Why I Like Fair Trade… And What It Needs

At Good Capital we have done one Fair Trade investment in Adina, a company that competes with Starbuck’s Frappuccino with a ready-to-drink line of iced coffee sold in supermarkets. Adina’s bottled coffee products are aimed at women under 35 and are lower in calories than their competitors, Organic, and sourced from Fair Trade cooperatives.

Because of our investing partner and the management team assembled, Adina has a great chance of success, at least financially. That is, we and our investors are likely to make good money. But if that’s all we do, our investors will not be happy. They are investing with us for more than financial reasons; they also want to know that they are leveraging their positive impact in the world by putting their money in our hands.

We tie directly into their philanthropic motivations but through a new angle; one that also engages their rigorous, investor mindset and doesn’t ask it to turn itself off or play by a second, less rigorous set of rules. We want the investors in our funds to bring their “A” games to the table. We are playing the real game, trying to get the ball in the pocket, not some soft form of bumper pool.

For us, Fair Trade solves a couple of problems and helps us overcome some investor objections. If Good Capital is selling both the prospect of leveraged social impact and a financial return, then, people ask, how do you measure that; how do I as someone who has trusted you with my money, know you are doing good?

Well, with Fair Trade we can quickly answer that there is a third party certifier at every point along the supply chain, that the coffee, vanilla, sugar, and tea in Adina’s products come from certified Fair Trade and democratically elected coops in places like the Oromia region of Ethiopia, the Ixil Triangle of Guatemala, and Surinam, Paraguay, and India.

We also get around the imperialist-tinged element of people with money deciding what is good for poor people producing commodities with the way the Fair Trade premium is delivered. In addition to paying the farmer a price higher than the market rate for the commodity, Fair Trade rules require the buyer to deliver a further premium to the cooperative to be spent as the community sees fit. They have to report on what they do with the additional premium, and it often involves building or fixing a school or clinic, achieving Organic certification, digging a well, or repairing some kind of irrigation or water project.

For us as investors, the benefits are two-fold; we don’t have to build a measurement system to prove the social impact to our investors, and the democratic element finesses political and power considerations, helping left-leaning investors and activists concerned about empowerment issues feel good about the way they are deploying their money.

Many of the most socially minded and active people of wealth still have a problem thinking of social impact and investing as existing in the same realm; they have a hard time accepting that investing for good can be an asset class. The cultural framework they have inherited is that you do your good out of your philanthropic pocket, expecting the total loss of your capital.

Then even these socially minded activists and philanthropists invest with a mindset in which you are not being who you should be unless you think only about financial return when you invest; it’s the bastard child of Milton Friedman and heir of Andrew Carnegie’s Gospel of Wealth from the devil’s side of the family.

The good news is that Good Capital is raising money, even in this climate, through this premise; more money is teeing up to come our way.

But the prospect of success, as slowly as it is creeping our way, creates risk for us and investors like us. If people are willing to invest with us, buying our premise that we can deliver financial and social value in greater measure than if they had just given their money away, we have to prove that we really are doing good.

We can point to the premium and what it has done in each coop, but have we really changed the lives of the people in that community in a positive way by our intervention? Some studies say that the real good is achieved through making a cooperative a viable decision-making structure; we get the people in the community to cooperate in hope of a realistic gain and the benefits derive from that. So Fair Trade’s role in helping people lift themselves out of poverty might be a secondary benefit.

So if we and our peers successfully funnel more money to Fair Trade, we have a risk factor that we need to address. What is the real impact of our money? What do the people affected say that it does for them, aside from what they did with the Fair Trade premium and other than what our metrics allow us to report back to our investors and the consumers who buy Fair Trade products?

To look into that issue, I’ve started substantive conversations with my friend Sabina Alkire of the Oxford Poverty and Human Development Institute at Oxford University. Her metrics, which are based on Amartya Sen’s capacity approach to development, incorporate and quantify the voices of the poor. They are being incorporated into how several countries (which can’t be announced yet) measure poverty, and are starting to be used by several development agencies. They are working because they really do empower the poor to say what’s working for them and what’s not; so you can more accurately know what impact any effort to alleviate poverty is having on the ground.

We’re going to see if her approach could be applied to the data that is already being gathered by Fair Trade coops in an effective way at a reasonable cost. If we can do that, then we will reduce the risk of funneling money to Fair Trade companies that promise that they are doing good, only to discover that we are not making the difference we and our investors had hoped we were.

Finding the right Fair Trade partner for this research is something to be managed carefully, of course, but that’s a step down the road. The first step, according to Sabina, would be to deploy a researcher funded by her institute to look at the data from a Fair Trade coop and company and see if it’s the kind of information her method could use to answer the key questions we want to answer on a regular and consistent basis.  We would also find out whether the effort would provide sufficient value at a reasonable cost.

We hope to have this project teed up during December and be able to talk more about it in January.

A potential positive upside if we succeed is that commercial companies and private sector companies would be measuring the same things that the development agencies and nations are starting to measure.

That could lead to significant partnership opportunities between venture-backed companies and development agencies. The chief barrier so far has been that the development agencies speak their own agency-centric, theory-of-change language, and social venture funds and venture philanthropy funds use vocabulary adapted from the market, like risk, return and social impact.

SoCap Media is convening another Social Capital Markets event in Washington D.C. in the spring, bringing together social investors and venture philanthropy funds with development and other government agencies. If things work out, the effort with Sabina could lead to a prototype of a Rosetta Stone that we could unveil, in beta, and subject to massive transformation and evolution, at that event. 

Kevin Jones is a cofounding principal of Good Capital, an investment firm that accelerates the flow of capital to enterprises that use market forces to create large-scale social change. Jones is a successful serial entrepreneur, angel investor, and cofounder of Social Capital Markets, the groundbreaking conference on social venture investing.

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