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Kat Tancock is co-founder and co-editor of nature-focused Rewilding Magazine and of Workshop, a small business magazine for makers and creators in Canada.

For years, I’ve kept the bulk of my savings in a portfolio of diversified, low-cost exchange-traded funds. While for the most part I’ve been happy with that decision, one aspect has long bothered me: The very nature of index investing means you don’t get to choose where your money is (and isn’t) going. Unfortunately, that means I’m invested in companies whose actions are at odds, to put it mildly, with my values, such as big energy companies with questionable environmental records.

I’ve been exploring market funds that are more selective in their holdings as one strategy to make my portfolio greener and more socially responsible. But during that process, I realized that I was longing for an investment vehicle that would do more than just alleviate my guilt. I wanted to be putting at least some of my money toward something that was making a positive difference, and whose results I could see up close. And that’s when I found out about community bonds.

Community bonds are a tool that allows non-profits, charities and co-ops to borrow money to fund their work, and investors to profit from supporting organizations and projects they believe in. This isn’t simple charity – issuers must have a revenue model so they will be able to pay interest to bondholders. Each bond issuer creates its own terms, including duration, interest rates and minimum investments. For instance, Montreal-based environmental organization Earth Day Canada is currently raising funds to install a network of electric-vehicle charging stations in Quebec and New Brunswick. With a minimum investment of $1,000, lenders can choose a five-year commitment at 3.5-per-cent interest or a seven-year term at 4 per cent, with earnings paid out annually.

One pioneer in this area has been Toronto’s Centre for Social Innovation (CSI), a social enterprise that has been offering co-working, event, meeting and office space as well as community and collaboration to those who are “doing good” since 2004. By 2009, CSI had a large membership and a waiting list and was looking to buy its own space. With only $50,000 in savings, the nearly $7-million needed to purchase and renovate the building they had their eye on seemed far out of reach, chief executive Tonya Surman says.

Thanks in part to a loan guarantee from the City of Toronto, Ms. Surman and her team were able to secure a mortgage – but they still needed to come up with $2-million elsewhere. That’s when Ms. Surman had a brainwave in how to turn what she calls their “community capital” into financial capital. CSI created bonds secured against the value of the building and raised the funds. “It was mayhem,” Ms. Surman says. “But it was the first example of an at-scale community bond, where ultimately it allowed us to now own two buildings.”

CSI’s experience has been a model for many groups. One of these is 10C in Guelph, Ont., a social innovation hub similar to CSI that’s been in operation since 2008. Thanks in part to community bonds, 10C was able to purchase and renovate a historic building in downtown Guelph that has become its home base. The bonds were essential in accelerating 10C’s ability to serve its community, executive director Julia Grady says. “If we were running a donation campaign, it would take us 10 years” to reach the financing that was needed, Ms. Grady says. “Community bonds gave us a way to build the project and be doing the work versus planning for a day in the far future.”

A standard investment portfolio is a mix of stocks and bonds, and community bonds “definitely sit on the bond side of that equation,” says Tim Nash, a financial planner and founder of Toronto-based Good Investing. While community bonds can be competitive with other types of bonds – especially during times like the past few years, which have seen relatively poor bond performance – there are a few trade-offs.

First, Mr. Nash points out, unlike some fixed-income investments, community bonds are not liquid, so investors should be confident in leaving that money where it is for the duration of the term. Second, he says, “they do tend to have different risk profiles than standard investments,” so it’s important to understand what assets, if any, are backing them. (Both Ms. Grady and Ms. Surman have held numerous information sessions with potential investors over the years, and highlight that this direct relationship is one of the benefits of community bonds.) And third is that while community bonds are technically eligible for registered investment accounts, the logistics mean that holding them in a registered retirement savings plan or tax-free savings account is cumbersome at best and often comes with additional fees, so many investors choose to simply hold them outside those accounts and pay tax on the returns.

Mr. Nash suggests that community bonds and other impact investments might make up between 5 per cent and 10 per cent of an investor’s portfolio. He suggests that what he calls the “warm fuzzies” – the positive feelings that come along with this type of investing – should be taken into account when making investing decisions. “Evaluate the risk, but also evaluate the return as the financial return plus the warm fuzzies,” he says. “That’s different for everyone. And it’s different for every bond.”

For me, it comes down to why I’m investing in the first place. It’s to save money so I can buy things in the future, yes. But my cash flow 30 years from now isn’t going to be the only factor that affects my well-being. The strength of my community and the state of the environment I’m surrounded by will have a huge impact, too. If I can contribute to making those better and make a decent return on my investment, all the better. And judging by the success of so many community bond programs, I’m not the only one who thinks this way. “We’ve become so disconnected from where our money is invested,” Ms. Surman says. “And I think people ultimately want to see how their money is working for society.”

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