Saturday, June 4, 2011

Strengthening Community Bonds to Build a Greener Future

Engaging the public in significant initiatives by issuing bonds has a long history in Canada, arguably originating with the war bonds used to finance the country’s early 20th century war efforts. Today, rather than using the proceeds of bonds to tear down a foreign enemy, they are being put towards the building of local communities.

CSI's Community Bonds

The Toronto-based Centre for Social Innovation (CSI) recently demonstrated how reaching out to the broader community has enabled it to expand on its mission of catalyzing and supporting new ideas to change its community. The original CSI building at 215 Spadina Street (CSI-Spadina) created shared workspace in downtown Toronto for over 200 members working at organizations with a social mission. CSI-Spadina provided them with a means to connect, learn and exchange ideas in a professional setting. This also provided CSI-Spadina tenants with a platform to engage their stakeholders and the community beyond the walls of their new home.

CSI-Annex, Toronto, ON (Source: CSI)
The success of CSI-Spadina encouraged CSI to consider how to increase its Toronto footprint and allow more organizations to benefit from its pioneering model. CSI’s eyes soon settled on a 36,000 square foot building at 720 Bathurst Street, which has become CSI-Annex. However, rather than turn to traditional financing options and working with limited internal resources, CSI decided to issue community bonds to meet its goal of raising $2 million for financing the purchase and retrofit of the building.

The community bonds issued by CSI were eligible as Registered Retirement Savings Plan investments and required investors to contribute in amounts of $10,000 or more while earning a 4% annual rate of return for five years. Other details included:
  • Interest - interest calculated semi-annually and accrued into the original investment;
  • Payment – principal and interest to be paid out at maturity;
  • Subordinated Mortgage-backed Investment – investors would be paid out equally on the value of the building after the bank/city in the event of a default;
  • Maximum Pool - sold a maximum of $2 million;
  • Trustee - third-party trustee hold the mortgage for the benefit of all bondholders; and
  • Revenue - repayment of bonds done through revenues generated through CSI’s core business.

ZooShare Biogas Cooperative

CSI’s success has not gone unnoticed by other local social entrepreneurs. Daniel Bida, founder of ReGenerate Biogas Inc., is attempting to put the community bond model to use in the community power sector. His role in spearheading the development of a 500 kW biogas facility at the Toronto Zoo was recently featured by Toronto Star reporter and CleanBreak blogger Tyler Hamilton.

Bida has put together a team that is proposing to take the zoo’s animal manure and turn it into renewable power, heat and fertilizer. The electricity will be sold into the grid under the Ontario Power Authority’s Feed-in Tariff Program at a guaranteed rate of 16.0¢/kWh for 20 years, while the waste heat could be put to use in a proposed nearby greenhouse.

In order to facilitate the financing, construction and management of the facility, Bida has worked with other interested parties, including Wakulat|Law principal Robert Wakulat, to found the ZooShare Biogas Cooperative. ZooShare is a not-for-profit renewable energy co-op, which is a new form of co-operative that was recently added to the Ontario Co-operative Corporations Act after the province’s introduction of the 2009 Green Energy and Green Economy Act contemplated more participation by communities in the generation of renewable power.

ZooShare is aiming to construct the biogas facility for about $5 million and fund about 70% of the total cost, or roughly $3.5 million, through the sale of community bonds similar to CSI. (The co-op has already received a design and development grant from the Community Energy Partnerships Program.) The bonds would be issued for seven-year terms, offer a 7% return and could be purchased through a self-directed RRSP in denominations of $500 or $5000.

ZooShare is part of a growing number of initiatives in Ontario that have decided to pursue the community bond route in the pursuit of project capital. Others include Options for Green Energy and SolarShare. As Hamilton notes:
Their approach represents a low-risk investment for people who want to support “green” community projects and make some money, but who don’t want to spend thousands of dollars putting solar PV systems on their own rooftops.
It also offers a way for those without property, such as renters, or without the proper land or rooftop exposure, to participate in the feed-in-tariff program. Community bonds, in essence, make the FIT program more inclusive and get the broader population directly invested in their energy future, be it solar, wind, biogas or hydro.
While still facing regulatory and financial institutional challenges, the introduction of community bonds is giving socially progressive entrepreneurs another resource to draw from in implementing their groundbreaking visions. If the use of bonds for these types of projects is able to capture the public’s imagination, it may help lay the foundation for the use of public bonds in contributing to the further development of Canada’s cleantech future.

Green Bonds

Since the Canadian federal government has eschewed providing a clear market-pricing signal for carbon and is unlikely to change this policy in the near future, it may instead find a public prepared to accept another approach to reducing greenhouse gas emissions. As proposed by venture capitalist Tom Rand, green bonds would be a government-backed financial instrument modeled on Canada Saving Bonds but designed to raise capital specifically for renewable energy production.

As CSI has demonstrated, Canadians respond favourably to investment opportunities in socially progressive ventures in their community. The principal attraction of green bonds is that they will enable similarly inclined individuals across the country to invest in an environmentally sustainable future. The proceeds from the green bonds would focus on supporting “threshold technologies” that would otherwise be unable to secure capital at commercial lending rates. According to Rand, the key details include:
  • Role Of Government: Governments would be the guarantor to the bond in lending their risk rate, reducing the risk to the investor.
  • Governance: The fund itself would function at arm's length from government, run by a Board of Directors with strong private sector representation. Ideally, the bond and the capital it raises can be positioned within existing structures.
  • Timeframe and the Larger Regulatory Framework: Ideally, the bond would be a temporary solution designed to address a market gap that can and should be addressed on a permanent basis within a larger regulatory framework. Like any fund, the bond shall generate a return, but over a time-frame longer than is typically considered by private capital.
  • Investment Opportunities: Investment profiles range from large-scale infrastructure or low-cost debt financing on a (large or small scale) project-by-project basis.
Once a technology has proven itself, the market takes over, the investment made through green bonds will be returned and the funds will be reinvested in other promising technologies. This could create a virtuous cycle of job creation, promotion of high-tech exports and nationwide support for addressing climate change.

In fact, the international community has already taken note of the green bond concept. In late May 2011, it was reported that the OECD had issued a report stating that green bonds could raise hundreds of billions of dollars a year to spur a shift to cleaner economic growth. The proposed funds would be administered by an international body and applied in much the same way as Rand’s proposed fund. To date, the impact of green bonds has been relatively modest. The amount of all green bond issuances has been about US$11 billion, which only represents approximately 0.012% of the capital held in global bond markets estimated at US$91 trillion.

Conclusion

Reducing GHG emissions can be achieved in a variety of ways, ranging from regulations and punitive measures to taxes and incentives. The real challenge is to establish policies that generate solid public support, promote technological innovation, and harness market forces. Community bonds have demonstrated that citizens are prepared to invest and strengthen their engagement within their communities if they believe in the mission of the project. It would be a fitting evolution of last century’s war bonds, if Canadians were now given the opportunity to use this concept to transform the marketplace; change behaviour; and create social value by greening their communities and the country.

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