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Bonds for Social Impact Investing

VIDEO: Simon Bond, manager of the Threadneedle UK Social Bond fund, argues that the social impact of bond investments are easier to track than with shares

Holly Black 18 September, 2019 | 10:26AM

 

 

Holly Black: Welcome to the Morningstar series, "Why Should I Invest With You?" I'm Holly Black. With me is Simon Bond. He's manager of the Threadneedle UK Social Bond Fund.

Hello.

Simon Bond: Hello.

Black: So, you're here to tell us a bit about the fund. What is it you're aiming to do?

Bond: Well, the purpose of the fund is to deliver the financial return you should expect for the risk that you're taking effectively through investment-grade corporate bonds but targeting bonds that are doing good for society.

Black: So, when I think about impact investing or ESG investing, typically, I would think of a fund that invests in companies' shares.

Bond: Yeah.

Black: You're doing it through bonds. So, why do you believe that's the way to go about this?

Bond: We do think in this country about shares quite a lot of the time. But actually, if you think about bonds, the sorts of entities that issue bonds that should be doing good for society, means that we have a much, much wider spectrum of available assets. If you think about local authorities, if you think about supranationals, think about charities, not-for-profit organisations. They all issue bonds. But of course, you couldn't invest through equities in those particular entities. Plus, we believe that bonds is a much more targeted way of following the money through to being spent in society to analyse the good that it's doing for local communities and local economies.

Black: So, what do you mean by that? You make a deal about how the money is going to be spent before you agree to invest in the bond?

Bond: Well, we do have this concept of green bonds. Through the green bond principles in 2014, that's been formalised, and we've seen a great growth in the green bond market. Subsequently, we've had social bonds, and sustainability bonds by the people that brought you green bonds, by ICMA. They are the types of bonds where you do specify that you need to spend the money in certain predefined projects. But we don't just limit ourselves to those kinds of bonds. We will also by general corporate purposes bonds, but we will try and follow the money through to the use of proceeds even in that case.

Black: So, what is an example of some of the areas that you're targeting with these bonds?

Bond: Well, we have a social partner, The Big Issue, The Big Issue Invest, to be specific, who've given us eight areas of social outcome whereby we determine whether a bond is social or not. If it's specifically targeting one or more of those eight areas, then that will be to us a social bond. And so, those become our social criteria.

Black: And they're things like climate change, social housing…?

Bond: Utilities in the environment we would call climate change. But it's social housing, you know, the top of Maslow's Hierarchy of Needs, health, education, jobs, financial inclusion, utilities in the environment. And generally, what the bond market is good at funding is the infrastructure behind all of that. So, it's the hospital in which the services are taking place, the school in which the services are taking place. So, it's the infrastructure that the bond market is really good at funding.

Black: So, I bet you get this question a lot, but obviously, a major concern some people have with impact investing is they think it's going to limit their financial returns.

Bond: Yeah. I've spent five-and-a-half years proving that that's not the case. If you take an investment-grade corporate bond risk, you should expect an investment-grade corporate bond return. And actually, a little bit more than that in the case of the five-and-a-half-year track record that we've had. Difficult thing to say when we started the fund, but easier now that we've actually justified it. So, if you go beyond that, of course, there is social investing beyond those concepts. But that's philanthropic, that's charitable, that's altruistic causes. What we are doing is investing. And we're investing in areas that we also think would be good for society.

Black: And I'm guessing one of the benefits actually of doing it through bonds is you get that reliable income stream.

Bond: Yes. Bonds in itself, if you think in terms of direct lending, which again, is associated with social investment, bonds are not too far away. Bonds are just tradable loans. And so, this concept of either equity or direct lending impact, actually, why not bonds, because bonds sit somewhere between the two. And you also get liquidity. The bond market provides you that tradability. So, actually, we have a daily price, daily liquid fund, you can put your money in today, take it out tomorrow, which is a concept that perhaps people need to get over. Because the preconception is that you are locking your money away for a long period of time with impact investing, not the case in this in this particular instance.

Black: Well, thank you so much for your time. And thanks for joining us.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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