21 Jun 2019
Five years after we launched the UK’s first social impact bond fund open to both retail investors and institutions, the Threadneedle UK Social Bond Fund is growing up fast
We launched the Threadneedle UK Social Bond Fund in 2014 in partnership with Big Issue Invest, the social investment arm of the Big Issue Group, aiming to bring the mainstream into social investing (and social investing into the mainstream). Our growing retail assets under management prove we are doing that.
Daily inflows have rocketed tenfold since the fund passed its fifth birthday in January and assets under management are up by more than 35% in the year to date, with the fund reaching
£147 million in May 2019. Clearly, appetite for investments that combine tangible social benefits with solid returns has never been stronger.
Being able to point to a five-year performance record has been important in encouraging new investors, although a lot of growth has come from existing investors significantly increasing their commitments.
Over the past five years we have played a key role in developing the market for social bonds, helping to craft the International Capital Markets Association (ICMA) Social Bond Principles, published in June 2017, and actively engaging with originators and potential issuers to encourage a deeper and more liquid market.
The fact that the fund offers daily liquidity in an asset class traditionally regarded as long-term and illiquid is a mark of how far it has broken preconceptions of social investing.
It is unlikely, however, that the fund would be attracting the scale of inflows it is currently experiencing if investors were sacrificing financial performance for positive social outcomes. In fact, performance-to-date shows this common concern is unfounded: investors are getting the return they should expect for the risk they are taking and, in addition, they’re getting “social alpha” through adding value to society. That was hard to demonstrate five years ago, but now we have a long enough performance record to support that statement.
Take the bond issue by the Charities Aid Foundation (CAF) to recapitalise Charity Bank, which lends to small- and medium-sized charities. This retail bond, which carries a 5% coupon, provides an attractive financial return but also creates wide social impact by enabling Charity Bank to fund a large pool of organisations too small to tap the bond market directly. The CAF bond fulfilled several of our goals: as well as providing strong financial returns and positive social impact, it helped develop the market in charity bonds – a major goal set by Big Issue Invest when the fund launched. It also played an important role in supporting the Retail Charity Bonds platform set up by charity and social investment specialist Allia, and broker Canaccord Genuity.
Although the fund targets financial returns and social alpha, it does not limit itself to ICMA- branded social bonds or to issues earmarked for specific purposes, such as the CAF bond.
Instead it supports socially beneficial activities and developments wherever it identifies them, assessing potential investments against eight areas of impact set out by Big Issue Invest, including health, education, quality employment opportunities, socially beneficial infrastructure and sustainable communities. Each holding is ranked “high”, “medium” or “low” depending on the intensity of the impact on society. Big Issue Invest reports annually on the fund’s social impact performance for the benefit of investors, indicating where outcomes align to the 17 UN Sustainable Development Goals or SDGs (Figure 1).
Figure 1: UN SDGs / SDG alignment of fund outcomes
Source: UN/Columbia Threadneedle Investments, as at 31 March 2019. Data shown is for the Threadneedle UK Social Bond Fund. Note: Additive/contextual SDGs are often relevant across outcomes, eg, the link of an outcome’s intensity in addressing social exclusion and deprivation and the Poverty SDG. The Fund itself and work around it link to SDG 17: Partnership for the Goals.
Another holding, issued by the University of Manchester, illustrates our ability to look at investments on their merits. The team met university representatives when they were planning a bond issue. It was considering moving the University of Manchester Institute of Science and Technology into the main campus, and the project involved new lecture theatres and student accommodation as well as a cancer research centre for the science department that offered clear benefits to society.
After analysing the issue against key social impact goals for the fund, including education, health, employment and housing – and noting the university’s strong outreach programme in local schools to promote higher education – we concluded the issue fitted the fund’s criteria and invested.
Initially, the fund’s social advisory committee assessed the university bond as having medium intensity. But when the university later formalised its social policy, pledging high standards of governance and social responsibility, the committee reassessed the issue and moved it to high impact intensity. In my view, this example illustrates how social impact tends to involve both the impact of a project on its community – “doing the right things” – and the environmental, social and governance standards of its management – “doing things right”.
This point is particularly relevant in areas of impact such as employment. Few issues in which the fund invests address just one of the eight social impact criteria Big Issue Invest has established for it. For example, even if most projects are not primarily intended to create employment, they tend to result in new jobs anyway. Consequently, we always examine an issuer’s employment practices – part of its social and governance performance
– with particular emphasis on conditions for the lowest-paid workers such as cleaners and maintenance and catering staff. We look for information that refers to people and the impact that we are having on them, whether that is tenants, employees, patients, students and so on.
Having enjoyed a successful first five years for the UK Social Bond Fund, how do we see the market for social bonds developing from here? Greater issuance by banks is one key area of future growth, since they finance large numbers of organisations that have high social impact. As in the case of Charity Bank, this means they can play the vital role of aggregator for the fund, giving us the ability to invest in a wide group of borrowers that we could not fund directly because they are too small individually to issue bonds.
We have been pushing UK banks to issue social bonds and have already invested in a sustainability bond from HSBC, calling for greater transparency and better reporting which came to fruition in the first annual report. Reporting represents the main challenge we see to the development of the social bond market.
Another potential area of growth is issuance by national governments. Governments such as the Netherlands, Poland, France, Belgium and Ireland are now the fastest growing source of green bond issuance, and we hope they will pursue issuance whereby the proceeds are ring-fenced for social impact projects.
We have written formally to the UK Treasury calling for a green gilt and hope this could lead to a major new source of large, liquid, socially beneficial issuance – and a wealth of fresh opportunities for the Threadneedle UK Social Bond Fund over the next five years.
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