Bonds
Bonds usually have a fixed rate of interest paid regularly and aim to pay back the capital at the end of the period covered by the bond. They are also known as fixed income securities.
There are two main categories of bonds:
- Commercial bonds are debt issued by companies or other commercial bodies
- Government bonds are debt issued by municipal bodies, local or national governments or agencies. Government bonds are known as gilts in the UK, Eurobonds in the EU and Treasuries in the USA. A number of supranational institutions such as the World Bank and the EBRD also issue debt.
All bonds are rated by mainstream rating organisations, using variants of a three or four letter system (such as Aa3 or BBB+). These assessments focus on the likelihood of the issuer defaulting on repayments.
Commercial bonds are debt issued by companies or other commercial bodies. It is possible to apply positive and negative screens to these investments. You can invest in commercial bonds through a segregated approach or through a pooled investment fund.
The Responsible Investment approach to commercial bonds is similar to that for equities. It is possible to screen some bonds according to negative criteria (for example to exclude tobacco or armaments) or positive criteria (such as investing in best-in-sector companies).
It is possible to invest in a number of entities and opportunities that are not accessible through the equity markets, e.g. bonds issued by the John Lewis Partnership, or special purpose bonds to finance social housing projects.
There is limited scope for engagement with bonds, as investing in bonds does not confer the rights of ownership. However when bonds are first issued by an organisation it may be possible to raise social, environmental and other ethical matters with the bond issuers.
The Responsible Investment options for commercial bonds depends on whether your charity invests through pooled funds or through a segregated approach.
Segregated investments
It is possible to develop a bespoke policy by which the fund manager will screen bond investments (on both positive and negative criteria) in line with your charity’s policy. Fund managers also engage with companies which issue bonds and, therefore, when deciding on which fund manager to employ, your charity may wish to examine their engagement policies and records.
Pooled investment funds
There are a number of bond funds, including common investment funds and retail funds, which employ responsible investment criteria.
Government bonds are debt issued by local, regional or central governments and agencies. A Responsible Investment approach tends to focus on sustainability and environmental issues.
A Responsible Investment approach to government bonds tends to focus on sustainability and social criteria – rather than negative screening criteria more frequently used for commercial bonds. However it is possible to screen out certain countries on the basis of issues such as the death penalty or non-ratification of international conventions.
A country’s performance can be assessed and rated against environmental, social and governance indicators. This can be compared to other countries’ performance as well as against international norms and conventions.
Your charity may wish to assess environmental criteria by considering whether treaties have been ratified (such as the Kyoto Protocol]), or by levels of deforestation and emissions. Your charity may wish to assess attitudes towards social rights through assessing ratification of International Labour Organisation (ILO) core conventions. Civil liberties, gender equality or quality of governance (including corruption) can also be considered.
Responsible Investment approaches towards government bonds are less developed than those for commercial bonds. The approach may be about changing the weighting of a bond portfolio (to go overweight or underweight on a country bond) rather than avoidance. Similarly engagement is a different proposition (although it may be possible to engage with supranational bodies).
A detailed description of bonds and Responsible Investment can be seen by downloading
Responsible Investment Approaches to Non-Equity Investments.