Community bonds offer a new asset class for investors, but what are the pros and cons of this social investment option?
A nonprofit/social enterprise walks into the bank.
Nonprofit/Social Enterprise
We’d like to borrow $80,000 of capital to fund our social enterprise.
Bank
No. This is new and scary.
Banker flees the scene. Social enterprise gets creative and reaches out to the community.
Nonprofit/Social Enterprise (to the community)
How would you all like to help fund our social enterprise by purchasing community bonds?
The Investment Community
What are those?
Nonprofit/Social Enterprise
Well, each of you could purchase a small bond, let’s say $1,000, which we will use over the next five years. In five years, we will return your investment plus 5% interest.
The Investment Community
Wow! I’ve always wanted to invest locally and socially beyond socially responsible mutual funds. Where do I sign up?
Eighty community members purchase community bonds. The nonprofit/social enterprise is a complete success. Everyone rejoices.
THE END
Want to invest socially and locally? It’s time for investors to start thinking about community bonds as a new asset class.
Community bonds are a new addition to the growing movement called social finance. Many times, we only hear about the benefit of community bonds from the social enterprise/nonprofit perspective, but we rarely hear about the pros and cons of investing in community bonds as a new asset class for investors.
So, what are the risks and rewards of investing in your local community?
Investment Pros:
1. Further diversification for private investors. Community bonds are not correlated to financial markets like publically traded bonds. Therefore, they offer an amazing opportunity for investors to invest in fixed income products whose prices and yields are not impacted by market interest rates.
Jargon-free translation: If you purchased a community bond offering 5% over five years, you’d earn 5% in five years regardless of whether market interest rates dropped.
2. Offers greater yield than most GICs.
Community Bonds are structured like a non-redeemable GIC, a guaranteed investment certificate. While there are several types of GICs, for the purposes of this article, we will stay with the most popular type of GIC, which is a non-redeemable GIC. With a non-redeemable GIC, you lend the bank $100 when you buy a $100 GIC and they promise you a 2.5% return if you don’t sell that GIC for however much time, let’s say five years. So, in five years, you’ll get back $102.50 back – guaranteed.
Right now, most five-year non-redeemable GICs at the major banks are offering interest rates of 2-3%. Most community bonds offer 5% over five years, which is much higher.
3. Low-Risk – Most community bonds add your investment to a pool of money that is designed to fund a portfolio of social projects, not just one. A great example of this is SolarShare. Solarshare Community Bonds help to fund The SunField Projects– 17 solar installation projects in Ontario and the WaterView Projects.
By investing your money into many different projects, the default risk is lowered. If one project fails, there are 17 other projects providing cash flow. Additionally, many of the social projects have existing government contracts, so the future cash flow for the projects are guaranteed.
Community bonds are not risk-free like a GIC. Do your research. Find out what projects you’re investing in and what the company plans to do about it if they don’t meet their targeted goals.
4. Many community bonds are sold in small increments, from $500 up to $10,000 bonds, to make it accessible for everyday investors.
Investment Cons:
1. Not a lot of options. Community bonds are an up and coming asset class. Right now, there are only a limited number of social enterprises that are starting to raise money this way, and community bonds can sell out very quickly.
2. Only a few are RRSP eligible. Mostly, community bonds end up being a non-registered investment. This means you will pay tax on any interest earned. Some community bonds, such as Toronto’s Centre for Social Innovation, were RRSP eligible, however, your bank may not be equipped for you to hold them in your RRSP, so returns remain taxable.
3. Little to no liquidity. Like a non-redeemable GIC, once you’ve purchased your community bond, the money stays there. There is no secondary market to buy and sell your bonds, so if you need that money within the investment period, you won’t be able to cash out. Over time, I foresee community bonds as the next emerging asset class for private investors looking for a low-risk social investment.
Some examples of community bonds in Ontario
1. SolarShare
Series of Solar Powered Projects, renewable energy
$1,000 bonds + $40 co-op membership fee = 5%/year over 5 years.
2. ZooShare
Developing a 500KW bio gas plant in Toronto
$500 – $5,000 community bonds
7% over 7 years
Series of green initiative projects
$100 for co-op membership + loan amount = 5% guaranteed on the amount you invested over 5 years.
Sustainable food in Toronto’s West End supporting new community Food Hub at Queen and Dufferin, including a community kitchen, local food workshops and events, and a retail space featuring local farmers and producers. (closed)
$500 bond + $5 co-op membership = 2.5% over 2 years
Shannon Simmons is a financial advisor and founder of The Barter Babes Project. She offers professional financial advice to those who can’t usually access it by providing her financial services in exchange for a bartered good or service instead of a fee.