There have been many conversations about whether sustainable strategies can deliver competitive financial returns as well as sustainable outcomes. In the equities space, we have seen substantial differences between the performance of sustainable funds and traditional funds; this is mostly explained by the stylistic differences between the most prominent sectors across sustainable strategies, such as their quality growth bias or sector tilts, for example limiting the exposure to the energy sector.
See also: Green bond market is becoming more fragmented
In contrast, within fixed-income funds, there is no evidence of such a difference in performance attributed to whether the strategies are managed with a sustainable mandate. Also, there have been discussions about the ‘greenium’, or a so-called premium attributed to use-of-proceeds bonds such as green bonds or social bonds due to the higher demand from investors justified by the additional environmental or social impact attached to these bonds. However, there is a lack of any clear evidence in the marketplace about this premium, or if there is one, it is very small.
In summary, we would say that fixed-income market returns are mainly driven by a company’s ability to pay its debt, credit risk, and sensitivity to changes in interest rates and duration risk.
Investor appetite for sustainable bond strategies has been contained over recent years. This can be explained by the negative performance of fixed income strategies in general since 2022, and the regulatory changes due to the advent of the Sustainability Disclosure Requirements (SDR), putting the plans to either invest in existing funds or the launch of new ones on hold. As the SDR regulations become effective and the higher yields make UK corporate bond strategies more appealing, we expect to see a resurgence in the appetite for UK responsible corporate bonds as a source of income for portfolios, while offering responsible and sustainable characteristics.
CT UK Social Bond
| Ethical exclusion | Sustainable solutions | Responsible practices | Impact investor |
| ✓ | ✓ | ✓ | ✓ |
Tammie Tang is the lead portfolio manager for this fund and she has been involved in the strategy since its launch in 2014. We are impressed with her commitment to the strategy and the passion for the social projects taken by the fund. This fund combines sound financial analysis with a genuine desire to improve social outcomes. Investing in investment grade corporate bonds, the fund should provide everything that one would expect from a standard corporate bond fund, including income, and diversification from equities. At the same time, the focus on investing in bonds that are supporting and funding socially beneficial activities provides significant non-monetary benefits.
The fund is truly social in its construct, with a strong philosophy of investing for better social outcomes. For a bond to be held in the fund, the proceeds of the bond must be evidenced to be contributing to some form of social goal, mainly in the UK.
The fund was originally constructed in conjunction with Big Issue Invest, the social investment arm of The Big Issue, a registered charity, and they still sit on the social advisory committee of the fund, providing another layer of governance and advice. In addition, a proportion of the management fee of the fund goes to Big Issue Invest, again aiming to create positive social impact in the UK.
The combination of solid fundamental analysis, as well as a market-leading social impact approach to investing, makes this fund something quite special.
Edentree Responsible & Sustainable Short Term Bond
| Ethical exclusion | Sustainable solutions | Responsible practices | Impact investor |
| ✓ | ✓ | ✓ |
Having evolved from being the investment division of Benefact Group to being a standalone group, EdenTree Investment Management has an impressive heritage of responsible investment. In fact, we believe that its investment approach of ‘profits with principles’, which has been in use for over 30 years, sets the firm apart as a market leader in this space.
This approach has been used in the management of this fund since its launch in 2017 by lead manager, David Katimbo-Mugwanya, who joined the group in 2015. We like that this is an easy to understand, high quality short-dated bond fund that is focused on capital preservation, with the majority of the portfolio invested in bonds rated single A and above.
The mindset of the managers is very much one of capital preservation. Although there may be some volatility in the capital value of the fund over shorter time periods, over the medium to long term the managers would prefer to miss their performance target than to lose capital. This seems a sensible approach in what is a low-risk fund and, when combined with the strong pedigree in responsible investment, marks the fund out as a compelling investment opportunity for responsibly minded, low risk investors.
Liontrust Sustainable Future Corporate Bond
| Ethical exclusion | Sustainable solutions | Responsible practices | Impact investor |
| ✓ | ✓ | ✓ |
The fund is managed by Kenny Watson, Aitken Ross, and Jack Willis. They transferred to Liontrust together from Alliance Trust Investments (ATI) in 2017. This is a corporate bond fund with a conscience.. The team believes that companies that produce goods or services that are of benefit to society or the environment, and who do so in a way that manages environmental, social and governance (ESG) risks and impacts will, in the long run, be the best investments.
The team has been managing funds in this way for many years now and investors can rest assured that this fund does far more than bolt on ESG considerations. Rather, sustainability is one of the core pillars in the investment process, and just as much emphasis is placed on the sustainability work which the team undertake, as credit analysis or valuation work.
This focus on sustainability is not, however, at the expense of sound investment principles. The team are all skilled credit analysts and bonds will only be included in the portfolio if they stack up on fundamental grounds as well as from a valuation point of view. This should result in a fund that not only has a conscience, but will also provide solid investment returns for investors over time.
