Economics as if Values Mattered, part 2
BY CHUCK MATTHEI
BENEATH ALL OF THE EMBOSSED certificates deposit books, and daily market reports, investments are human relationships. Capital, after all, represents labor and land. and whether it is accumulated from wages or donations, rents or product sales, inheritance or other unearned income, we might appropriately ask three questions: With whom are we called to enter into economic relationship? What is the purpose or intended product? Are the interests of the parties fairly balanced? In other words, who should have use of our money and what should be their obligation to us and our claim upon them?
In the religious community in recent years, there has been steadily growing interest in “socially responsible investment.” From the share- holder resolutions of the Sisters of Loretto (dubbed “The Stinging Nuns” by Time) against the health and safety practices of the Blue Diamond Coal Company, to the South Africa divestment campaigns, to various attempts at screening out weapons producers major polluters, and alcohol and tobacco companies – and affirmatively selecting companies with fair labor practices or environmental sensitivity – hundreds of religious institutions and many parishioner are trying to integrate faith and finance.
There is a social mortgage on capital, resulting in the need for economic initiatives that can effect a just distribution of equity and earnings. Within the spectrum of social investment activity, “community investments” are the best reflection of gospel priorities. Community investments target resources to the poor: meet urgent needs for housing, employment, and essential services: and support structural change in the economies of low-income communities-objectives that are difficult, if not impossible, to achieve through conventional securities. Moreover, community investments compare well with many conventional options and, thoughtfully chosen, can be a responsible course for any investor.
Community Investment Options
FOR MOST PEOPLE, investment decisions begin with opening a bank account. It’s not always easy to choose the most responsible institution, but you can review a bank’s CRA File (the federal Community Reinvestment Act requires banks to provide a measure of service to the communities from which they draw capital), talk with bank officers, and, perhaps most helpful, ask community development organizations about their actual experiences with local banks.
There are a small number of community development banks that welcome non-resident deposits. Best known are the South Shore Bank, which since 1970 has been dedicated to revitalizing a neighborhood on Chicago’s South Side, and the newer Community Capital Bunk. in Brooklyn, New York. The Elkhorn bank established in Arkansas by South Shore was the original model for the Clinton administration’s pending Community Development Banking and Financial Institutions Act.
Among conventional institutions, Vermont National Bank’s Socially Responsible Banking Fund is the most innovativeinitiative. Any depositor may participate, and the bank is committed to using all designated deposits in or near Vermont for affordable housing, family farms, small businesses, and environmental conservation.
In a relatively short time, the SRB Fund has grown to more than S60 million. Last year, in the difficult climate of continuing recession, the bank would have recorded a decline in overall deposits except for the unique appeal of this program. And though some initially feared that community investment might be riskier and less profitable than conventional lending, the SRB Fund had the lowest delinquency rate of any department in the bank.
Most low-income communities are poorly served by banks, and some not at all. But in 300 communities across the country, community development credit unions (CDCUs) provide basic consumer banking services. All credit unions are financial cooperatives, owned and controlled by their members. Unlike parish, workplace, and other traditional credit unions, however, CDCUs are defined by the geography of a low-income continuity and are allowed to accept non-member deposits to bring additional resources into under-capitalized areas.
According to the National Federation of Community Development Credit Unions, based in New York City, CDCUs currently manage more than S500 million in deposits. The federation will direct potential investors to individual credit unions, and it also manages a central fund to enable large investors, through a single investment, to channel funds to many CDCUs.
BOTH COMMUNITY development banks and credit unions are chartered and regulated financial institutions that offer a full range of savings, checking, certificates of deposit, and other options, with the protection of federal (or state) deposit insurance. Community development loan funds (CDLFs), on the other hand, are non-profit corporations that fulfill their charitable purposes through the activity of borrowing and lending.
CDLFs are distinguished by their ability to commit 100 percent of the capital under management to community development, by their flexibility, and by their analysis of poverty and philosophy of development. From the outset, the movement has set for itself a three-fold mission: 1) to assist those who need capital in meeting their immediate needs and changing the patterns of ownership that perpetuate their poverty; 2) to engage those who have capital in reflection on the origins and social responsibilities of wealth: and 3) to challenge those who manage capital to recognize the credit- worthiness of the poor and allocate resources more equitably.
Most CDLFs serve metropolitan areas or states: several are regional or national in scope. They solicit loans from many individual and institutional investors, on terms set by the investors within parameters established by the fund. The money is pooled and used to finance a broad spectrum of community development and service programs, including community land trusts, worker-owned businesses, soup kitchens, health clinics, and day-care centers.
The National Association of Community Development Loan Funds in Philadelphia counts 44 member funds, with others in development. Together they have placed more than S135 million in project loans throughout the United States. The association provides training and technical support, and administers a program of peer reviews or self-regulation. Its central fund also enables large investors and donors to distribute loans and equity capital among member funds. The Episcopal Church has made a S1.6 million Investment in the central fund, several charitable foundations have provided large loans, and Citibank recently made a $1.1 million equity grant.
In addition to these institutions, there are other business development and micro-enterprise funds affiliated with the Association for Enterprise Development, and a variety of additional community investment programs. Together they offer a broad spectrum of opportunities for conscientious investors, and many will utilize a combination of investment vehicles.
Social Impact And Financial Performance
EVEN MODEST INVESTMENTS can have considerable impact. To date, loans made by NACDLF members alone have been responsible for the development of more than 18,000 units of affordable housing, the creation or preservation of more than 4,000 jobs, and vital services for many thousands more.
In some cases a fund will provide all of the financing for the first project of a young organization; in others, it will be the “missing piece” of a much larger financial package. NACDLF members’ loans have leveraged at a rate of more than 10:1—but even more significant, more than 2,000 loans have gone to first-time borrowers, both organizations and individuals, who had nowhere else to turn, but now have a credit history and a record of real economic and personal achievement.
Perhaps the most important contribution of a community development lender is this catalytic effect on other institutions. The New Hampshire Community Loan Fund’s (NHCLF) first loan, for example, went to a small group of low-income families who were threatened with displacement by the pending sale of their mobile home park. They had neither the security of owners nor the legal protection of tenants.
NHCLF established a co-op conversion program, offering a combination of community organizing, technical assistance and financing to mobile home parks throughout the state. Over time, the success of these efforts persuaded several banks and the state housing finance agency to alter their policies and extend mortgage loans—and the state legislature passed a bill giving mobile homeowners a first-right-of-refusal before their parks can be sold to any other party.
The financial performance of community investment institutions has been equally impressive. NACDLF members report loan losses of approximately one-half of 1 percent, with investors protected by loss reserves and the funds’ equity. Community development banks and credit unions typically perform better than industry averages. Of course, care must be exercised in the selection of an intermediary, and community investments are not the most lucrative options in the financial markets, but there should no longer be any doubt that they can be a prudent – and faithful – commitment.
Mobilizing Religious Commitment
THE EARLY FORAYS OF the churches into community investment in the 1960s produced mixed results and some substantial loan losses. The lesson of that experience is the value of qualified intermediaries.
A qualified intermediary has already assembled a staff, board, committees, and consultants with the necessary mixture of social concern and financial skills. It assumes responsibility for evaluating applications and negotiating, documenting, managing, and monitoring project loans. In most cases, the investor’s legal claim is on the entire portfolio of the intermediary, and you are not dependent on the individual performance of the projects you support. When needed, the intermediary will provide or locate technical assistance for the project.
As new models and a new generation of intermediaries began to emerge in the late 1970s and early ‘8Os, religious institutions and representatives did play a central role – and they still do. The Boston Community Loan Fund was initiated by Old south Church, a United Church of Christ congregation, reaching out to other denominations and secular organizations in a broadly ecumenical effort. The New Mexico Community Loan Fund was sponsored by the New Mexico Council of Churches and the Catholic Diocese of Las Cruces. And religious investors provided a substantial portion of the initial capital for virtually all of the new institutions, with Catholic orders of women often in the lead.
The process of proposing, debating. and implementing community investment commitments with your own board of trustees can be enlightening, enlivening, and also quite challenging. Make sure that you bridge the common gap between social justice and investment committees, and include financial decision makers in the process from the outset. Use community investment practitioners as advisors to review practical experiences and relevant precedents. Ask for a detailed description of the percentage allocations and performance of each type of security in your current portfolio, as the basis for accurate comparison—and then establish clear principles, specific criteria, and an appropriate percentage for community investments.
Most important, use the process of investment planning as an opportunity to renew and enlarge the faith of your community. Though a serious business decision, the commitment to community investment is also an opportunity for reflection on the relevance of the gospels in modem life. It is an occasion for evangelization—a decision that not only applies to institutional resources but may inspire many individual members as well.
When Rev. Douglas Theuner was called to be the Episcopal bishop of New Hampshire, he initiated a relationship with the New Hampshire Community Loan Fund. First he made an investment from the bishop’s discretionary fund. and then he went to the trustees of the diocese to propose a much larger investment from the resources in their stewardship. He and his wife have made a personal investment, and now he is convening a series of meetings in all of the regions of the diocese to encourage the participation of individual parishes and parishioners.
Similarly, the leadership conferences of Catholic religious orders in the New England area launched a collaborative investment program in law-income housing, using the services of an established intermediary. Individual orders can determine the amounts and terms of their investments: a steering committee establishes the social criteria and priorities; and the intermediary performs the financial evaluation and manages the loans. The program was announced in what some would call a prayer service and others might call a political demonstration in City Hall Plaza in Boston, and news of the event immediately brought inquiries from numerous individuals and other religious organizations.
THERE ARE NOW many good examples, but one can still expect some hesitation in response to a community investment proposal. Virtually everyone will ac knowledge the potential social benefits, but many trustees will be concerned about financial issues—and perhaps even their legal ability lo take this action.
Individuals are free to make any investments they choose, but trustees have specific legal and fiduciary responsibilities in their management of corporate assets. In a legal memorandum prepared for the Episcopal Church, however, New York attorney William McKeown concludes that community investments are permissible. He says, in part “…Charitable purposes, and particularly religious purposes, are not as readily measured in monetary terms as commercial or business purposes are. The law recognizes this fact: “…A charity’s governing board must manage the assets o an ongoing enterprise in order to carry out its purposes, not merely to conserve assets and generate income.”
Traditionally, investors and investment managers are concerned about risk, return, and liquidity: preserving wealth, deriving income, and maintaining sufficient flexibility to meet changing personal needs or take advantage of new market opportunities. The practical relevance of these considerations is obvious, but Christian tradition offers unique perspectives and may impose unique criteria.
All investments involve some element of risk. Each intermediary or project must be evaluated realistically and the portfolio balanced carefully. But it is a mistake to assume that community investments are inherently riskier than conventional investments, if they are properly packaged, they may be just as secure, and sometimes even more so. The record briefly cited above bears witness – as does the fact that most of the dramatic losses in the Savings & Loan and banking industries in recent years have come at the upper end of the market.
In any event, financial risks must also be weighed against the vulnerability of a project’s intended beneficiaries. What is the risk of human suffering if the project does not proceed? The central metaphor of the Christian faith is the story of Jesus coming to terms with risk, fear, and sacrifice. The challenge for Christians is not to avoid all risk, but to accept necessary risk for the right cause.
A greater concern for many investors may be the rate of return. The potential varies from project to project, but in general, community investments offer only modest returns, the lower end of conventional market opportunities.
At first, trustees may respond to a community investment proposal by com- paring its anticipated return with the overall portfolio average, but this is like comparing the proverbial “apples to oranges.” Most community investments should be compared with other fixed- rate securities or deposit accounts, not equities. Properly calculated, it should be possible to transfer a meaningful percentage of virtually any portfolio to community investments with limited impact on total return.
The need for income may also bear some scrutiny. Religious institutions typically look to investment income for both operating expenses and mission funds. It is understandably tempting to make every effort to maximize return if those earnings are supporting charitable programs. However, community investment can enhance the social contribution of the church, even if it somewhat reduces investment earnings, because the combined impact of charitable gifts and investments—of social services and community economic development—will be greater than the impact of a somewhat larger grant fund alone would have been.
If $100,000 from bonds paving, say, 7 percent is moved into community investments at 4 percent, the institution will lose S3.000 per year of grant- making capacity. But for every grant dollar lost. S33 of community investment capital will be committed to similar purposes!
Catholic Worker founder Dorothy Day was fond of reminding religious leaders that money lending at interest was forbidden in the early church. Most church members today are neither aware of this prohibition nor can they imagine its rationale. But the economist John Kenneth Galbraith explains that the “economy” in biblical times was very primitive. Most people labored to meet their basic needs – and borrowed only when they did not have enough. In that context, it was considered inconsistent with the spirit of Christian community io lake advantage of someone in a time of distress bv imposing an interest charge.
With the advent of market capitalism, people began to borrow in order to go into the marketplace and make more money. In this context, it seemed reasonable to expect a share of the profits. Nonetheless, despite the dramatic economic changes of the past two millennia, it is important to acknowledge that there are still millions who labor to meet basic needs and are unable to do so because they lack access to the capital necessary to acquire productive resources. If the “least of these” are truly the focus of a Christian economy, one cannot help wondering if early Christian traditions might yet have relevance. Finally, there is the concern for liquidity, investors typically accept lower return on some investments in exchange for lower risk or greater liquidity, and this can also be a barrier to increasing the volume of capital for community development. Here it is useful to repeat that community investments offer a wide range of opportunities and terms, from liquid accounts to deposits and loans of virtually any length. Remember that the term “faithful” implies not only belief and commitment, but perseverance as well.
The Widows Mite
ULTIMATELY, investment should be as much of a sacrament as any other act of a faithful person. Many charitable institutions define their charitability solely by their use of investment earnings, not the nature of the investments themselves. But the consistency of ends and means is a basic tenet of moral philosophy. Mahatma Gandhi, who recognized the inescapable relationship between faith and finance when he said. ‘To the poor, God can only appear as a loaf of bread,” also observed:
They say’ “means are after all means.” I would say, “Means are after all everything.” As the means, so the ends. The Creator has given us control over means, none over the end. Realization of the goal is in exact proportion to that of the means.
The investments referred to throughout this article as “community investments” are still known to many as “alternative investments.” To date, in fact, they have been an experiment for most investors. Now, with the successful record that has been established, and with gospel imperatives in mind, perhaps it’s time for community investment to become the norm of religious practice.
The Interfaith Center on Corporate Responsibility, which tracks the social investment initiatives of 250 Protestant ‘ denominations, Catholic orders, and other religious institutions, estimates that their community investments currently total approximately S250 million (with the United Methodist General Board of Pensions accounting for SIOO million in low-income housing). It is an impressive amount of money—but it still represents only two-thirds of 1 percent of ‘ the S35 billion value of these portfolios. ‘
When Jesus compared the offerings made by the wealthy men and the poor widow, he observed that the measure of faith is not the number of dollars, but rather the degree to which we give of our substance rather than our surplus. Religious institutions have provided critical leadership in the community investment field, affecting the lives of thousands of low-income people, and set valuable precedents for other institutions and individual investors. But we can do better.
CHUCK MATTHEI, 1948-2002, a community development practitioner for more than 20 years, was president and founder of Equity Trust Inc.
This is the second article in Economics As If Values Mattered,
a three-part series redefining land, labor, and capital by Chuck Matthei,
first published in Sojourners Magazine, December 1993
Reprinted with permission.