Tag: Impact Investing

Praxis Mutual Fund shareholders expect us to invest with their values in mind. The Praxis Impact Bond Fund turned 25 this year and through the first half of the fund’s tenure we diligently focused on screening out holdings contrary to those shared values. In 2006, our eyes were opened by a public bond offering that showed us what positive impact bonds (those bonds that make a positive impact on the climate and/or communities) could do.

In November of that year, the International Finance Facility for Immunization (IFFIm) issued their inaugural “Vaccine Bond.” This bond raised $1 billion to help immunize children in developing countries. It accelerated the ability for six European nations to use their stellar credit rating to help save lives. An independent evaluation of the program in June 2011 calculated that over 2 million future deaths had been averted because of the IFFIm program.

For years the Praxis Impact Bond Fund had excluded “unaligned” issuers and invested nearly 1 percent of the fund in Community Development Investments. But with the advent of impact bonds, the opportunity to purchase bonds that promoted our core values while earning a market rate return was exactly what our investors desired before they knew it was possible.

The market for positive impact bonds paused for several years during the Great Recession, but, by the end of 2009, the International Bank for Reconstruction and Development (part of the World Bank) issued its first green bond in U.S. Dollars. This was another important step forward in developing a symbiotic market where issuers grew funding for the environmentally focused aspects of their business while generating products for a willing group of investors wanting to make a real-world impact.

Over the next decade, issuance of green, social and sustainability bonds exploded. According to the Climate Bond Initiative there has been about $190 billion in green bond issuance globally year to date through mid-October 2019. This already surpasses the $171 billion and $156 billion issued in 2018 and 2017, respectively.

This phenomenon extends beyond environmentally-focused initiatives. According to Bloomberg there has already been $49 billion in sustainability and social bonds issued in 2019, which is on pace to double the $29 billion issued in 2018.

We expect these markets to continue to grow in the hundreds of billions of dollars each year because both issuers and investors want to make an impact on the world that we share. According to Bloomberg there is over $600 billion in sustainable debt (green, social and sustainability) outstanding at this time. However, it still pales in comparison to the $102.8 trillion of global bonds outstanding according to SIFMA in 2018.

Some say that specific rules and regulations should be established to discourage greenwashing (environmental impact in name only). But we believe the Green Bond Principles, the Social Bond Principles, the Sustainability Bond Guidelines, and market forces, not regulations, will sort this out.

The Green Bond Principles recommends external reviews of new bond issues. Several organizations have been analyzing and rating impact bonds issuing what is commonly known as a Second Party Opinion. As an example, green bonds issued by FNMA (Fannie Mae) are rated “light green” by CICERO (Center for International Climate Research). This rating suggests that Fannie’s bonds are a first step to a low carbon future, but they still include fossil fuel use. Some investors believe “light green” issues dilute the green label, but we believe more issuance, even if only partially addressing environmental and social challenges of our society, is better than less.

Our industry is also subject to hindsight bias with respect to the first green bonds issued. Looking back from our current vantage point, the earliest green bonds weren’t as impactful as ones that are issued today. But we believe those issuers needed to step up, so the next ones could stand on their shoulders. In the same way, worrying whether the next green bond has the perfect profile is not productive. There are no perfect issuers and no perfect bonds, but we dare not let perfect be the enemy of the good. We can be honest about the history of this market without being dismissive of what has been accomplished.

Robert Watson-Watt was a Scottish physicist credited with the development of radar. He justified his choice of a nonoptimal frequency in his radar construction because of the “cult of the imperfect.” He said, “Give them the third best to go on with; the second best comes too late, the best never comes.”

Watson-Watt’s perspective fits the impact bond market well. We simply can’t wait for the perfect green bond that receives two strong second opinions and the issuer that must receive perfect scores from all the ESG rating agencies. What we really need is change that is both flexible and fast and a market that generates the full spectrum of investments—from light green to dark green.

Ideally, this market must eventually be in the trillions of dollars. If the market raises $1 trillion a year in green bonds and we later find out that $10 billion was “light brown” instead of “light green”, then that is far better than having only $50 billion in perfect dark green bonds.

The market—and those who watch it so closely—will punish the issuers and their investment banks that bring bonds that fail to engage in this effort with integrity. However, we also need the market to reward those who bring innovative, needed change and progress even if their issuance is not perfect. The future of our planet and our communities demands the participation of the many, not just the perfect or the pure.

These are exciting times for investors to invest with their values and make a positive impact in the world. Everything in life is a balance and we don’t want grossly over-promised and under-delivered impact bonds, but we also know that we can’t wait around because “the best never comes”.

Article by Benjamin Bailey, Vice President of Investments and a Senior Fixed Income Investment Manager for Praxis Mutual Funds® and Everence® Financial, a leading provider of faith-based financial products in the United States and a ministry of Mennonite Church USA. He is a member of the organization’s investment management committee and has more than 15 years of experience in fixed-income investing. He has served as co-portfolio manager for the Praxis Impact Bond Fund since 2005 and co-portfolio manager of the Praxis Genesis Portfolios since June 2013. He also acts as co-portfolio manager on internal insurance portfolios and externally managed client accounts.

Cited in The Wall Street Journal, Money, The Banker and the Associated Press, Benjamin has spoken on Green Bonds and investing for a low-carbon economy at the US SIF Annual Conference, the SRI Conference and other national venues. In 2014, he was named a NextGen Bond Manager to watch by WealthManagement.com, highlighting a handful of managers younger than 45 who are quietly outperforming many of their peers.

Benjamin joined Everence in 2000, assisting portfolio managers as a socially responsible investing research analyst. A graduate of Huntington (Ind.) University, he earned the Chartered Financial Analyst® designation in 2003 and has served as president of the Investment Section for the American Fraternal Alliance. Benjamin often serves as a resource to regional and national organizations and events on positive investing in the bond market.

Disclosures

Bond funds will tend to experience smaller fluctuations in value than stock funds. However, investors in any bond fund should anticipate fluctuations in price, especially for longer-term issues and in environments of rising interest rates.

The Fund’s stewardship investing strategy could cause the fund to sell or avoid securities that may subsequently perform well, and the application of social screens may cause the fund to lag the performance of its index.

Consider the fund’s investment objectives, risks, charges and expenses carefully before you invest. The fund’s prospectus and summary prospectus contain this and other information. Call 800-977-2947 or visit www.praxismutualfunds.com for a prospectus, which you should read carefully before you invest. Praxis Mutual Funds are advised by Everence Capital Management and distributed through Foreside Financial Services, LLC, member FINRA. Investment products offered are not FDIC insured, may lose value, and have no bank guarantee.

The climate crisis is precipitating a sustainable investment revolution, and I think that revolution will endure in 2020.

When the environmentally-responsible mutual fund company that I lead was founded in 1991, the average investor was not concerned about sustainability. Times have changed.

Nearly 80 percent of respondents to a recent study said that they “love the idea of investing in companies that care about the same issues” as them. This isn’t just lip service.

Investors are putting their money where their mouth is: sustainable funds attracted an estimated $8.0 billion in net flows in the first half of 2019, vastly eclipsing the $5.5 billion in flows for all of 2018.

All told, sustainable, responsible, and impact (SRI) investing assets now account for one in four dollars in total assets under professional management in the United States, according to the most recent US SIF Foundation Report on U.S. Sustainable, Responsible, and Impact Investing Trends.

I expect the exponential growth of environmental, social, and governance (ESG) investing to continue in 2020; and I think three factors largely will drive it.

The climate crisis — Concerns about climate change continue to mount. Each new day seems to carry another account of deadly heat waves, devastating tropical storms, raging forest fires, or some other cataclysmic effect of climate change. As long as the existential threat posed by the climate crisis looms, investors are going to seek out ways to invest with their values.

The material risks associated with the climate crisis — There is growing evidence that corporations that manage their ESG risks may outperform their competitors. A Harvard Business School study found that “high sustainability companies significantly outperform their counterparts over the long term, both in terms of stock market and accounting performance.”

Millennials — In the coming years, millennials will be the beneficiaries of the largest generational wealth transfer in human history — and millennials tend to care deeply about the environment. Almost three-quarters of the 92 million American millennials say that “global warming” is “personally important” to them. Millennial investors also are nearly twice as likely as non-millennials to make investment decisions based on specific environmental or social outcomes. I don’t foresee the millennial commitment to sustainability waning in 2020.

Increased “Sustainable” Investing Options

Given the skyrocketing interest in ESG investing, it’s unsurprising that “sustainable” investment options have proliferated — and I expect this trend to continue in 2020.

Between 2016 and 2018, the number of SRI mutual funds increased 50 percent and the number of ESG-themed exchange-traded funds (ETFs) grew 176 percent. While the number of new SRI/ESG funds may not continue to expand at this breakneck pace, I still expect steady growth. It’s simple supply and demand. In 2018, the ESG assets managed by the 500 largest global asset managers rose by 23 percent, while their overall AUM shrank three percent.

More Skepticism of ESG Greenwashing

Many of the new or revamped ESG funds are products of firms that historically have cared very little about sustainability. Few of their products use values-based screens and most only selectively consider ESG performance. I anticipate a growing skepticism of ESG greenwashing in 2020, as savvy investors learn that some “sustainable” funds include the companies most responsible for the climate crisis.

Larry Fink, CEO of BlackRock, the largest asset manager in the world, received plaudits for writing in his 2019 annual letter to shareholders that “every company must not only deliver financial performance, but also show how it makes a positive contribution to society.”

For investors concerned about the climate crisis, these are encouraging words — but where’s the (faux) beef? Blackrock remains the largest global investor in coal and one of the largest investors in oil and gas companies. At some point, I believe environmentally-responsible investors are going to start asking if it’s even possible to invest sustainability with a company like BlackRock.

Shareholder Proposals

As investors become more knowledgeable about ESG investing, I think they also are going to start asking more questions about how these new entrants are engaging with the companies they’re invested in — especially in regard to proxy voting, which is the most fundamental way shareholders can express their views to corporate management.

Climate related shareholder proposals are an integral way for shareholders to press companies to improve their sustainability and reduce their exposure to the risks associated with the climate crisis and environmental degradation.

In the year ending August 31, 2018, BlackRock and Vanguard, the two largest U.S.-based fund managers, supported only 23 percent and 33 percent of climate crisis reporting proposals. For comparison, the largest asset manager in the U.K., Legal & General, supported 85 percent of such proposals. Even the ESG-branded portfolios of BlackRock and Vanguard voted in favor of shareholder resolutions less frequently than peers, according to a Morningstar analysis.

If BlackRock and Vanguard had supported these investor efforts to address climate risks, at least 16 climate-related shareholder resolutions at S&P 500 companies would have garnered majority support in 2019. I think investors will start taking more notice of this inconsistency in 2020.

I also expect an uptick in the number of shareholder proposals that pertain to deforestation in 2020. Other firms finally are realizing that ending the destruction of tropical forests is one of the easiest and best ways to combat climate change and that corporations that fail to address this very real material risk are doing a disservice to their shareholders.

Investors are increasingly choosing to invest in responsible funds because they care about the environment and are concerned about the climate crisis. As SRI investing moves into the mainstream, I think investors are going to start demanding that firms walk the walk when it comes to sustainability.

This means supporting climate related shareholder proposals, publicly pressing companies to improve their sustainability, and – ultimately, I believe – divesting from the most polluting industries on the planet. Already, more than 1,000 organizations, almost 60,000 individuals, and at least one entire country have joined the divestment movement. I expect this trend to continue in 2020, too.

Vive la (sustainable) révolution!

Article by Leslie Samuelrich, who leads Green Century Capital Management, focusing on the firm’s investment strategies, business development, and impact investing program. The Green Century Funds have experienced 185% growth under her leadership. Ms. Samuelrich has more than 25 years of experience in ESG investing, corporate engagement, and environmental and public health advocacy. Her comments have appeared in The Wall Street Journal, Bloomberg, The New York Times, Responsible Investor, Barron’s, and many other outlets. She currently serves on the Board of Directors of the Forum for Sustainable and Responsible Investment (US SIF) and the Advisory Board of the Intentional Endowments Network. She is a guest lecturer on impact investing at The Wharton School and annually presents at dozens of national and regional industry conferences and events. Ms. Samuelrich holds a BA in Economics from Boston College.