Investing in social bonds
What do universities, housing associations, The Big Issue and Columbia Threadneedle Investments have in common? All of these organisations are involved in the world of ‘social impact’ investing, a fast-growing investment sector that aims to invest for good and for profit.
Social impact investing is growing in popularity and is now more than simply a concept amongst investors. It brings together the simple but powerful principles of achieving positive social outcomes such as job creation, while generating a financial return for investors. Profit and principle – it’s a compelling approach.
In 2013, Columbia Threadneedle Investments partnered with Big Issue Invest, the social investment arm of The Big Issue, to launch a socially responsible bond fund. The aim of this fund is to deliver positive social outcomes, bringing much-needed investment to some of the UK’s most deprived regions.
So how does social impact investing work? First, the basics.
Investing is a complicated area but for us as individuals, it essentially comes down to trying to turn the cash we have into a bigger pot of money. This is usually done with an end-goal in mind, such as affording the holiday of a lifetime, buying a home, putting our children through university, savings, or helping us to live comfortably in retirement. Most of us, however, are not particularly skilled at choosing potential investments,
which is why professional investors exist.
Most of us are not particularly skilled at choosing potential investments, which is why professional investors exist
On behalf of their clients, active asset managers like Columbia Threadneedle Investments invest clients’ money in the assets they believe will generate a profit over time. These range from equities (company shares) and bonds (debt issued by companies), to property (offices and warehouses), commodities (gold, oil and wheat) and other more complicated assets. Asset managers aim to provide a return that is better than traditional savings routes, although of course your capital is at risk when investing.
Traditional bonds are tradeable loans by investors to companies, local authorities or the government. They usually pay a fixed rate of interest each year and aim to pay back the capital at the end of a stated period – this is why bonds are often referred to as ‘fixed income’. Corporate bonds are usually issued by companies as a way of raising money to invest in their business, while government bonds are issued by a government – to help with government spending.
The UK social bond universe
For any social bond fund to be a success, how the fund manager chooses investable projects is critical – if the investment fails to help facilitate positive change it would be deemed a failure, even if that project is profitable. Thus, socially responsible bond funds invest in bonds with a clear focus on supporting positive outcomes for individuals, communities or society as a whole, operating in areas such as housing, employment, education, transport and health.
However, finding suitable projects in any area is difficult, and this is where Big Issue Invest comes in. Big Issue Invest has helped Columbia Threadneedle develop a framework for monitoring how effective those investments are, from a social perspective.
Investments are ranked according to the intensity of their social outcome – high, medium or low. This is not a simple, tick-box exercise, but involves a 360-degree assessment of every bond issue and investment under consideration. This analysis draws on a number of factors to gain a realistic idea of the genuine social outcome. Before investing, the location of the investment is taken into consideration. Regions such as the North, Midlands, Wales and Northern Ireland are prioritised over more prosperous areas such as London and the South East.
In practice, investments can touch on multiple areas. For example, Manchester University issued a bond to fund new campus buildings. This contributed to infrastructure development as well as education, learning and skills. The new complex also included a cancer research centre, partly funded by Cancer Research UK. What’s more, the university is located in an economically disadvantaged area, the North West, and the institution itself offers access to students from a relatively wide range of backgrounds.
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Social bonds can also help to establish a market for charities and non-profit organisations to raise finance themselves through issuing bonds. The money invested in these projects is much needed in many cases. Indeed, it is difficult to overstate the importance of stable, long-term financing to organisations and institutions operating in these fields.
Following the global financial crisis (GFC) in 2007-09, some of these entities have experienced years of chronic underinvestment, but in the last three years, there have been encouraging signs that this market is expanding. Golden Lane Housing, for example, raised £11m in eight days after issuing the first ever charity bond on the London Stock Exchange to buy and adapt 30 properties for people with learning disabilities.
This is investment in bonds with a clear focus on supporting positive outcomes for individuals, communities or society as a whole
The ideal result for all involved is a renaissance of the type of funding that existed before the GFC – finance for vital social services and infrastructure both locally and nationally, from care homes, roads, hospitals and bridges to ports or major railway developments.
Initiatives like this social bond fund are demonstrating that social impact investing can have a meaningful impact on all of us, on our savings, our pensions and the future of our society. With more people realising the potential of social investment, we are collectively making a positive impact on the world we inhabit.