CNote is a tech-enabled impact investment platform – and a means for finance to be used as a “tool for economic justice”. Its focus on diversity, equity, and inclusion helps corporate and institutional investors use their capital to strengthen underserved communities. Catherine Berman, CEO and Co-Founder, CNote, talks to TMI about this growing opportunity, and outlines how investing via the platform does not typically require any investment policy changes.
CNote’s primary goal is to bring together opposite ends of the financial spectrum. In an age when societies are obviously divided, enabling a corporate to have a genuinely positive impact on financially marginalised communities is no easy feat. Indeed, often when tackling ESG themes, especially those of diversity, equity and inclusion (DEI), accusations of ‘social washing’ abound. But CNote’s digital deposit and investment platform overcomes the negativity, enabling corporate and institutional investors to target – and make demonstrable differences to – the communities in which they operate.
The platform facilitates investment, at scale, in fixed income and cash products from US community development financial institutions (CDFIs), low-income designated (LID) credit unions and minority deposit institutions (MDIs). With investor options to customise portfolios by region or impact theme, funding gets directly to the areas resonating with them. This might, for example, concentrate on Black-led CDFIs, CDFI loan funds focused on low-income women entrepreneurs, or climate adaptation programmes in disproportionately impacted communities.
Drivers for change
CNote was established in 2016, being the confluence of two significant events, explains Berman. Previously she had been working for a large US-based financial services company. This gave her what she describes as “a front-row seat on the rise of ESG and sustainable investing”.
Her clear view of the markets revealed that ESG needs were not being fully met for large-scale cash and fixed income investors. This was especially true where capital preservation, and transparency around impact reporting, was required.
Around the same time, it was becoming increasingly evident that the wealth gap in the US was growing more akin to a “chasm”. This was denying access to capital and financial opportunity for an ever-larger group of people. “I recognised that there was an opportunity to do something positive on both sides, using finance as a tool for economic justice,” explains Berman. Working with CNote co-founder, Yuliya Tarasava, she says “that’s when we realised that by combining a ‘community-first framework’ with a high-tech platform, we could make it far easier, safer, and more efficient for corporates to invest directly in communities”.
Several large corporations had expressed interest in CNote’s cash solution from the outset. With the first big names on board, Berman felt a real sense of “co-creation with the market”. This was instrumental in getting off the ground because in seeking to address seemingly polarised participant needs, it was evident that a number of friction points were dissuading many corporates from investing in CDFIs and MDIs.
Selection is the first hurdle because it is difficult to find the right investment target, continues Berman. “For a large company looking to move dollars into an MDI, or to place deposits into communities of colour, there is no central database displaying all options, no way to know which need funding, and no means of exploring risk profiles,” she explains. “For the treasurer, if they even find a target organisation, they have no way of really knowing if it’s the right one to work with.”
Another major issue is capital deployment. Having identified investment opportunities, getting the money to an organisation in a secure and efficient way is a challenge in itself. But then funding must be tracked so its deployment in the community can be monitored for efficacy.
This leads to a further problem: impact reporting. Investors need to know their money is making a difference because they are obliged to report on it. In the US, recently announced Securities and Exchange Commission (SEC) disclosure requirements align with the trend for active shareholders to demand transparency over ESG investments. As a counter to greenwashing, measuring and reporting impact in a usable way is now a key requirement for businesses placing cash in ESG funds.
Berman sums up the whole challenging encounter: “Prior to CNote, the experience for our corporate treasury partners was one of hours and hours of online research to figure out who to work with,” she recalls. “Then they had to engage in due diligence and underwrite themselves; few had community finance expertise so some resorted to hiring consultants. They were then faced with opening multiple accounts to deploy the cash. It could all take several months. And for those that persisted, increasingly stringent impact reporting rules meant time spent consolidating disparate data from community institutions, if that data even existed.”
This “messy, time-consuming reality” was overturned by the arrival of CNote, says Berman, the platform reducing what could be hundreds of hours of work “to something that could be set up within a week”.
CNote’s platform is in part a product of strong internal data expertise, states Berman. “It starts with knowing where to get the data, and how to bring it together. To do this, we use proprietary and public multilayer datasets to inform who is doing the work in the community, how well they are doing it, and what its effect is.”
Because data is part of an ever-changing landscape, it’s CNote’s remit to stay abreast of every significant event. For this, the team must locate and understand what matters, says Berman. “We have decades of community finance expertise, and can read the balance sheet of a CDFI or MDI and fully understand the different components and whether these signal risk or opportunity.”
Of course, the technology and automation tools underpinning the platform are intended to deliver an intuitive, efficient, and transparent user experience. To this end, a single dashboard aggregates all relevant information, presenting monthly statements and consolidating and delivering quarterly impact reports. With the platform leveraging cloud technology and API connectivity, Berman says all workflows can be integrated with core treasury systems such as a TMS.
There are many community-based funds in existence, so it is incumbent upon CNote to ensure all those selected for the platform are of suitable quality for corporate and institutional investment. Using set diligence criteria, both for cash and fixed income, each institution is awarded a risk rating.
With many of these institutions operating for several decades, and some with more than 100 years of history, CNote’s experts are able to piece together detailed performance and risk analysis data on each. “The first tool we built was our automated diligence and risk scoring algorithm,” recalls Berman. “This makes our rating process more efficient, reduces bias, and offers a more straightforward application in terms of analysing and underwriting these community finance institutions.” While individual ratings are not visible on the platform, investors can seek more information and analysis from CNote if required.
The adoption of ESG criteria into a treasury investment approach can require policy adjustments. However, investing in CNote impact cash funds “is one of the most straightforward and lower risk ways to get started”, asserts Berman. “For all of the corporate treasurers we work with, there has not been one that needed an investment policy change.”
In the first instance, CNote’s screening process is seen by its client list – one that currently includes Apple, Mastercard, Netflix, Patagonia and PayPal among others – as sufficiently rigorous. Platform transparency enables clients to view the whereabouts of their money every day, with the cash going directly to the target institution. CNote, as the intermediary, never touches it.
There is also added protection for “every last dollar” invested. By moving dollar investments in increments of less than $250,000 into specific mission-driven deposit institutions, regardless of the actual sum invested, insurance cover is provided by the American Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA). “We’ve unpacked the risk at every turn,” Berman states. “Corporate treasurers stepping into this space now have an opportunity that – in our experience – neither impacts on investment policy nor requires multiple investment committee meetings to approve.”
One of the initial goals of CNote was to manage the fundamental demands of both sides of the investment equation: acceptable security, yield and liquidity for investors, matched by affordable, impactful community funding for the deposit institutions. In terms of delivering a strong ESG product to the corporate community, Berman says CNote yields historically have been “very much competitive and comparable” with traditional market players. With the fundamentals taken care of, she notes that “most of our corporate investors see our main differentiator in how we deliver ESG cash”.
Many large institutional offerings apply a ‘filter out’ approach to ESG and DEI. Investor cash is placed in a traditional MMF, for example, but certain elements that do not fit part of that institution’s ESG framework are removed. CNote adopts an ‘invest in’ approach, where an investor, through their deposits, chooses to invest in the ESG values and goals that meet with their views or objectives. “Our approach enables direct investment in what you believe in, and the changes you wish to help make,” notes Berman.
This approach has added value where some investors may be concerned about the lack of industry-wide standardisation on impact reporting. Indeed, being able to select and closely track invested cash via CNote is intended as a mitigation of the reputational risk of greenwash accusations.
“There’s never a point at which the treasurer will wonder if their cash reaches the intended target because it’s all there in the quarterly impact report,” states Berman. With CNote’s reports based on its proprietary framework and automated processes, she believes that the aggregation of multiple public and private datasets, layered on specific industry data, combine to “create a sense of what is really making a difference”.
Invest for change
The bottomline for all participants is that every investment makes a positive difference. “We work with corporate treasuries across a wide range of industries, and they say ESG and DEI investing matters more now than ever,” notes Berman. “For many of our corporate partners, large and mid-cap, it’s become a priority board-level discussion, with many now baking ESG and DEI into their long-term corporate strategy.”
By enabling investors to customise their fixed income approach to target a specific community, region or theme, it becomes easier to match corporate goals with balance-sheet activism. “With CNote, treasurers have the scale, the options and the ability to reduce the risks and friction when getting an ESG and DEI investment programme off the ground,” states Berman. “The opportunity to really ‘walk the walk’ in corporate values around ESG and DEI is exciting, and treasurers are beginning to find out why making a difference with their balance sheet is such a powerful tool.”