3 ESG Bond Picks

VIDEO: Threadneedle UK Social Bond fund manager Simon Bond picks bonds issued by a university, a social housing trust and HSBC

Holly Black 23 September, 2019 | 12:11PM
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Holly Black: Welcome to the Morningstar series, "3 Stock Picks." 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, we're not doing three stock picks today; we're doing three bond picks that are in the portfolio. Where would you like to start?

Bond: Correct. Manchester University, which is a good example of something that you couldn't invest through the equity market, but they issued a bond a number of years ago.

Black: And why did they issue a bond?

Bond: Well, that's the key element, what was the money being used for. And so, when we quizzed them, there were three particular elements that the use of proceeds was going towards. It was student accommodation, it was lecture facilities, additional lecture facilities, and crucially, for us, for the science department, a Cancer Research Center.

Black: Oh, wow. So, that ticks a lot of impact investing boxes.

Bond: It does. And in terms of the way we analyse the social characteristics, the fact is, in the northwest of England, multiple deprivation statistics from the UK Government say that's a more deprived area, it's creating construction jobs, it was new build. Obviously, we hope that the research that takes place in that building will have health benefits, and the building was a green building. So, it ticks an awful lot of those boxes. And in addition to which, of course, we needed to check the criteria of Manchester in terms of being a university employer, how they treat their catering staff, their cleaning staff, their maintenance staff, the more vulnerable employees. And again, that comes into the analysis that we go through.

Black: Super. So, what is bond number two?

Bond: Bond number two is one that's fairly close to my heart, which is Peabody Trust Housing Association. I call it Peabody Trust Housing Association, because I like the legacy of George Peabody from the Victorian era. He was a Victorian philanthropist that left a legacy for the London poor through his trust, part of which was to set up a housing association to house Londoners that is still delivering impact to this day.

Black: So, what is this bond being used for?

Bond: It's for social housing, and principally for the social housing that Peabody provide. They have a big development in Thamesmead, just south of the river, where they're building a lot of extra social housing, and boy, do we need social housing in London. But it also goes back 28 years ago, the first entity I analyzed as a young, fresh faced, clean shaven analyst, was Peabody Trust Housing Association. And indeed, I passed George Peabody statue on my way to and from the office every day to remind me actually that you can do good through your investments as well as getting a financial return.

Black: How do you find out that the Peabody Trust wants to issue a bond? Do they come to you?

Bond: They come to the market. These are publicly tradable institutional bonds. These are normal corporate bonds. And of course, again, with Peabody Trust, you can't invest through the equity market. But generally, there is a public market, whereby there will be a new issue. And it's the point where there's a new issue where the money gets borrowed by the borrowing entity and spent in society, and that's where we're looking for the impact. Where's the money being spent? What good is that money doing for local communities, local economies?

Black: And what sort of coupon are you getting on these bonds?

Bond: Well they vary. And of course, the coupons are getting lower and lower and lower. So, originally, when I bought the first Peabody debenture in around about 1992, I think it was, we were talking about interest rates in the teens. These days that's very far from the truth.

Black: Not so much.

Bond: Exactly. So, it reflects the risk that the market is currently discounting for that type of credit quality.

Black: So, what's the last one we're talking about?

Bond: The last one that we're going to talk about is HSBC. But it's not just HSBC. It's HSBC's SDG bond, which stands for Sustainable Development Goals.

Black: That is not something I typically associate with a huge global bank.

Bond: No, it's not. And it's the new technology that the market has developed through effectively that is a sustainability bond, an ICMA-branded sustainability bond. So, its specific use of proceeds is towards predefined environmental and social projects, and specifically through seven of the UN's SDGs, which is 7 of the 17 that the UN have defined. So, the use of proceeds has to go towards those seven SDGs.

Black: But why is HSBC doing that?

Bond: Well, they have a big book of lending, some of which you would hope is lending that is beneficial to society. And what we like to be able to do is access from somebody that can borrow big and lend small, access that good landing, that part of the book that's doing good for society, so that we can follow the money through to the good that it's doing. And specifically, we need that kind of entity because not everybody is big enough to be able to issue an institutional bond. So, if we can have a bank issuing an institutional bond that targets good lending practices to the benefit of society, then that's what we're really looking for.

Black: Well, thank you so much for your time.

Bond: Pleasure.

Black: 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.

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Holly Black  is Senior Editor, Morningstar.co.uk