In this short series, Fund Manager Michael Sheehan explores the many ways that impact can be achieved through investing in fixed income securities, following the line of sight through case studies from the EdenTree Global Impact Bond Fund. Today’s theme is Sustainable Solutions.
Why do people invest? The easy answer is to maximise financial returns. And according to some schools of thought, that should be enough.
In a well-functioning market economy, seeking to maximise returns drives innovation, the efficient allocation of capital and reduces economic waste.
However, the theory of a well-functioning market economy doesn’t always stack up. A sole focus on financial returns can often take little heed of the environment’s ability to regenerate or its potential as a sink, nor about issues of social or intergenerational fairness – issues that financial markets have increasingly come to understand are important to long-term, sustainable returns.
“Maximising” requires consideration of a wide range of factors likely to affect not just the returns of one investment but also the opportunity for the next investment and the one after that.
This is where sustainable and, indeed, impact investing has entered the fore. The idea that investments can deliver positive societal and environmental benefits without sacrificing returns therefore should appeal to every investor.
Investing for impact
In terms of impact investing, there are two key forms: “finance-first” which seeks to produce a competitive financial return alongside a positive impact, and “impact-first” where returns tend to be secondary to impact.
When managing the EdenTree Global Impact Bond Fund, we take a finance-first approach, generating positive outcomes for people and planet whilst never losing sight of the main attraction that bonds offer investors. We focus in on four key themes, which we believe will help address today’s global challenges: Sustainable Solutions, Social Infrastructure, Health & Wellbeing and Education.
In this article, we focus on Sustainable Solutions, a theme that involves investments in the bonds issued by companies or institutions whose products or services help solve a significant challenge or problem in society. These might include climate change, contribution toward the circular economy and improvement of water scarcity. Ideally, we seek out companies that choose to issue bonds via a use of proceed framework so, as investors, we can clearly see where capital is allocated and measure its impact. It is important to us that the issuer has strong sustainability credentials, as well as the bond itself.
Iberdrola, which investors will know as one of the leading providers of clean renewable energy, has a number of green bonds outstanding. As these bonds are labelled green, the proceeds are solely used to finance projects that are beneficial for the environment such as renewable energies and the expansion and digitalization of the electricity transmission networks. The sustainability case is inherent throughout the business, but first and foremost to be included in the portfolio, the company must have an investment thesis built around robust credit fundamentals that are key for every investment in corporate bonds.
We also own ING, the Netherlands national champion bank. The positive impact may not be as evident at first, particularly with the controversies that tend to follow the banking sector. However, the security owned by the Global Impact Bond Fund is a green bond where the proceeds are used to provide loans as part of ING’s green portfolio which finance renewable power projects. Again, while a clear impact is being generated, at a time of heightened concern about risk in the wider banking sector, we need to ensure that we are being compensated for the risk of investing in bank securities and more specifically ING bonds.
Both bonds contribute to the energy transition yet come from different sectors with different risk and return profiles. When considered together they highlight the breadth of the opportunities for investors to contribute capital towards a positive environmental goal and diversify risk without compromising that fundamental goal of seeking to maximise returns.
The views contained herein are not to be taken as advice or recommendation to buy or sell any investment or interest. The value of an investment and the income from it can fall as well as rise, you may not get back the amount originally invested. Past performance should not be seen as a guide to future performance. EdenTree is authorised and regulated by the Financial Conduct Authority and is a member of the Investment Association.