Partner Insight: How might impact bond investing evolve over the next five years?

clock • 5 min read

We asked Wellington Management's Campe Goodman about the purpose of his new impact bond fund and where this new market is heading

What is the purpose of the Wellington Global Impact Bond Fund?

In short, two objectives: strong financial returns and addressing some of the world's social and environmental challenges through impact investments.  

For us, those challenges fall into three major groups: life essentials (e.g., affordable housing); human empowerment (e.g., improving education) and protection and improvement of the environment (e.g., recycling and renewable resources).   

How do you select investments for the fund?

It's a two-step process. We identify the issuers and create our universe of impact issuers - setting a high bar. Then from that universe, we construct the portfolio that we think is going to have the risk/return characteristics we are looking for.

Can you give examples of your impact investing in the UK?

One of the big problems in the UK and other developed countries is insufficient affordable housing. UK housing associations are a great way to address that so we've been buying bonds issued by some of them. Likewise, we invested in a quasi-governmental transportation authority in the UK that issued a green bond to make improvements to train capacity in a major urban centre, and to expand hybrid buses and create more cycle lanes.

 What key performance indicators (KPIs) do you use to measure impact?

One of the most straightforward is metric tons of CO2 and methane emissions that have been avoided. That's generally a good KPI for clean energy. Other KPIs include units of affordable housing created or, for hospitals, dollars of charity care provided, or the number of people provided with clean water.

Is there any reason to think impact investing is risky this late in the economic cycle?

I'd say there isn't any skew in the universe of impact bonds that makes it either riskier or less risky than the whole universe of bonds. There's a range of high-quality impact bonds available - including quality sovereigns and multinationals - that provide really great protection in a negative cycle environment. Then there are more risky investments that are great to have in an early or mid-cycle environment. So we feel we're able to position the portfolio right now as defensively or as aggressively as we want to.

How will impact bond investing evolve over the next 3-5 years?

First, we're seeing more issuers, and we're also seeing more issuers figuring out how to package some of their activities as impact investments. So the supply of investment opportunities is growing, though I'd love to see it grow even faster.

Second, demand is growing. I've been doing fixed income investing for 20 years and, even five years ago, nobody was talking about impact bonds. Absolutely nobody. The growth of interest is amazing.

But because global needs are so great, the big challenge is to get even more investors coming into the space. Hopefully, if people see strong returns, they'll gain confidence that they can meet both their investment and their impact objectives.

Third, standards and KPI measurement will evolve over time. We've got lots of good ideas but other people will have good ideas as well. We want to be sure our reporting is best in class. One thing that won't change is our twin goal: generating strong investment returns and having a positive social and environmental impact.  

 

Risks

CAPITAL: All investors should consider the risks that may impact their capital, before investing. The value of your investment may become worth more or less than at the time of the original investment. The Fund may experience high volatility from time to time.

CONCENTRATION: Concentration of investments within securities, sectors or industries, or geographical regions may impact performance.

CREDIT: The value of a bond may decline, or the issuer/guarantor may fail to meet payment obligations. Typically, lower-rated bonds carry a greater degree of credit risk than higher-rated bonds.

CURRENCY: The value of the Fund may be affected by changes in currency exchange rates. Unhedged currency risk may subject the Fund to significant volatility.

INTEREST RATES: The value of bonds tends to decline as interest rates rise. The change in value is greater for longer term than shorter term bonds.

BELOW INVESTMENT-GRADE: Lower rated or unrated securities may have a significantly greater risk of default than investment grade securities, can be more volatile, less liquid, and involve higher transaction costs.

EMERGING MARKETS: Emerging markets may be subject to custodial and political risks, and volatility. Investment in foreign currency entails exchange risks.

Important information

This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management.

This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Investing involves risk and an investment may lose value. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund.

Any views expressed are those of the author(s), are based on available information and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients.

Except where registered for public sale, Fund units are offered only to qualified or professional investors on a basis that it does not require the registration of the Fund for public sale. The Fund only accepts professional clients or investment through financial intermediaries.

Please refer to the latest Key Investor Information Document (KIID), the Fund offering documents for further risk factors, pre-investment disclosures, and the latest annual report (and semi-annual report) before investing.

KIIDs are available in the official languages of each country in which the Fund is registered for sale (please visit www.wellington. com/ KIIDs). UCITS Funds are authorised and regulated as a UCITS scheme by the Commission de Surveillance du Secteur Financier- Wellington Management Funds (Luxembourg). This material is provided by Wellington Management International Limited (WMIL), a firm authorised and regulated by the Financial Conduct Authority (FCA) in the UK.

More on Investment

Investment Company of the Year Awards Winners Interview - JPMorgan Global Growth & Income Investment Trust

Investment Company of the Year Awards Winners Interview - JPMorgan Global Growth & Income Investment Trust

clock 22 February 2024 • 3 min read
Investment Company of the Year Awards Winners Interview - JPMorgan European Growth & Income plc

Investment Company of the Year Awards Winners Interview - JPMorgan European Growth & Income plc

clock 22 February 2024 • 4 min read
Partner Insight: Global social bonds can offer more impact

Partner Insight: Global social bonds can offer more impact

Impact investing offers investors the opportunity to pursue financial returns and social and environmental outcomes.

Sarka Halas
clock 21 February 2024 • 2 min read
Trustpilot