It has been a decade since Columbia Threadneedle Investments made the pioneering move into fixed income impact investing, launching the CT UK Social Bond in 2013 - the UK's first daily liquid social bond fund. Having followed that with the Threadneedle (Lux) European Social Bond in 2017, we are now going global with a unique and proven approach built on the principles of impact investing
Why social?
At Columbia Threadneedle we believe that positive societal outcomes, such as health and well-being, correlate poorly with broad economic measures such as aggregate gross domestic product (GDP); in fact we have seen that "rich" or developed countries can be among the worst for social outcomes. The reason being that aggregate wealth is not a good predictor of outcomes, with the magnitude of wealth and income gaps within countries a particular problem.
The critical predictor of social outcomes for people is inequality. Inequality is high across the world and at risk of deteriorating further: despite income inequality between countries improving, income inequality within countries is getting worse.1 Key systemic global events continually put this vulnerability in the spotlight: the Covid-19 pandemic, the war in Ukraine and the subsequent cost-of-living crisis. The most vulnerable in society are most adversely impacted.
Therefore we believe we can do more to advance net societal benefits by targeting deprivation and inequality as opposed to hopeful improvements in aggregate economic measures. Improved outcomes for the least well-off and more marginalised in society will mean improved outcomes such as better health, greater productivity, improved standards of living and less crime, which we believe net benefit not just the cohort targeted, but all society.
Why fixed income?
When we launched the CT UK Social Bond, we started with the belief that the bond market has a natural role to play in dealing with inequality. It has three clear advantages that make it ideal for impact investing: scale, scope and the ability for proceeds to target specific outcomes.
Bonds are a vast universe, easily the biggest asset class at more than $130 trillion in size,2 and the amount of new capital the market will raise in any one year is similarly big. For example, last year the public bond market raised $10 trillion in new capital, which is near 20x the size of the $0.5 trillion raised in new public equity. The scale owes to the broad spectrum of issuers, which includes government-related entities, supranationals, development banks, other non-profit organisations, education establishments, non-listed companies and listed companies. It is this ability to pull in both private and public capital funders that makes the bond market so well positioned to play a role in addressing social issues.
The third point about bonds is that they offer a targeted investment opportunity, which is a key point about impact. Bonds can be secured against identifiable assets, with money raised ringfenced and with an agreed specific use of proceeds. This allows us to be intentional towards the outcomes and the population set that can benefit from our allocation of capital - we can follow the money through and evidence how it will support beneficial outcomes for society.
When we launched the UK Social Bond this type of investing was new, but a focus on impact measurement was key to our approach - which remains the case. As the ESG (environmental, social and governance) labelled bond market has grown past $3.5 trillion in cumulative issuance, a series of guiding principles for the bond market have been established by the International Capital Markets Association (ICMA), helping to crystalise this approach. As pioneers in this area we were well placed to contribute to the development of these principles, which require issuing entities to be very clear in how they define eligible projects, and then in how they monitor and report on these - a transparency which further enhances the suitability of the bond market in this type of investing.
We also actively worked with the Impact Investing Institute in supporting a campaign for a green gilt in the UK, which ultimately saw the UK government issue its inaugural green gilt in 2021 and commit to reporting social co-benefits. With our experience as active investors we are strong believers in the potential of the bond market to play a growing role to address social needs through our advocacy and education of issuers.
1 United Nations, Inequality - Bridging the Divide.
2 World Economic Forum, Ranked: The largest bond markets in the world, 17 April 2023.
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