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What are bonds?

Bonds are debt instruments created for the purpose of raising capital. They are loans to organisations. Bonds usually have a fixed rate of interest paid regularly and aim to pay back the capital at the end of the period covered by the bond. They are also known as fixed income securities.

There are two main categories of bonds:

• Commercial bonds are debt issued by companies or other commercial bodies
• Government bonds are debt issued by municipal bodies, local or national governments or agencies. Government bonds are known as gilts in the UK, Eurobonds in the EU and Treasuries in the USA. A number of supranational institutions such as the World Bank and the EBRD also issue debt.

All bonds are rated by mainstream rating organisations, using variants of a three or four letter system (such as Aa3 or BBB+). These assessments focus on the likelihood of the issuer defaulting on repayments.

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Commercial bonds

Commercial bonds are debt issued by companies or other commercial bodies. It is possible to apply positive and negative screens to these investments. You can invest in commercial bonds through a segregated approach or through a pooled investment fund.

Responsible Investment issues

The Responsible Investment approach to commercial bonds is similar to that for equities. It is possible to screen some bonds according to negative criteria (for example to exclude tobacco or armaments) or positive criteria (such as investing in best-in-sector companies).

It is possible to invest in a number of entities and opportunities that are not accessible through the equity markets, e.g. bonds issued by the John Lewis Partnership, or special purpose bonds to finance social housing projects.

There is limited scope for engagement with bonds, as investing in bonds does not confer the rights of ownership. However when bonds are first issued by an organisation it may be possible to raise social, environmental and other ethical matters with the bond issuers.

How Responsible Investment operates

The Responsible Investment options for commercial bonds depends on whether your charity invests through pooled funds or through a segregated approach.

Segregated investments

It is possible to develop a bespoke policy by which the fund manager will screen bond investments (on both positive and negative criteria) in line with your charitys policy. Fund managers also engage with companies which issue bonds and, therefore, when deciding on which fund manager to employ, your charity may wish to examine their engagement policies and records.

Pooled investment funds

There are a number of bond funds, including common investment funds and retail funds, which employ responsible investment criteria.

Examples

Examples of bond funds include: