Impact investing is not an asset class, rather, it's an approach that can be applied to a diverse range of asset classes, and while this I’ve spoken about this concept at length in this newsletter, today I want to focus on fixed income.

Fixed income is the world’s largest asset class. It has a set of unique characteristics that make it ideal for driving impact outcomes, but so far it hasn’t been utilised at anywhere near its full potential.

There’s long been a view that fixed income should just be used for risk mitigation and earning a yield, rather than trying to solve pressing challenges. This is ironic, because fixed income is also recognised as a scalable solution that can mobilise some of the biggest pools of capital, in a reliable structure, over long time frames. Which clearly sounds like a useful tool for impact investors.

This is particularly relevant to global allocators (like super funds, pensions, and insurance companies) that require big-ticket opportunities, and who may have discounted the investability of impact due to a lack of capacity.

A recent research report from Tideline and Builders Vision argues that fixed income offers powerful solutions; ‘Hiding in plain sight’.

​Scaling Solutions: The Fixed Income Opportunity Hiding in Plain Sight aims to unite investment managers, governments, multilateral institutions, and other stakeholders to recognise the power they have with this unique asset class to create solutions and address global challenges, at scale.

As a resource it’s useful for issuers, investors, and allocators, as it offers valuable nuance about how impact practices (applied horizontally) can be adapted specifically to the fixed income asset class (the vertical).

It’s a weighty document, and as you would expect from Tideline, it leans deeply into what it takes to deliver genuine impact.

This week Tideline released a webinar recording!

For those dipping their toe into the theme, and looking to understand how bonds can be aligned with impact, the webinar makes the report’s core insights even more accessible.

Tideline, and a selection of those featured in the report, discuss the opportunities and the challenges of integrating impact principles to the fixed income realm.

​WATCH IT HERE​

A unique set of challenges

I’ve worked with Australian fixed income managers, like Artesian, helping to design their impact frameworks, and in the process grappled with balancing the universal nature of impact practices with the specific characteristics of the fixed income asset class.

It’s well suited to alignment with impact practices because ownership is concentrated, and use-of-proceeds are mostly well articulated. But it gets complicated by a global mix of ‘labelling’ regimes (think green bonds, or social bonds) that are governed by various certification organisations, and which aren’t directly comparable, and which rarely align with rigorous impact principles.

The Tideline report is a valuable addition to the field as it proposes a clear definition for what constitutes an “impact fixed income” strategy.

Below I’ve included some highlights from the report:

Fixed income is well suited to impact

Fixed income as an asset class has a number of characteristics that make it well suited to delivering impact:
​Responsiveness

• Its capacity to rapidly mobilize capital
• Eg. Bond issuance was used to deliver disaster response funds for both the LA Fires, as well many National efforts to deal with covid

Scale:

• Ability to bring in large amounts of capital
• There is a global set of trusted and standardised processes for issuance
• Eg. bonds are used for the construction and maintenance of roads, bridges, hospitals, and water and sewage systems

Degree of precision:

• It’s capacity to generate targeted impacts
• Use-of-Proceeds bonds have clear mandates for how funds are to be used
• EG. Green bonds, sustainable bonds, or social bonds (and new entrants, like orange bonds and blue bonds)

Going deeper than the label

Labelled bonds offer a valuable foundation for impact investors to identify issuers that recognise the potential commercial benefits of investing in projects that deliver ‘green’ and ‘social’ outcomes, plus of course the potential for a discounted cost of capital.

But just because a bond is labelled as green, doesn’t necessarily mean it would fit an impact investors portfolio.

“The bond labeling regime provides a strong foundation for assessing and overseeing impact at the transaction level. However, on its own, bond labeling is insufficient as a means for enabling investors to harness the full potential of impact fixed income.”

A key issue to consider is that allocating solely to labelled bonds, with Use-of-Proceeds mandates, is that you may miss out on some of the most high-impact opportunities from mission-driven organistions, as they’re unlikely to wear a label that would ring-fence their use of the funding.

Also, the labeling regime falls short of what is required for genuine impact due diligence, and opens up risks of impact washing.

Investors, as always, need to clearly define their own impact approach and apply suitably rigorous analysis as part of the DD process.

Applying impact practice to fixed income

The core pillars of impact investing can be applied to fixed income as a foundation for building an impact strategy, but the report emphasises that there are some nuances, and that they may show up a little differently.

Intentionality in fixed income is expressed through three core characteristics

• having a defined impact strategy in place, that guides security selection
• assessing an issue versus responsibility practices
• taking a holistic approach to evaluating securities impact beyond mere assessment of uses of proceeds or revenues

“These differences don't mean that investors are compromising on impact rigor or outcomes in fixed income, just that impact is handled a little differently in this asset class from what they may be used to,” explains Jade Huynh, Senior Associate at Tideline, on the webinar

Which managers are doing it well?

(Refer to the report for full case-studies. Below are excerpts from the webinar)

Nuveen

Stephen Liberatore, Head of ESG & Impact, Global Fixed Income

“What we're really looking for is how do we lever the way that the fixed income market operates, and the way that it's structured, to create securities that represent a positive social and or environmental outcome.

So for us we invest in four thematic areas: affordable housing, community economic development, renewable energy and climate change, and natural resources. For us the security's got to fit our proprietary impact framework… It's basically focused on transparency and disclosure. So for us, an impact investment is a security that has a direct and measurable social and or environmental outcome associated with it.

And since everything that we do is on an active total return basis, that definition has to also align with there being attractive total return in the security we're evaluating.”

T. Rowe Price

Matt Lawton, Portfolio Manager, Impact Fixed Income

“Intentionality; is expressed through proactively seeking out companies and projects that we believe are addressing acute environmental and social pressure points on a global basis. And so some of the impact themes in the climate space would be reducing GHG, promoting healthy ecosystems and then also social themes such as enabling social equity and improving health outcomes… Intentionality is documented and reinforced through a theory of change model that we undertake for every investment in the portfolio.

Contribution, or additionality: where we as investors endeavor to contribute to the achievement of the impact outcome. So this means partnering and engaging with our portfolio companies to provide better impact and hopefully by extension better financial outcomes. So for example, impact bond origination; the T. Rowe Price team will identify prospective issuers of impact bonds and help guide those issuers through a transaction life cycle, providing counsel on things like uh project selection KPIs and reporting.

Measurement: as impact investors, we have a responsibility to measure and evidence impact from our investments through metrics, right? GHG emissions avoided, cubic meters of water saved, affordable housing units financed, and then monitoring and reporting on the progression of those metrics over time.

It helps build trust, drives accountability, and then demonstrates to the market and investors that bonds can deliver both outcomes and returns at scale.”

Community Capital Management

Jenny Kwon, Impact Research Analyst

“So what's unique to CCM is our impact customization and reporting. It's twofold; the first one, going back to that place-based investing I mentioned, also known as geographic targeting, where clients are able to really target their impact on a regional level, on a state level, all the way down to a specific county to bring back money into their communities.

The second aspect being impact targeting, which means for us the different themes. So thematic targeting the 14 unique impact themes I mentioned before. So essentially we are enabling these different allocators to really progress their theory of change by aligning their capital to their mission by investing in CCM…

…Just in 2024, we financed over 2,000 loans to low to moderate income borrowers and also financed over 115,000 affordable rental housing units, and also invested over $37 million into community development financial institutions, also known as CDFIs. For us these outcomes and results mean more than just the bonds themselves. We're always looking to advance the field alongside our peers here. And for us, one way we do that is our impact investing institute, which is an in-house research hub.”

The tools are in our hands

A welcome conclusion from the report was that existing models of impact management can be adapted to support investors in rapidly scaling up their allocations to ‘impact fixed income’ with confidence.

“The tools are in our hands. Fixed income can and should be a powerful engine for achieving global sustainability ambitions.”

I work with impact investors to quantify their impact, so they can improve investment decision-making and grow inflows.

If you want to find out more about how I can help you design a rigorous climate investment strategy, and develop engaging impact reports... click HERE​

Or just hit reply, and let's talk.

John Treadgold Follow me on LinkedIn​