Future Returns: Closing the Wealth Gap Through Financial Innovation | Barron’s

Whether you’re an individual interested in impact investing or part of a corporation with extensive environmental, social, and governance (ESG) goals, one overriding concern for many people today is wealth inequality.

“My cofounder and I both have financial backgrounds and found ESG investing personally exciting,” says
Catherine Berman,
CEO and cofounder of CNote, an investment company that supports underserved communities. “We both saw the wealth gap in the U.S. turn into a wealth chasm and we wanted to fix it.”

In 2016, Berman and cofounder
Yuliya Tarasava,
who is also COO, had an “aha moment,” Berman says, when they recognized that technology could connect investors with community-based financial institutions that would benefit everyone. The technology streamlines aggregated deposits into community development financial institutions (CDFIs), low-income designated (LID) credit unions, and minority deposit institutions (MDIs). Those institutions get an infusion of cash that they can use for a variety of purposes, such as down payment assistance for low to moderate income homebuyers and financing for entrepreneurs of color and small emergency funds for disaster relief in low-income areas. 

Since its founding, investments made on the platform have created or maintained more than 4,000 jobs, according to CNote. In 2021, more than 72% of money deposited in loan fund institutions went to women-led businesses and more than 82% of the loans were made to Black, Indigenous, and people of color (BIPOC) borrowers.

Community First Framework

The pillars of economic equality are entrepreneurship, homeownership to build wealth and personal finance education, Berman says.

“We’re supporting best practices projects throughout our network of thousands of high performing community financial institutions such as Black-owned banks, community loan funds and women-owned credit unions,” Berman says. “Our community first framework focuses on getting capital to flow to people like first-time entrepreneurs who need help starting a business, particularly women of color.”

CNote’s technology, which deposits investor funds into more than 2,000 impact-driven community financial institutions, provides an opportunity for investors to advance their ESG goals and support locally relevant programs throughout the United States, including Alaska, Hawaii, and Puerto Rico.

“The platform allows us to scale these investments and deploy them through the ecosystem of community financing,” Berman says.

CNote tracks every investment with technology and data as well as individual stories. Every financial institution and program gets evaluated, Berman says.

“Technology plays a key role in democratizing access to these dollars because programs aren’t as reliant on who you know or who has the best marketing team,” she says.

CNote looks for innovative ideas, such as a Texas credit union that provides small amounts of money—sometimes just a few hundred dollars—in disaster relief to help someone fix their car or repair their pipes after a flood or an ice storm.

“Credit unions and community banks can create financial products that help get people on their feet for lasting change,” Berman says.

Corporate and Individual Investor Benefits

Institutional investors such as Apple, Mastercard, Netflix, AMD, PayPal, and Patagonia have adopted the CNote platform to get millions of dollars into undercapitalized communities, Berman says.

“From the investor angle, it’s both an impact win and an investment win,” she explains. “One popular solution we have for corporations, foundations and institutional investors is ‘Impact Cash,’ which places funds in deposit products, such as money market accounts and CDs, in impact-driven banks and credit unions. The platform makes this simple to do and every dollar is FDIC or NCUA insured.”

Investors get variable returns from Impact Cash deposits based on rates offered to CNote by their network of community financial institutions. CNote can also create customized impact investments for corporate capital.

“Many corporations want to invest not just in safe funds but in their backyards and in the causes they identify as important to meet their diversity, equity, and inclusion goals and improve their ESG performance,” Berman says. “For example, we can create a custom portfolio focused on Black-led CFDIs or on loans focused on low-income women entrepreneurs in a particular region.”

Individual investors can invest in CNote’s Flagship Fund that supports small businesses, helps build affordable housing, and focuses on sustainable economic growth. No minimum investment is required, and the fund offers quarterly liquidity, currently with a 2% return.

Accredited investors can invest a minimum of US$100,000 in CNote’s Wisdom Fund, a fixed-income fund (currently with a 1% return) that moves capital into small business loans for women of color.

Technology and Transparency

Community financial institutions typically operate less efficiently because they lack the funds to invest in technology to streamline their data, Berman says.

“CNote’s technology provides these institutions with highly trackable data,” she says. “On the corporate side, companies have the technology but haven’t been able to invest in community financing at scale because it’s hard to move the money and track it through multiple institutions. It becomes a tornado to achieve. Our technology provides the transparency and speed to manage this.”

CNote provides data for stakeholders, auditors, and the SEC on all investments. In addition, it provide quarterly reports with stories about individuals directly impacted by these investments.

“We invest in people, not products,” Berman says. “Our reporting allows people to understand the high-level impact and the individual level. We want investors to understand the transformative effect it has when an individual gets a loan to help them with their first opportunity to open a business.”