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The ESG benefits of cooperatives

Cooperative food store in London

A cooperative food store in London. Image via Shutterstock/Richard M. Lee

Much has been made of the “E” and “S” of ESG in recent years. From biodiversity loss to lead pollution in pipes, environmental impacts that are inextricably linked to negative health outcomes and social injustice have made it into mainstream business metrics. The “S” measures have also seen an uptick, especially after the 2020 proliferation of COVID-19 and the systemic racism awakening among investors, lenders and consumer-facing brands.

As the ESG trend continues and sharpens, the “G” appears to be far behind in consideration. What makes for good governance that lowers risks and improves opportunity for and impact on market participants?

In no small part, cooperatives have a key role.

According to the International Cooperative Alliance, a cooperative is defined as "an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically controlled enterprise." In a nutshell, a co-op’s priority is to provide goods and services to its members over the long term at the most affordable terms and conditions.

The typology of co-ops includes worker (employee) cooperatives (Equal Exchange), investor cooperatives (Kachuwa Impact Fund), electric cooperatives (Kaua‘i Island Utility Cooperative), producer cooperatives (Organic Valley), purchasing cooperatives (ACE Hardware), credit unions (Self-Help) and consumer cooperatives (REI). A new trend is multi-stakeholder cooperatives, with multiple membership types in one entity.

Over 90 percent of U.S. cooperatives are consumer-owned, although employee-owned cooperatives are experiencing the most growth. In a recent article, Courtney Berner of the University of Wisconsin Center for Cooperatives explains, "Cooperatives typically emerge when people’s needs are not being met by the market" and in the United States, "from wage stagnation and the emergence of the gig economy to retiring business owners, employee ownership has been identified as a solution to many of our socioeconomic ills."

In the U.S., over 40% of people belong to at least one cooperative; these co-ops generate over $650 billion in annual sales and hold over $3 trillion in assets.

In the U.S., over 40 percent of people belong to at least one cooperative; these co-ops generate over $650 billion in annual sales and hold over $3 trillion in assets. Still, the average new company, whether a steady-growth small business or high-growth startup, rarely chooses a cooperative governance structure. Perhaps if companies could score more "G" points by forming cooperatives, investors would flock to these ESG opportunities at a higher rate and create a virtuous cycle.

The benefits of cooperatives, apart from the benefits of any "one person equals one vote" structure, include community wealth and longevity of business operations. The oldest U.S. property insurance company, founded in 1752 by Benjamin Franklin, is a co-op called The Philadelphia Contributionship — and it’s still operating.

A 2021 study of worker cooperatives suggests there may be a cooperative wage boost of $3.52 per hour at the mean and $2 at the median for worker-owners; the same study also reports that worker-owners feel they have better quality training, job security, job satisfaction and work effort. The Depression era co-ops provided livelihood for more than 300,000 people in California alone.

One historical drawback of cooperatives has included the inability to attract long-term capital. To mitigate the lack of co-op-focused capital in the market, a number of financial cooperatives, including cooperative banks such as the National Cooperative Bank, pull asset-backed securities together and structure investment deals that are non-voting. CHS Inc., a large agricultural cooperative, offers non-voting preferred stock on the Nasdaq. 

To be sure, many co-ops are not practicing what their governance structure would imply. "Some electric utility cooperatives and credit unions seem to have forgotten that they are cooperatives," explained Blake Jones, co-founder of the Clean Energy Federal Credit Union, which in addition to running a full-service clean energy-focused credit union, supports green lending in the wider ecosystem of over 5,000 credit unions. Some co-ops are indeed passively conducting business-as-usual and not leveraging the voice of their membership for innovation; they are serving as what Jones calls "dormant democracies."

Are cooperatives a good governance structure for the climate-friendly economy in particular? There are multiple examples of co-ops supporting climate solutions, and with a few regulatory changes, they could do more.

Amicus Solar, a certified B Corp and public benefit corporation, is a core part of the success of small-to-medium sized solar companies throughout the U.S. A purchasing cooperative that includes over 65 solar PV project developers, engineering, procurement and construction (EPC) companies and installers, Amicus Solar members pool their purchasing dollars to secure favorable pricing and terms with manufacturers and service providers. In return, they offer suppliers streamlined access to their members’ collective purchasing requirements.

Many rural electric cooperatives, driven by their members, are pushing their boards to install renewable energy. Recently in Colorado, the co-op United Power filed to leave Tri-State Generation and Transmission Association in order to add more renewable generation to its energy mix.

A number of multi-stakeholder solar cooperatives are developing. One such example is People Power Solar Cooperative in Oakland and the People’s Solar Energy Fund (PSEF) at the national level. PSEF is developing and financing community-owned solar projects in low-income communities. Currently owned by its workers and consumers, PSEF is also developing ways to leverage special securities registration exemptions so that any resident, regardless of their credit or living situation, can invest $500 or more in a solar project and earn an annual dividend. 

There are a set of U.S. regulatory changes that would bring more cooperative models to scale, especially for the clean energy and climate-friendly economy.

Unfortunately, the co-op solar model is under threat in some locations. For example, in California, there is a proposal against community power that is taking place in a complex regulatory proceeding on rooftop solar. The Energy Democracy Project’s People’s Utility Justice Playbook explains the history of the IOU model and the ways in which it has undermined a community’s ability to invest in clean energy and community wealth. 

There are a set of U.S. regulatory changes that would bring more cooperative models to scale, especially for the clean energy and climate-friendly economy. Useful changes include explicitly confirming that Subchapter T (rules on the taxable income on cooperatives) can be applied to investment cooperatives; replicating many co-op-friendly laws that exist in places such as Minnesota and Colorado at the national level; and enabling cooperative-specific Small Business Administration (SBA) loans.

Specific to clean energy cooperatives, needed policy changes include allowing for more community representation over grid policies and revising the Investment Tax Credit and Production Tax credits so that they are available as a cash grant for nonprofit, cooperative and publicly owned projects or projects under 5 megawatts, thereby giving communities access to financing currently reserved for only large commercial developments.

The efforts for more community wealth building through clean energy cooperatives is growing. Solar United Neighbors, Legacy Solar Coop and Cooperative Energy Futures are all additional examples. For those wishing to find a worker co-op to support in the U.S., #ShopCoop is a resource; for those looking for climate-friendly banking cooperatives, BankForGood is a resource; and for startups and new companies looking for support on getting started and financing a cooperative company, Start.coop is a resource.

Editor's note: This story was updated Feb. 8 to correct a reference to Tri-State's organizational structure.

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