Breaking The Barriers: Holding Community & Green Bonds In Registered Accounts
Sep 25, 2017
Response to MaRS report: Barriers to Putting Community Bonds into RRSP Accounts published April 2017
Solar Bonds, Green Bonds, and Community Bonds (“Community Bonds”) are securities issued by non-profits, co-operatives, charities, and B-Corporations that finance projects that benefit communities, people, and the environment.
Community Bonds issued by Ontario organizations including SolarShare, the Centre for Social Innovation, the Ottawa Renewable Energy Co-operative, and CoPower are currently being held in registered accounts for retail investors at Concentra Trust (through the Canadian Worker Co-op Federation), Caldwell Securities Inc., Questrade, MD Management (National Bank of Canada), Olympia Trust, and RBC Dominion Securities, and wealthy investors at Scotia iTrade, TD Waterhouse, BMO Nesbitt Burns, CIBC Wood Gundy, and Richardson GMP.
Despite the challenges noted in the MaRS report Barriers to Putting Community Bonds into RRSP Accounts, Community Bond issuers and their investors have made excellent progress in getting their securities held in registered plans.
Progress & the Opportunity
SolarShare, the Centre for Social Innovation, Ottawa Renewable Energy Co-operative, and Co-Power have issued nearly $10 million in Community Bonds that are currently being held in RRSP, TFSA, and RRIF at the financial institutions noted above. This includes individual contributions from $1,000 up to $1,000,000 from both retail and wealthy investors.
Of the $10 million invested in Community Bonds, more than 30 percent has been transferred directly from large banks and brokerages who will not hold Community Bonds in registered plans to those that do. For instance, from December 2015 through December 2016, SolarShare investors purchased $1,440,000 in Solar Bonds held in TFSA, RRSP and RRIF. This was an increase of 32% from 2014. At this rate (and in reality), nearly $2 million more is on track to be invested in Solar Bonds through registered accounts in 2017.
As is also noted in the MaRS report, millennials are attracted to investing with impact. Indeed, since 2015, 31% of all new SolarShare investment has come from millennials. As described in The Globe & Mail:
“Millennial investors are 65 per cent more likely than baby boomers to consider ESG factors when making investment decisions, according to an Ipsos Reid survey done for the Responsible Investment Association (RIA) and commissioned by OceanRock Investments Inc. It’s an important demographic given that millennials now make up about half of the North American workforce and are estimated to inherit more than $30-trillion in the coming decades, according to Accenture. Responsible investing has grown by 49 per cent in the past couple of years to more than $1.5-trillion in assets under management in Canada in 2016, according to the latest data from the RIA. That’s 38 per cent of Canada’s investment industry, up from 31 per cent two years prior.
As this generation pays down its student debt, inherits money and builds wealth, responsible investing will continue to become more mainstream,” said Dustyn Lanz, senior director of communications and member affairs at the RIA.”
Many younger investors experienced the financial crisis of 2008 first-hand, and are warier of traditional investments. They want investment opportunities that offer tangible results and social, health and environmental benefits in addition to profit.
With increasing demand for socially conscious, value driven impact investments, financial institutions that wish to retain the next generation of investors must work to remove barriers accessing and holding non-traditional investment vehicles such as Community Bonds.
Addressing the Barriers
The three key barriers identified in the MaRS report are addressed as follows:
Prove Income Tax Act Eligibility
The Community Bond issuers noted above have met this requirement of the Income Tax Act by obtaining a professional tax opinion and renewing it annually.
Calculate Fair Market Value (if Necessary)
Community Bond issuers are responsible for obtaining 3rd-party valuations for their securities which can present a financial obstacle. SolarShare, for example, sought out a 3rd-party valuation opinion when it began issuing securities for registered accounts in 2013. SolarShare now places a charge on all of its assets in favour of a trustee acting for all Solar Bond holders. The assets are valued by SolarShare management regularly to ensure the fair market value of those assets always exceeds the outstanding face value of the Solar Bonds issued. This approach has been acceptable to many financial institutions, provided a suitable professional tax opinion is obtained annually.
It is also worth noting that organizations that issue Community Bonds may also secure asset-backed loans from commercial sources, which require rigorous legal and technical third-party due diligence evaluations. For instance, two commercial lenders have scrutinized SolarShare’s projects and finances in great detail to satisfy themselves that their principal investments (totaling close to $18 million) and interest will be repaid.
Avoid Administrative Costs
While the financial institutions noted above accept and process physical Community Bond certificates, many issuers wish to implement electronic bond processing and tracking. SolarShare and CoPower are actively exploring these electronic options, aided by financial planner Tim Nash.
Suggestions for Financial Institutions
To meet the demand for new and innovative investment opportunities driven by impact investors, financial institutions should review and update their policies to facilitate investment in new types of products to avoid losing significant market share over time.
Issuers of Community Bonds are eager to work directly with interested financial institutions to discuss and address these barriers. To this end, SolarShare and the TD Bank Group have formed a working group to find ways to eliminate or mitigate barriers and improve investor access to Community Bonds; interested financial institutions and Community Bond issuers are welcome to participate.