Responsible investing: Do bonds that make the world a better place fit into your portfolio?

When the return on traditional bonds is so low, why not invest in ones that make society better?

 

The UK was once home to a thriving social bond market, where investors of all stripes clubbed together to fund socially beneficial projects. The 1960s was the heyday of loaning money to local authorities, and in the Victorian era bond markets were used to fund railways. 

 

This died away – but it’s back. “It probably is a reaction to the financial crisis… people realise there needs to be a social element to the capital markets,” says Simon Bond, who manages the UK Social Bond fund at Columbia Threadneedle.

 

Many people perceived the global financial crisis as one centred around greed and excessive risk-taking in the name of profit.

 

Since then, questions of ethics have never been far from the headlines. Just a snapshot includes the tax bills paid by Starbucks and Google, the remuneration packages of bosses at the UK’s biggest companies, the environmental damage caused by the oil spill at BP’s Deepwater Horizon, and the collapse of a Bangladeshi factory supplying clothes to Primark.

 

It is these kinds of issues which funds investing in a socially responsible way are aiming to avoid. There are many ways to go about it, whether by avoiding ethically contentious areas such as weapons or tobacco, or consciously investing in green technology. There is an ethical investment fund for everyone.

 

Socially-focused bonds are a growing area. The likes of housing associations, healthcare providers and universities are the kinds of enterprise that need to borrow money, often several million at a time, to fund their projects. They are large organisations with good credit ratings and they can borrow from banks, but they often get a better deal by borrowing on the open market. Which is why they issue bonds.

 

Crucially, these are not a different type of bond or an investment with a special set up. They are the same as ordinary corporate bonds in structure, and the organisations issuing them can have revenues topping hundreds of millions. It is just that fund managers search the market specifically looking for organisations which have social good as their main aim. “I want my fund to look, feel and perform like a corporate bond fund,” says Bond.

 

His fund was launched in partnership with The Big Issue Foundation, the homelessness charity. It aims to “channel as much investment as possible to people and places with the greatest social need”. The annual yield on the fund is 3 per cent.

 

At a time when the government is pulling back from providing all kinds of social support, these are the sorts of ventures that could step in to fill the gap. Indeed, social impact investing is much bigger in the US, which has a more limited welfare state.

 

Another factor which makes social bonds attractive is the return investors can receive. Traditional bonds have been giving very low returns in recent years. There are many reasons why, but it boils down to there being more investors willing to put money into bonds than there are bonds to invest in.

 

But it is possible to find some bonds from more ethical companies which have a modestly higher return. One of the reasons is that the big fund management groups which have billions to invest do not bother looking at companies which are raising smaller sums of money. A housing association, for example, may be “only” looking to raise £2m – a small amount in the investment world. 

 

“It is just because it is a more esoteric area, not everyone is going to invest in them,” says Bryn Jones, manager of the Rathbone Ethical Bond fund. His fund has an annual income of over 4 per cent.

 

Since bonds are not giving anyone dazzling returns, but are still useful for their regular income payments, it makes sense to invest in social bonds and make a positive impact while doing so.

 

Columbia Threadneedle’s fund takes advice from the Big Issue Foundation on how ethical each potential investment is. Manager Simon Bond tries to find investments which help further a list of ethical objectives, which includes more affordable housing, employment opportunities and looking after the environment.

 

He invested in Motability Operations Group, which provides loans to people who need to buy special disability cars. “A very high percentage of people borrowing money with them to buy these specially adapted vehicles would not have access to finance,” Bond says.

 

He has also invested in Golden Lane Housing, which is part of disability charity Mencap. The money went towards homes for disabled people, “an area of society with a disproportionate need for it,” Bond explains.

 

Jones of the Rathbones Ethical Bond fund has invested in Midlands Together, a housing company which provides employment and training to people who have served a prison sentence and normally can’t find work. “It bought beaten up properties in Birmingham with the money and does them up, employing ex-convicts to do so. Not one of them has reoffended,” Jones explains.

 

Savers wanting a socially-conscious bond investment should look at fund fact sheets and choose one which invests the areas of your preference.

 

When a company wants to borrow money, it can either go to a bank and arrange a loan, or it can create a bond.

 

Bonds are put out by companies which want to borrow money from a wide number of people – the market – rather than a bank.

 

This will be such a large sum, usually millions, that thousands of people will hand over money. Anyone that puts money into a bond is called an investor, and that’s because the company will pay a rate of interest.

 

The investor’s money is locked away for a period of years until the company can pay the money back. In the meantime they will be paid a quarterly rate of interest

 

Savers can invest in bonds directly from the London Stock Exchange’s order book for retail bonds. But many people consider it easier to invest in a bond fund, where a fund manager chooses a selection of the best bonds.