Bonds & Ethical Investing

Bonds & Ethical Investing

When it comes to investing, many people focus on equities and shares. But for those interested in a lower-risk option that aligns with their values, bonds are worth considering - especially bonds with an ethical or sustainable focus.

What are bonds? 

Bonds are essentially loans that investors make to organisations like companies, social enterprises  or governments. When you buy a bond, you're agreeing to lend your money to the issuer for a set period of time, in exchange for regular interest payments and the return of your principal when the bond matures.

How bonds work: 

Here's a simple example - let's say a company wants to raise $10 million for a new environmentally-friendly manufacturing facility. They could issue 10,000 bonds at $1,000 each. If the bonds pay 5% interest per year and mature in 10 years, then each bondholder would receive $50 per year for a decade, then get their $1,000 back at the end.

How are ethical are bonds? 

The key to ethical bond investing is looking at what the money will be used for (often referred to as ‘use of proceeds’). Bonds can be issued for all sorts of purposes - some quite positive for society and the environment, others neutral or even harmful.

Growing numbers of bonds are being issued to fund ethical and sustainable initiatives - like renewable energy projects, affordable housing, healthcare access in underserved communities, and more. By seeking out these ESG (environmental, social, and governance) and impact-focused bonds, investors can earn steady returns whilst seeing their money put to work for good.

Green bond examples: 

• The Pathfinder Green Bond Fund, in partnership with Affirmative Investment Management (a specialist bond management division within MetLife Investment Management), exclusively invests in bonds allocated to green purposes, such as clean transportation, clean water access, increasing resilience to extreme weather events, and renewable energy supply networks.  

• The Devon Artesian Green and Sustainable Bond Fund, run by Artesian and marketed in New Zealand by Devon, invests solely in green, sustainable, and social bonds, with a focus on corporates and a bias towards Australia and New Zealand. The fund targets projects with carbon abatement or social impact outcomes. Artesian's impact report showcases a sound framework and examples of their impact bonds, earning the fund the highest rating for fixed income from Australian Impact Investments. 

Green or sustainable bonds require extra due diligence to assess both the financial outlook and the real-world impact, but they allow investors to pursue their financial goals and their values simultaneously. As always, diversification across issuers and bond types is key.

There is an active debate about whether those issuing green or sustainable bonds can offer a lower interest rate than conventional bonds. The evidence is mixed and generally the returns are similar for issuers and investors. Green and sustainable bonds certainly attract a lot of demand - most green or sustainable bond issues are over-subscribed and the bond funds are attracting significant investment.

Takeaway: 

For risk-averse investors who want to see their money make a positive difference, bonds with an ethical or sustainable focus can be a compelling choice. They offer a way to earn reliable income whilst providing capital for initiatives that address some of society's greatest challenges. As the sustainable investing movement grows, expect to see more and more bonds that deliver both financial and ethical returns.