Impact investors shape their portfolios with the dual objectives of generating a measurable benefit for the world and earning a financial return. This is as true for those investing in impact bonds as it is for those investing in equities.
What Are Bonds?
Bonds are an investment vehicle in which investors lend money to entities in return for an agreed-upon interest rate. Investors are generally attracted to bonds because of their fixed income streams and the increased diversification they bring to broader portfolios that include equities. Companies—as well as local and national governments—issue bonds to raise capital for a variety of reasons, from supporting projects and refinancing existing debt to funding acquisitions and fueling strategic growth plans.
Issuers agree to pay investors periodic interest, also known as coupons. The contract between the issuer and the investor also specifies a maturity date, at which point the investor gets back the original amount they invested—the principal. While bonds are generally considered a low risk investment vehicle, they do come with the risk of default, especially when small companies with weak balance sheets issue debt.
Impact Investing Bonds
There are a growing number of options for those looking to invest in fixed income and see impact.
- Green bonds. Green bonds are issued to fund projects with environmental benefits. While the European Investment Bank remains the largest issuer of green bonds, iPhone maker Apple and other companies have issued billions of dollars in green bonds to fund their own renewable energy projects.
- Social impact bonds. These bonds support initiatives to improve community well-being. The Massachusetts Bay Transportation Authority has taken this route to finance projects with positive social impact, such as an initiative to make bus travel more accessible for disabled people.
- Development impact bonds. Also known as DIBs, these bonds target projects with positive social impacts in developing countries, often with a health or education orientation. The world’s first healthcare DIB was issued in 2017 to lower maternal and newborn deaths in Rajasthan, India. This followed the 2015 launch of the first education DIB, which aimed to increase school enrollment in the same region.
- Traditional corporate bonds. Impact investors may also purchase traditional bonds from companies that score well on environmental, social, and governance (ESG) factors. For example, electric car manufacturer Tesla has issued significant amounts of debt through corporate bonds.
Though green bonds in particular have seen significant growth in recent years, it is important to remember that sustainable bonds do come with financial and impact risks depending on the overall financial health of the bond issuer as well as the underlying projects financed.
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