Community Bonds – A Primer

Holding Hands | Source: katerha on FlickrIs it possible to invest in a sustainable and ethical fashion that promotes environmental health and a better world without resorting to mutual funds, or some other packaged investment? With the advent of community bonds, it is.

What are Community Bonds?

Community bonds are just what they sound like – bonds issued by local, community organizations (either a non-profit or a co-operative) to local, community investors. The investment funds provide the organization with either money to pay down existing loans that they may have, or to provide start-up capital for a potential project. In exchange, the organization agrees to pay a fixed rate of return on the investment over a fixed term, and to repay the investment at the end of the term. In Canada, depending on whether or not the bond offering has been approved by the Provincial investment regulator, the bonds may be eligible to be held inside an RRSP or TFSA.

Why Should I Buy a Community Bond?

That’s a great question. Its one that I asked myself when I first looked into community bonds. What are the benefits/advantages of community bonds over other, more traditional investments?

  • The money stays in the community. When you invest in a local non-profit or co-operative, you can directly see the impact of your investment in the daily activities of the organization. In many ways, those activities might directly benefit you, so in a way, you might even be investing in yourself.
  • A fixed rate of return means you know what you’re getting. With any investment, there is risk to be sure. If the non-profit or co-operative is poorly run, they might not be able to meet the expected rate of return, or worse, they could go under and you could lose your capital. This is where its important to research and investigate the organization before investing and to know the risks you’re accepting. But if everything works out, the knowledge of knowing exactly what return you’re getting provides a lot of peace of mind.
  • Many community bonds support worthwhile projects. I’m going to highlight two community bond offerings that I have recently found out about, but there are others and in general, they support organizations that are intended to promote projects that are good for our health and our environment. These are investments that you can feel good about making.
  • Community bonds are accessible investments. Community bonds are typically issued in amounts that are accessible to even beginning investors with small amounts to invest (for example, on the order of $500-$1000). You do not have to be a millionaire to get started in community bonds.
  • Returns may beat traditional investing. If you’re a daytrader, this may not be the case. But for the average investor who purchases mutual funds or ETFs, and is subject to the daily fluctuations of the stock market, a constant annual return of 5-7% may beat the stock market or at the very least, is very competitive in the long run.

What are the Disadvantages of Community Bonds?

  • Capital is not accessible. One should note though that like any bond, they are not accessible investments in the sense that you can access your money at will. By buying a bond, you are committing to investing your money over a fixed term.
  • Investments may not be eligible for RRSP/TFSA tax sheltering. If this is the case, you should make sure to factor in the tax that will be payable on the gains before deciding whether the investment is worthwhile for you.
  • Returns may not beat the stock market. The flipside of one of the advantages. If you’re a savvy investor, there’s no question, you could possibly make a better return on the stock market in the long run.

What are Examples of Community Bonds?

Two community bonds that I have recently found out about are SolarShare and ZooShare. SolarShare offers $1000 5-year bonds with an annual rate of return of 5%. There is a $40 membership fee to join the co-operative however which slightly lowers the effective rate of return. The bonds are not currently eligible for RRSP/TFSA sheltering, and you currently can’t buy more than one of them, but both of these conditions will go away as soon as the bonds have been approved by the Financial Services Commission of Ontario (a process which is currently underway). The money provides capital for the organization to construct and maintain solar power generation projects in the province of Ontario. Thanks to Ontario’s Feed-In Tariff program, the power generated is bought at a guaranteed rate over a fixed term. Since SolarShare already has a good number of solar panels already installed and functioning, this makes for a fairly low-risk investment in my opinion.

ZooShare is a little bit higher risk, only because the investor is exposed to risks associated with project construction. ZooShare proposes to build a biogas plant capable of generating power from the digestion of animal manure and food waste. The reason its called ZooShare is because it will be located at the Toronto Zoo and one of the main feeds to the plant will be ‘zoopoo’ – manure from the animals in the zoo. ZooShare plans to offer $500 and $5000 7-year bonds with an annual rate of return of 7%. Like SolarShare, there is a fee to join the co-operative ($100) but if you join the co-operative before they start issuing bonds, they will give investors a $100 discount on their first investment, essentially eliminating the fee to invest. Also, like SolarShare, the bonds will be RRSP/TFSA eligible once the regulatory approvals process has been completed.

Both of these projects are great examples of community-driven efforts which stand to improve the health of our environment, keep money in the local community and provide a competitive return to investors. And that, to me, is a socially responsible investment.

Disclosure: At the time of writing, I am currently not a member and have not invested in either of these co-operatives, but do have intentions of investing in both in the near future.

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2 thoughts on “Community Bonds – A Primer

  1. It sounds like a pretty cool concept. I’m sure lots of people would want ton invest in a local, environmentally friendly cause, especially if it produces decent returns. I’ll have to watch out for something similar in BC, but I wouldn’t go for it unless it was covered in my TFSA.

    As for the zoo poop thing, that is an awesome idea too. I think every zoo should be considering something like that when feasible.
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