Blockchain Investing with Impact

Nathan Cummings was a grocery tycoon (you don’t hear those two words very often) who built Consolidated Foods, later known as The Sara Lee Corporation. You may know Sara Lee for their frozen cakes, but the company was much more, selling a wide variety of foods, beverages, and household products around the world.

Although he came from humble beginnings, the first child of Jewish Lithuanian immigrants, Cummings became a very rich man. As his wealth grew, he gave much of it away, becoming an avid philanthropist, especially in the arts. Later he established The Nathan Cummings Foundation, a philanthropic fund overseeing about $450 million in assets, which this week changed my life.

Inspired by a New York Times article called A Family Opens Up About its Investing Mistakes (great headline), I read The Nation Cummings Foundation report on their “mistakes” in transitioning their foundation to using 100% of their assets to achieve their mission of “creating a more just, vibrant, sustainable, and democratic society.”

In plain English, they said, “Instead of putting 5% of our fund into good-for-you investments, we’re going to go all in.”

This is what we call “impact investing,” or investing in companies and causes that will a) make money and b) have a measurable and beneficial social or environmental impact.

Both are important, so I’ll repeat it. Impact investments have to:

a) make money (otherwise they’re a charitable contribution), and

b) have a measurable benefit in “ESG”:*

  • Environmental: The investments must help the environment (or at least not actively harm it).
  • Social: The investments must treat workers fairly (or at least not actively violate human rights).
  • Governance: Management and the board must be transparent and honest (or at least not sus).

The usual investing wisdom is that if you want to b) have a measurable and beneficial impact, then you a) won’t make as much money. This was the giant leap of faith that The Nathan Cummings Foundation took when it went “all in,” going from 5% to 100% of its assets into impact investing.

The story of how they made this transition is a page-scroller. While the foundation had made gradual steps toward responsible investing, the big showdown came at a board meeting in 2017, where several generations of Cummings family members had to win over independent trustees — and each other — to get a majority vote to take the leap of faith into 100% impact investing.

I assume pie was served.

The drama is full of boardroom politics, family relationships, and risk-taking pioneers. They hired Lowell Weiss, the former editor of Atlantic Monthly and White House speechwriter, to write the story, which would make a great Netflix show (think Succession for the socially-conscious generation).

Perhaps most remarkably, The Nathan Cummings Foundation is practicing what they preach, opening up about what went well on their journey toward impact investing, and what they got wrong. In this column, I’ll outline a few of the ways their story changed my thinking, and how we might apply these lessons to the new world of blockchain investing.

Impact Investing: Three Big Takeaways

These three lessons were hard-won, and I greatly appreciate The Nathan Cummings Foundation taking the time to share them. They’ve impacted my thinking on impact investing — specifically, in our new world of blockchain.

1) You can make just as much money with impact investing, and maybe more. “Our new investment approach has not required any financial sacrifice,” the foundation reports. “None.”

The foundation created extensive models to show their new impact investing strategy provided stronger returns, even in the topsy-turvy economy of 2020, than their traditional strategy. They helped disprove the myth that impact investing is not a money-making proposition.

The reasons for this may be counterintuitive: it may be that companies that clean up their mess, pay employees more fairly, and limit executive compensation may be naturally stronger. They attract better people, which results in higher-quality goods and services, and more innovation. They may be better performers because they do the right thing, not because they cut corners.

As a simple example, U.S. automakers looked like reliable “blue chip stocks” for decades, until Tesla came along. Now they’re all playing catch-up to Tesla’s stock price. The mission of “making really great electric cars” looked like a money-losing proposition, until Tesla showed you can make just as much money with clean cars, maybe a lot more.

2) Impact investing takes work. As the foundation shifted to 100% impact investing, they interviewed a ridiculous number of fund managers, discovering that most of them dabbled in impact investing on the side, mainly to cater to a specific earthy-crunchy clientele. Few had impact investing in their DNA.

As they began to make decisions on how to reallocate the foundation’s considerable wealth, they had to pull out of a lot of existing investments, which was difficult and painful. (Imagine having those conversations.) Many of their investments will take years to wind down, drawing out the process even longer.

Then there was rigorous vetting and screening of all the potential investments they could make. What were the foundation’s core values? How would they evaluate investments — with hard numbers — across each of those values? (See their Appendix for their values, principles, and the specific questions they asked about potential investments.)

3) Impact investing needs better measurement metrics. How do we show whether companies are really delivering on our specific Environmental, Social, or Governance goals? It’s easy for a company to say they’re committed to diversity and inclusion; how do we measure whether they practice what they preach?

The report points out that there are several competing frameworks for measuring the “impact” of impact investing, but no industry standard. However, they suggest we have to start somewhere. As the great management guru Peter Drucker once said, “That which gets measured, gets managed.”

Thus, starting to intentionally measure the impact of our investments — whether through the United Nations Sustainability Development Goals, the Impact Management Project, or your own Excel spreadsheet — is the first step. Start by measuring what you can.

So how do these lessons apply to blockchain investors? Let’s look at them from the ESG perspective.

First, the “E”: Environmental Impact of Blockchain

Let’s be honest: bitcoin uses a lot of energy. The mining rigs that keep the bitcoin network humming consume a vast amount of electricity — about the same as all the rest of the data centers worldwide.

That’s right: bitcoin uses as much power — and creates as much planet-warming greenhouse gas — as all those servers that run our spreadsheets, Netflix, and YouTube, combined. But just selling our bitcoin is not the answer, as most other crypto assets are similarly energy-intensive.

There are a few ways we can shift our blockchain investments to favor what’s better for the environment.

1) We can invest in mining farms run on renewable energy. In his new report, CoinDesk research associate George Kaloudis discusses bitcoin’s rapid movement to clean energy: about 40% of bitcoin mining is powered by renewable energy, versus 20% for overall energy consumption worldwide. Kaloudis makes the case that bitcoin could accelerate the global transition to renewable energy. If we end up with more solar farms and wind turbines because bitcoin miners (driven by investors) are demanding them, that’s a terrific outcome for the planet.

2) We can invest in blockchain platforms run on Proof of Stake. It’s like the difference between solar and coal: Proof of Stake is not just marginally more efficient than Proof of Work, it’s a totally different ballgame. Some PoS blockchain networks like Algorand are even pledging to be carbon negative: to give back more to the environment than they take out. That makes trading ALGO a lot better for the planet than trading ETH.

3) We can HODL instead of trading. Whenever you buy or sell bitcoin, it creates another entry in the shared digital ledger, which has a “domino effect” of replication across every bitcoin node worldwide. If you’re constantly trying to “buy the dip” and “take profit at the peak” (e.g., buy low and sell high), it’s not only bad investing strategy — no one can time the market over the long-term — it’s also bad for the planet. When we HODL, we help keep the planet CODL.

Next, the “S”: Social Impact of Blockchain

A core argument that we constantly make about blockchain is that it’s helping to “bank the unbanked.”

Is it?

Last time I looked, those without access to the traditional financial system — which includes banking, lines of credit, mortgages, and so on — were not exactly investing in crypto. How would they? You still need to deposit the funds from somewhere, usually a bank.

We talk about redistributing wealth, but my observation is that blockchain wealth is just getting redistributed to the “whales” who already have most of the blockchain wealth. Even in the crypto/blockchain industry, the rich get richer.

We talk about building a new system of “financial inclusion,” but blockchain is still so hard to use — especially out on the fringes of DeFi — that I can’t imagine that more than 1% of the world can figure it out.

No doubt we are making blockchain more user-friendly, but most people still don’t have the time, technology, or talent to get into it. If you’re a single parent working for minimum wage and living paycheck to paycheck, buying bitcoin is hardly your solution.

Also, “blockchain investing” is still an oxymoron. For most people, it’s more like “blockchain gambling.” There’s a get-rich-quick mentality that leads to increasingly risky derivatives and crazy speculative bubbles.

Blockchain investors don’t want to “bank the unbanked.” They want to “make bank.”

What we can do to change this story? We can:

1) Invest in blockchain projects with low fees (preferably no fees). Anyone who talks about how blockchain will help the unbanked through lower fees just hasn’t used blockchain recently. When it costs $12 to make a $3 ETH transfer, we can legitimately ask what the hell is going on. Fees are the dirty secret of this industry, an insidious problem that needs the best and brightest minds of blockchain to solve. The best fee is zero.

2) Invest in blockchain projects that really are solving social problems. Binance Charity Foundation, which we cover in our book, is a nonprofit that allows investors to donate in cryptocurrency — which goes directly to recipients worldwide. This has a direct and tangible benefit of getting the unbanked to open crypto wallets, in order to receive the money. It also gives donors total transparency into where their donation is going, as it’s all recorded on the blockchain.

3) Avoid investing in “meme stocks” like GameStop and Dogecoin. These cater to unsophisticated investors who want to get rich quick, and Reddit preys on their ignorance by disguising it as “fun” to lose money.

Finally, the “G”: Governance of Blockchain

Today the blockchain industry is mostly white, and mostly male. The problem is that leads to a lot of testosterone-fueled, risk-taking behavior — which is not good for investors, or for the industry as a whole.

Fortunately, there are many women getting involved in blockchain through groups like Global Women in Blockchain, but (in my experience) it is rare to see woman-led blockchain startups. It is rarer still to see blockchain projects led by people of color.

I serve on the board of the Boston Blockchain Association, and it’s a problem we’ve been actively working to solve. At first, our board was made up entirely of white males, but I am happy to report that we now have three smart and talented women on the board, and we are much better for it. Diversity can be achieved, but it must be intentional.

As investors, we can:

1) Look for women- and minority-led blockchain projects. Obviously we want to find investments with real value, but we must overcome unconscious biases that the most valuable projects will come from young white dudes.

2) Avoid projects without clearly identifiable founders. We continue to see new projects launched by anonymous teams, which does not bode well for governance down the road. If there’s no accountability at launch, good luck getting accountability later on.

3) For community-governed projects, get involved with the process. Many new DeFi projects have governance proposals issued by the community (Uniswap, for example). If investors don’t get involved, these projects can get biased toward the largest whales. If you own a token, try to be involved (or at least aware) of what’s happening behind the scenes, to be sure you still agree with it.

The Biggest Impact is the Idea of Impact

Perhaps the most enduring contribution The Nathan Cummings Foundation has made in this journey is the report itself. It’s not just the power of example, but it’s being willing to open up about their experience. This makes it easier for other people to join their journey, even if the journey wasn’t easy.

Compared to them, our job is much easier, because our industry is so much younger and smaller. It’s important that we begin to infuse these impact ideas into the industry now, to make them part of our blockchain DNA.

We can’t just pay lip service to these ideals, we have to actually do something. The ideas I’ve outlined above are a starting point, because we have to start somewhere. I hope you’ll join me in helping me put these ideas into action.

Together, we can inject these ideals into the blockchain bloodstream. Over time, this is how our investing can have world-changing impact.

  • Note I am oversimplifying concepts like ESG, SRI, and impact investing (a more detailed description here). The lack of clear and consistent definitions between these is one of the issues highlighted in the Cummings Foundation report.

John Hargrave is the author of Blockchain for Everyone: How I Learned the Secrets of the New Millionaire Class, the bible of blockchain investing.

Author of Mind Hacking (www.mindhacki.ng). CEO of Media Shower (www.mediashower.com). Making things better.