For quite a while I’ve been thinking about the similarities between CFSI’s perspective on using market forces to mitigate poverty and the green movement. Both are double bottom line enterprises – with the ability to yield profit and social returns – which address complex, system problems, with material vested interests against industry innovation. Despite the legacy disincentives to address the problem (banking and FS in the former and the fossil fuel industry in the latter), there is tremendous entrepreneurial energy to find new solutions. There are many half-baked ideas out there, but some are attracting top talent, sufficient capital and real traction in the market. Completely new businesses and business models are imaginatively addressing these complex problems that the hegemony had long dismissed as futile do-gooderism.

It’s a stretch to compare what Al Gore is doing on a global level regarding the environment to what CFSI is doing domestically directed at industry regarding wealth creation for the poor – but it’s figuratively right: both are creating awareness of the problem and creating a space for a new marketplace to emerge. Stick with me, even if you don’t find the latter comparison useful.

I just finished an interesting article in an old edition of the New Yorker titled “Big Foot” by Michael Specter about the complexities of going green. The article discusses the long and circuitous carbon footprint of various commodities, from their seed, nourishment, harvest, packaging, storage, transport, distribution, shelf-life, consumption and decomposition. It points to many counterintuitive realizations, like that shipping roses from Holland to London creates easily six times more greenhouse gasses than from Kenya to London. Most interestingly, however, the story features a financial futures expert, Richard Sanders, who after decades of “inventing markets to create value for investors where none existed before” founded the Chicago Climate Exchange (CCX). CCX operates on a “cap and trade” model in which all participants agree to greenhouse emission caps and trade their surpluses and deficits on the exchange. It works by making it cheaper to reduce emissions, rather than more expensive. Is this the panacea to all environmental issues? No. does it obviate regulations, laws, or personal behavior change? No. But in one form or another CCX and like exchanges have demonstrated their ability to alter large market forces towards addressing major social problems.

I’m going to do a terrible job tying this idea to wealth creation for the poor, but I feel in my bones this is a powerful idea. There is no easy equivalent to carbon dioxide needs to be reduced. There is no easy equivalent to nature which abides without fail to physical laws. But thanks to CRA there are objective and serviceable definitions on underserved areas and people. Capital, in various forms including payments, short- and long-term savings, credit at the best risk-adjusted rates, and appreciating assets, needs to be increased to these areas and people. Could an exchange exist for these various forms of capital applied to underserved areas? Could this become part of a new CRA, which as Ellen Seidman envisions is opened up to all financial services players, not limited to banks and thrifts. Instead of caps, there would be baselines for each broad asset class which needs to be allocated to underserved areas and people (no idea if the old idea of “service area” should apply here, I’m guessing not). Each company has a “poverty alleviation” baseline for relevant types of capital. If a company can’t reach the baseline, it must purchase “poverty alleviation” credits at market rate. If a company exceeds its baseline, it may sell any excess credits. So, if a company must lend $10m at a fair rate to an underserved segment. A company which is able to so at a lower cost (or even a profit), may ask what it wants for every dollar over $10m from those companies which couldn’t figure out how to lend the $10m. This could prove incredibly lucrative to early innovators and serve so painful to the old dogs that they will quickly find cheaper ways to allocate this capital.

Another exchange would be created for short-term savings. A deposit seeking company must have, say $25m in “low income” short-term savings, as a baseline. Companies who have more than the baseline can sell their excess poverty alleviation savings credits at any price the market will bear to those who don’t meet the baseline. Etc.

This is naïve and flawed in a million ways, but after a couple conversation with Mr. Sanders and the like, I will bet my short term savings that such a markets concept can be incredibly powerful in providing financial services to the underbanked. In the meantime, here is a keynote speaker idea for June 2010.