Because we were prepared for the downturn and the "bear market bounce" today we were not caught up in the market frenzy and continue to delve deeper into what truly are the best practices for sustainable investing...In our research today the question of supporting bio degradable food based plastics came up.. if we are using petrochemicals to grow the food for plastic we take up land for food and use petrochemicals at the same time…the key may be the relative environmental footprint including the plastic waste vs bio-degradable waste, and the amount of land required for the bio-plastic. It gets even more complex: is the starch used for making bio-plastic a by product of food production? If so then much less land is being given up and the agricultural footprint gets smaller. My gut tells me that bioplastic is much more positive than biodiesel all things considered and that we should support its development. Just think of the mountains of plastic bottles (I will never forget the masses of them in the Urubamba River in Peru!) that would melt in time like sugar back to the earth…

The chickens have come home to roost for our country’s most storied financial institutions, and for our financial regulators. Systemic investment in high risk securities, left unregulated and under-capitalized, has toppled the banking giants while regulators scrambled to bail them out. This debacle in business ethics has been unique in the degree to which the perpetrators lied to themselves as well as to the public, while regulators looked on in complicity. Leading financial institutions acted against their own self-interest by ignoring not only societal expectations, but the reality of their own financial positions as well. Of course, as we have seen in the national rash of foreclosures and economic downturn, the impact of their actions extended beyond the ruin of individual firms, and there are a few implications for SRI:

1) This is perhaps the largest and most glaring example of the financial materiality of social factors. Socially responsible investors who recognized subprime lending as predatory lending saw a red flag obscured for even our oldest and most successful financial institutions by a smokescreen of investor optimism and complex financial engineering.

2) In the face of such colossal failure by financial institutions to self-regulate and the obvious negative results for businesses and the economy, the public has more reason than ever to question the neo-liberal ideology that universally frowns on government regulation (despite the insistence even now of its proponents that regulation is not the answer). Opportunity is widening for a new economic paradigm that addresses the weaknesses of both Friedman and Keynes, and the CSR movement is enjoying global momentum and influence that ensures us a loud voice as this paradigm takes shape.

Yes Ben, I did get a sense of hope from Sostenica and CEPRODEL’s investments. The impact of their work extends beyond the economic and environmental benefits of each loan to include changing the mindset of borrowers. As opposed to government policies or economic trends, this kind of change can only be brought about on the micro level. I saw many examples of how Sostenica and CEPRODEL’s investments affected borrower’s views both of themselves and the world. Borrowers felt empowered not only to help themselves but to help others as well, and to become more engaged in their communities.

The impact of Sostenica/CEPRODEL was especially visible among rural borrowers. These borrowers are far more conservative about borrowing than their urban counterparts, because their ability to repay is based on factors out of their control (weather, crop disease, availability of water). Many farmers are also skeptical of the viability of sustainable agriculture. Sostenica/CEPRODEL was slowly changing both of these views through their technical assistance for individual farmers and through the example of successful farms. In particular, one farmer named Fabresio used CEPRODEL credit to develop a very complex and successful organic farm. His entire community witnessed his business grow, and he took a leadership role in cooperatives that spread awareness of his farm even further. Fabresio contributed to changing his neighbors’ mindsets regarding organic agriculture, but he also led by example with business planning and risk analysis that he applied to his farm. Fabresio had originally earned a University degree in statistics and lived in the U.S. for a short while, but had then bucked the trend of his peers and decided to return to his family farm. As CEPRODEL’s Director of Credit Orlando said of Fabresio’s success, “This is what happens when University education returns to the countryside!”

Reading this story it is easy to get discouraged. There is so much wrong on the macro-level that incremental improvements on the micro level can seem hopeless.

Did you get a sense of hope after observing the investments SosteNica was making through Ceprodel in Nicaragua?

Here is the story of one borrower I met in Nicaragua:

Martinez Medino is a cattle rancher who needs more help on his farm, but his children have all moved to the U.S. or to Nicaragua’s capital city of Managua. His daughter earned a degree from a Nicaraguan university, but couldn’t find work. Determined to stay in the city rather than return to her father’s farm, she is now working in a maquiladora (a factory that is tarriff-free under NAFTA) for $3 a day. This reflects a sweeping trend among youth across Nicaragua and the developing world.

Medino also faces abusive pricing from the truck drivers who take his milk to the city and sell it (Medino has no vehicle of his own). Efforts to establish coops that would give ranchers more bargaining power have been undermined by buyers’ manipulative tactics. Sometimes the buyers approach farmers individually and offer them better deals if they leave their coop, and once the coop is significantly weakened they raise prices for everyone. Or sometimes the buyers are deliberately late for pickup and refuse to pay for spoiled goods. Government protection is needed to preserve a level playing field for farmers and raise the impact of microfinance.

In the meantime, Medino has used CEPRODEL credit and technical assistance to build a trough and irrigate his field, grow hardy grass that can keep his cattle well-fed through the dry season, and build a shelter that protects his cattle from the elements. All of these investments are part of a business plan worked out with CPRODEL that guides Medino's credit allocations. Next he plans to use credit to pay for more labor during the peak season.

Thanks Keely. You give a clear sense of the serious and thorough approach we have taken. Can you give a few images from the various investments we have made? This will bring to life what we are doing...
Ben 08/11/08

Ben has asked me to describe our approach to investing in community development. I began working on our community investing program when I joined Benchmark last August, and almost a dozen investments later it is exciting to see how our approach has developed. From the start we knew that we wanted to apply the principles of asset allocation and diversification to community investing. As I researched the different types of community development organizations and investment products, our strategy continued to take shape and a theme emerged for our investments: unique stories.

The community development organizations that we invest in are all unique stories – they are innovators and leaders in a variety of fields, often addressing niches of need that were overlooked before these organizations stepped in. Part of their work is usually technical assistance for other organizations that want to replicate their model, or for governments who can further leverage their expertise in community development.

This approach not only focuses our investments on the leading edge of community development, it also allows full diversification while providing reasonable constraints for the number of investments. Our community investments are diversified not only by their quantity and geographical distribution, but also by the size of organizations, the scope of operations, and the area of social impact. The limited number of investments allows us to develop relationships with investees. This helps us to a better understand how our investments are being used and what risks we are taking on, and it also leads to identifying new ways of working with investees to leverage each other’s resources and achieve higher social impact.

A highlight of this relationship-building was a trip I took to Nicaragua to visit the operations of Sostenica/CEPRODEL, a partnership between a loan fund and a microfinance institution and one of our investees. In a whirlwind 4-day visit hosted by Sostenica’s founder and CEPRODEL’s Director of Credit, I visited several urban and rural borrowers, spoke with loan officers, and got to know Sostenica’s Board of Directors. Discussing the barriers to Nicaraguan economic development and the role of microfinance with borrowers was a powerful and enlightening experience. Witnessing the impact of community investments and learning about CEPRODEL’s credit policy from loan officers enriched my confidence in Sostenica/CEPRODEL and my appreciation of Benchmark’s connection with the people who put our investments to work. This trip truly contributed to the quality of our investment, and we hope to take advantage of opportunities to deepen our relationships with other investees in the future.

Developing our community investment program continues to be fascinating, engaging and fulfilling work. I am excited to further explore community development organizations and see how our program matures moving forward.

It has been almost a year since my partner doubted something I blogged about the emergence of private equity stock markets and I began sulking that no one believed me (it turned out to be very true...).

Then I couldn't find a way to blog without bragging that all the things Sam and I saw coming were in fact happening. Now, a year later I'm glad to be able to say that the approach we have taken is not only vindicated with positive 1st and second quarters, but even being touted by others as the strategy of the future. James Montier in his new book Behavioral Investing says the following: "Rather than having endless numbers of specialist managers, each charging a fee,surely it would be better to have one manager and pay one fee,but allow that manager freedom to invest wherever the opportunities lie (p 244)." He goes on to speak about the importance of shorting rather than being tied for some abstract reason to benchmarks (ie indices which track the rising and falling markets). We are especially enthusiastic about the overlays we have designed to benefit in a continuing sideways market such as deep out of the money puts and our hedged equity pool which invests heavily in our screened indices when the market is down and divests and hedges below the market when it is up.

I'd love our analyst Keely Byrne to pick up where I left off last year, to describe the Community Impact pool that is now a reality...

Talk in the financial media about the growing CDS (credit default swaps) problem has just begun.

This may be new to you but it is a growing story and a huge risk that is not well understood.

A CDS is a contract between the holder of a risky asset (say a portfolio of sub-prime loans, credit cards, etc) and a financial entity willing to guaranteee that risky asset against default. Very similar to insurance policies except that there is no regulation and unless the protection buyer has done her homework there may not be adequate collateral to insure the risk.

A Wall Street Investment bank builds a portfolio of sub-prime debt and then buys this insurance from a hedge fund through the issuance of a derivative contract - a CDS. The protection buyer (Wall Street Bank) pays a monthly premium to the Protection Seller (hedge fund) and all is well until a default occurs (much more common now than two years ago). In default, the protection buyer excercises her claim and the protection seller is forced to ante up the loss. The hedge fund or [protection seller is called the counter party. And therein lies the problem.

If the hedge fund or other counter-party is unable to meet its obligation when a default occurs it creates a significant problem in the financial system. This situation is the current risk we face. Some have estimated that there are 3 CDS contracts written for every package of sub-prime loans! The CDS default problem may dwarf what we have already seen. Stay tuned.

OSF
January 14, 2007

It’s 2008. Add sideways and you get 10 add again and you get 1. This is an occult numerologists way to extract meaning from numbers. One is a year of beginning, wholeness, unity, individuality (as paradoxical as this may seem), and synthesis.

My New Year’s resolution is to resolve to do “what I ought, do what I resolve,” to quote Ben Franklin’s ultimate virtue. So first I am resolving to write more and connect more with those like-minded cultural creatives who are not looking to maintain the status quo, who are guided by spiritual thinking, and who believe we are all responsible for the future together. Since I can’t get direct feedback on this site, I have started a freer blog called Ben’sBenchmark on Google. Social Networking continues to flourish and change what is possible. It has initiated new freedoms along with less privacy. How will this dynamic play out? We shall see.