Financing Your Local Green Business

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Despite a growing need for eco-conscious, local businesses, the financing opportunities still remain restrictive.
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“Good Green Jobs in a Global Economy” by David J. Hess explores the politics of green jobs and suggests solutions for maintaining a growing economy while promoting green energy.

Good Green Jobs in a Global Economy (MIT, 2012) by David J. Hess looks at the implications of convergence of industrial and environmental policy in the United States. Hess discusses the shift in the United States’ economy, looking at the impact that green jobs has had on both the national and global economy. The following excerpt is his discussion on financing local green businesses.

A complete approach to the funding of locally owned green energy would also include support for the incubation and growth of green small businesses. There are some general government programs to assist small businesses, but the regulatory system is structured to limit the options for small investors who wish to invest in small businesses. One set of options, microfinance and community loan funds, accept quasi-charitable donations with zero or low interest rates. Likewise, community investment options from the larger mutual fund companies, such as the Calvert Foundation Community Investment Note, provide a low rate of interest. Some community banks and credit unions also offer financial products that include investments in or donations to local environmental groups. However, interest rates are all relatively low in this set of financial instruments.

Somewhat higher rates of return with correspondingly higher levels of risk can be obtained for debt investment in small businesses through Internet-based lending sites. Although in 2008 the Securities and Exchange Commission issued a cease-and-desist letter to the leading company,, by July of 2009 the company had successfully completed registration and was back in business. Partly in response to the perceived need to develop a better regulatory environment for new financial models, the peer-to-peer organizations formed a trade group, the Coalition for New Financial Models, in 2009. Within the peer-to-peer system, it is possible to support small businesses that meet social and environmental responsibility criteria. This approach is still a loan rather than an equity investment, but it allows investors to assume more risk and gain higher rates of return than those found in community loan funds and similar vehicles.

Although the existing options for small investors are laudable, they are basically debt investments with low rates of return. Whether one goes through a loan fund, through the Calvert Foundation, through a credit union, through a community bank, or through a peer-to-peer site, non- accredited investors generally cannot make equity investments in the green small-business sector. The legal structure of investment has made it difficult to develop similar options for equity investments for non- accredited investors who might be willing to accept higher risk for the prospect of higher returns. Although there are some plans to develop the equity side of green community capital, such as regional stock markets, to date the mechanisms that could rebalance investment in locally owned independent businesses remain very restricted.

Because the retirement industry is structured to send individual investments into the stocks and bonds of publicly traded corporations, there is a gap between the need for investment in the small-business sector and the trillions of dollars of retirement savings, not to mention other investments held by non-accredited investors. For persons who wish to invest in small businesses with a social and environmental responsibility mission, the options are very limited. Michael Shuman writes:

Locally owned small businesses constitute about one-half of the private economy in terms of output and jobs, but they receive almost no investment from the nation’s pension funds or from mutual, hedge, venture, or any other kind of investment funds. In a well-functioning financial system, roughly one-half of the investment should go to roughly one-half of the economy. Today, every American, even the stalwart advocate of community development, is overinvesting in the Fortune 500 companies and underinvesting in local businesses key to local vitality. This is a colossal market failure.

Shuman argues that regulations of the Securities and Exchange Commission prevent small investors from investing even modest sums in small, privately held, locally owned businesses. The burdens for securing such investments are so high (he estimates them to be 50,000 dollars to 100,000 dollars for a private offering of stock) that the mechanism of equity investment is out of reach for most small businesses.

Shuman proposes a reform of Securities and Exchange Commission regulations to allow equity investment in small privately held companies. He argues that risk can be controlled if three conditions are met: no single investor can own more than 100 dollars in any one company, all investors must reside within the same state in which the company is located and shares are sold, and the size of the company’s total stock valuation must be less than 250,000 dollars. In 2010 the Sustainable Economies Law Center sent a petition with a similar proposal to the Securities and Exchange Commission, but the government agency ignored the request and the letters of support that it received. However, during the next year the House of Representatives approved legislation (HR 2930) in support of the proposal on a bipartisan vote of 407 in favor and seventeen opposed. The law would allow small businesses to raise up to 1 million dollars in capital and allow individuals to purchase up to 10 percent of their income in shares, and there were provisions for disclosure standards. The Securities and Exchange Commission opposed the law because of concern with securities fraud, and the companion bill in the Senate faced opposition. Shuman supported the legislation in an editorial titled “Don’t Occupy Wall Street, Ditch It!”

One can envision many other financial products for investing in local green businesses. An option to have a tax-free early withdrawal from retirement funds for investment in distributed renewable energy or energy efficiency for a residence or small business could unleash billions of dollars of investment that would create green jobs primarily in the locally owned contracting sector. It would also offer people a different, “localist” option for investment: rather than investing in the future growth of the stock market, they could invest in the future savings of household expenditures.

Reprinted with permission from Good Green Jobs in a Global Economy: Making and Keeping New Industries in the United States by David J. Hess and published by MIT Press, 2012.