Bond options for the socially responsible

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Most discussions about socially responsible investing (SRI) seem to revolve around stocks. If you’re an index investor with an interest in SRI, there are a number of ETFs that screen companies according to their environmental, social and governance report cards. But what’s an SRI investor to do when it comes to fixed income?

You might argue that bondholders need to be even more discerning than stock buyers if they’re concerned about investing in irresponsible companies. After all, when you buy a company’s bond, you’re lending it your money (though you’re usually picking it up on the secondary market rather than infusing the company with new cash). And bondholders don’t even get a vote like shareholders do, so they can’t exercise any influence on management.

But there’s a problem for Couch Potatoes with a conscience: there simply are no bond index funds that screen issuers according to SRI principles. You’ll have to choose a different option:

Use government bonds only. Instead of using a broad-based bond index fund—which will include about  20% to 30% corporates—you might select one that includes only government bonds. BMO offers half a dozen ETF options (both federal and provincial, with your choice of short, mid or long terms), while the RBC Canadian Government Bond Index will do the trick for mutual fund investors.

Build a GIC ladder. There’s nothing wrong with forgoing bonds altogether and using a five-year GIC ladder for the fixed income side of your portfolio. In fact, SRI investors may prefer to work with their local credit union, and these often offer the best rates.

Use a low-cost active fund. Since there is no index fund that fits the bill, the PH&N Community Values Bond Fund is the best alternative for those seeking an SRI bond fund. It includes about 40% corporates and uses positive screening for companies with socially responsible business practices. Those involved in tobacco, alcohol, gaming, pornography, military weapons are eliminated. With an MER of just 0.61%, it’s cheaper than any bond index fund in Canada with the exception of TD’s e-Series. Over the 10 years ending April 30, the fund returned 5.5% annually, compared with 5.8% for the iShares DEX Universe Bond (XBB).

Consider “impact bonds.” At this point you’ve moved out of indexing and into impact investing, where the goal is to provide financing for projects you support while also expecting a financial return. Timothy Nash of Strategic Sustainable Investments mentioned a few examples during out recent interview:

  • Oikocredit offers five-year bonds with a yield of 1.75%. Issued in units of $250, the bonds provide microfinancing for entrepreneurs in developing countries.
  • SolarShare is a not-for-profit that issues five-year bonds with a 5% yield. The funds are used to promote community-based solar electricity generation in Ontario, so the qualify for that province’s generous feed-in tariff.
  • ZooShare is building a biogas plant that will generate electricity using manure from the Toronto Zoo and food waste from grocery stores. They’ve announced a bond issue with a 7% yield.

Clearly there’s significant risk in going this route. Renewable energy projects (at east in Ontario) typically benefit from government support, so the default risk may not be particularly high with these bonds. The biggest risk is illiquidity: you’re locking up your money for five years with no way to access it in an emergency. Any investment like this requires an extra dose of due diligence.

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