We asked Wellington Management's Campe Goodman how he built Wellington's new impact bond fund.
To explain his investment process, Goodman describes what happened after he first set out the fund's criteria to Wellington's broader credit teams. "I soon got an email from an analyst who had identified a really interesting high-yield issuer: a company in Brazil that provided clean water and better sanitation," Goodman explains.
The team checked the firm against the fund's key criteria - including whether the impact of an investment could be measured in terms of a specific key performance indicator - and added the firm to the fund's universe of possible investments. That's the first hurdle for an issuer.
Then when Goodman began selecting high-yield issuers for his portfolio, he spotted the water firm's "great risk/reward and investment characteristics". So he double checked with the credit analyst and ran the idea past one of Wellington's experienced emerging markets portfolio managers, before sizing and sourcing the investment.
Creative controversy
Everyone supports the drive for clean water, but some other impact areas are more controversial. "We'd like to help fund the transition of ‘dirty' industries like metals and mining towards more environmentally-friendly practices because we think that could be incredibly impactful," says Goodman. But his experience with energy utilities highlights a problem.
"A lot of utilities are issuing green bonds for their wind power," he says, "but only some are actively shutting down thermal activities and moving towards wind and solar." Impact investors must be selective. "We want to buy the bonds of firms making a real transition," he says.
In other industries, he says, it can be even more of a challenge to try to make sure "we aren't providing any capital to negative impact activities at all." The answer may be future innovation in the form of ‘transition bonds' structured to meet a high bar of transparency and sustainability goals.1
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