hype sometimes suggests. Rather community-centered investors must recognize their role as one among many institutions working for change. As such they might be quicker to listen, even if it at times means slower to speak.

       Lastly, community-centered investing must direct more capital to community based businesses, not only through many of the existing community development loan funds, but also with the investment of at-risk equity. Loan funds provide the water for communities to grow and develop, but equity is the seed.