Praxis Mutual Funds® shareholders expect us to invest with their values in mind. The Praxis Impact Bond Fund turned 25 this year, and through the first half of the fund’s tenure, we diligently focused on screening out holdings contrary to those shared values. In 2006, our eyes were opened by a public bond offering that showed us what positive impact bonds (those bonds that make a positive impact on the climate and/or communities) could do.
In November of that year, the International Finance Facility for Immunization (IFFIm) issued its inaugural “Vaccine Bond.” This bond raised $1 billion to help immunize children in developing countries. It accelerated the ability of six European nations to use their stellar credit rating to help save lives. An independent evaluation of the program in June 2011 calculated that over 2 million future deaths had been averted because of the IFFIm program.
For years, the Praxis Impact Bond Fund excluded “unaligned” issuers and invested nearly 1% of the fund in Community Development Investments. But with the advent of impact bonds, the opportunity to purchase bonds that promoted our core values while earning a market rate return was exactly what our investors wanted before they knew it was possible.
The market for positive impact bonds paused for several years during the Great Recession, but, by the end of 2009, the International Bank for Reconstruction and Development (part of the World Bank) issued its first green bond in U.S. dollars. This was another important step in developing a symbiotic market where issuers grew funding for the environmentally focused aspects of their business while generating products for a willing group of investors wanting to make a real-world impact.
Over the next decade, issuance of green, social and sustainability bonds exploded. According to the Climate Bond Initiative, about $190 billion in green bonds have been issued globally year to date through mid-October 2019. This already surpasses the $171 billion and $156 billion issued in 2018 and 2017, respectively.
This phenomenon extends beyond environmentally focused initiatives. According to Bloomberg, $49 billion in sustainability and social bonds already have been issued in 2019, on pace to double the $29 billion issued in 2018.
We expect these markets to continue to grow in the hundreds of billions of dollars each year because both issuers and investors want to make an impact on the world we share. Bloomberg reports that more than $600 billion in sustainable debt (green, social and sustainability) is outstanding at this time. It still pales in comparison, however, to the $102.8 trillion of global bonds outstanding, according to SIFMA in 2018.
Some say that specific rules and regulations should be established to discourage greenwashing (environmental impact in name only). But we believe the Green Bond Principles, the Social Bond Principles, the Sustainability Bond Guidelines, and market forces – not regulations – will sort this out.
The Green Bond Principles recommends external reviews of new bond issues. Several organizations have been analyzing and rating impact bonds – issuing what is commonly known as a Second Party Opinion. As an example, green bonds issued by FNMA (Fannie Mae) are rated “light green” by CICERO (Center for International Climate Research). This rating suggests that Fannie’s bonds are a first step to a low-carbon future, but they still include fossil fuel use. Some investors believe “light green” issues dilute the green label, but we believe more issuance, even if only partially addressing environmental and social challenges of our society, is better than less.
Our industry is also subject to hindsight bias with respect to the first green bonds issued. Looking back from our current vantage point, the earliest green bonds weren’t as impactful as ones issued today. But we believe those issuers needed to step up, so the next ones can stand on their shoulders. In the same way, worrying whether the next green bond has the perfect profile is not productive. There are no perfect issuers and no perfect bonds, but we dare not let perfect be the enemy of the good. We can be honest about the history of this market without being dismissive of what has been accomplished.
Robert Watson-Watt was a Scottish physicist credited with the development of radar. He justified his choice of a nonoptimal frequency in his radar construction because of the “cult of the imperfect.” He said, “Give them the third-best to go on with; the second-best comes too late, the best never comes.”
Watson-Watt’s perspective fits the impact bond market well. We simply can’t wait for the perfect green bond that receives two strong second opinions and the issuer that must receive perfect scores from all the ESG rating agencies. What we really need is change that is both flexible and fast and a market that generates the full spectrum of investments – from light green to dark green.
Ideally, this market must eventually be in the trillions of dollars. If the market raises $1 trillion a year in green bonds and we later find out that $10 billion was “light brown” instead of “light green,” that’s far better than having only $50 billion in perfect dark green bonds.
The market – and those who watch it so closely – will punish issuers and their investment banks that bring bonds that fail to engage in this effort with integrity. But we also need the market to reward those who bring innovative, needed change and progress – even if their issuance is not perfect. The future of our planet and our communities demands the participation of the many, not just the perfect or the pure.
These are exciting times for investors to invest with their values and make a positive impact in the world. Everything in life is a balance, and although we don’t want grossly overpromised and underdelivered impact bonds, we also know that we can’t wait around because “the best never comes.”
Editor's note: This article was originally published in the Dec. 2019 issue of GreenMoney eJournal and is reprinted with permission.