Editor’s note: Paul Ellis, a well-known advisor and consultant on sustainable investing strategies and writer for Financial Advisor, caught up with three industry experts from Columbia Threadneedle Investments—James Dearborn, head of municipal bond investments and senior portfolio manager; Chad Farrington, head of municipal bond credit research and senior portfolio manager; and Amy Roberts, head of SMA business development—to discuss impact investing strategies.
Ellis: James, Chad and Amy tell us how Columbia got into the social bond management business.
Roberts: I was working in our intermediary sales company when a client inquired about investing in our Threadneedle Social Bond strategy, which is only available to U.K. investors. I started looking for who on our U.S. team might see this idea as worthwhile and James and Chad raised their hands.
Dearborn: I lead the team that manages about $25 billion in muni bond assets for Columbia clients in mutual funds and high-net-worth accounts. We work with a team of analysts and a dedicated trading team. I’ve been in the muni industry for 30 years. I’m the lead portfolio manager on the Social Bond Fund.
Farrington: I’m co-manager of the fund and head of credit research at Columbia and that’s how I got involved, to develop the framework for implementing sustainable and impact investing.
Roberts: Several of our intermediary distribution partners gave us input into the product development process, including Jackie VanderBrug at U.S. Trust, who in turn, introduced us to Sustainalytics. Chad’s team worked closely with them to create a framework that includes the social assessments.
Ellis: When did this process begin at Columbia Threadneedle?
Roberts: The early part of 2014, and we took several months to determine with Columbia Threadneedle’s management team that there was an opportunity for us to create a differentiated product for this market.
Dearborn: My team was convinced when the manager of the Threadneedle Social Bond strategy in the U.K. told us he wished they had a muni bond market there because it’s so well suited for impact investing strategies.
We also felt that working with Sustainalytics would help us identify sectors within the muni bond market like health care and housing where we can make an impact based on the projects the fund finances, the issuers we lend money to and the communities the bonds support. We saw that we could identify good stories that were also good credits.
Based on our work to develop this fund, I think advisors need to be more proactive about using social and impact investing, not just waiting for their clients mention it. They should take the time and make the effort to know about it and have some good ideas for how to direct their clients’ assets in this area.
Ellis: Tell our readers about muni bond funding for municipal infrastructure buildout and renewal projects.
Farrington: From a public infrastructure standpoint one of the main areas of focus will be the delivery of clean water and wastewater treatment. The California drought issues are an example.
Dearborn: Aging inner-city school infrastructure K-12 is also an area of capital investment for the fund. Rebuilding public and charter schools is part of our mandate.
Farrington: We’ve identified areas of focus like energy efficiency improvements for hospitals. Retrofits for greater efficiency, water reuse and waste recovery system projects are currently in the fund as well, and we expect to find more. Using a formula developed with Sustainalytics, we grade projects from high to low impact, and expect to eventually be fairly evenly distributed across the varying levels of impact.
Dearborn: In addition, state and local governments will participate in the process for meeting the Paris COP21 carbon footprint reduction agreement guidelines. Their funding needs will play right into this fund’s wheelhouse. So it’s not just social bonds in health care, housing and education. We are including environmentally focused projects as well.
Ellis: Are you participating in the dialogue around defining the metrics for green bonds?
Dearborn: Our partner Sustainalytics is well established as a third party verifier for green bond certification. We’re happy to be part of that process and try to use a common set of standards, but are not involved in any public dialogue about what is and is not a green bond.
Farrington: Municipal bonds have typically been more difficult from a disclosure standpoint in terms of getting information. But we’re finding more issuers are getting interested in this area. The New York City Housing Development Corporation, for example, relabeled their entire program Sustainable Neighborhood Bonds to highlight areas they have always focused on but not reported on.
We can work at the grass roots level to raise the profile of these issues. I think we’re going to see these metrics become more available as the issuers recognize their importance.
Roberts: When we were interviewing social partners, our focus was on impact and how we could measure that, not the ESG metrics of issuers. Sustainalytics does our annual report, which is an iterative process. We spend a lot of time talking about what’s important to measure and issuers are starting to see the value in being more transparent about things that are part of their mission and are bringing those to the forefront.
Farrington: With that said, however, in the municipal bond market today, the process of impact ratings disclosure is practiced primarily in municipalities that have the staff resources to do it. Our fund focuses on communities that need the capital, but may not have the resources to pursue the ratings.
For us the better story is to focus capital on under-served communities, and there are enough opportunities to scale that process in the market without sacrificing return to do so.
Ellis: Can you give our advisor readers an example of stakeholder engagement within the fund’s holdings?
Dearborn: The Social Impact Report written by Sustainalytics spotlights organizations whose bonds the fund is capitalizing and describes the services the organizations provide. This allows investors to identify what their money is doing in various communities.
We own Sustainable Neighborhood Bonds issued by the New York City Housing Development Corp., which manages Arbor House in the Bronx. It’s a LEED certified, multi-use building with a hydroponic garden on the roof that provides jobs for local people and sells to markets in the city. The superintendent lives on sight and there’s a health-care facility for residents in the building. There’s a waiting list to rent in the building, which makes it a good credit risk for the fund.
We visited the building and the best part of that for me was talking to the residents about how much they care for the place. It was a powerful experience to know that our fund is supporting that community.
Ellis: How are your conversations with investors and advisors about the fund going?
Dearborn: We’ve been overwhelmed by requests from advisors and investors who understand the social impact element of our story and want to learn about the fund. It’s been great for all of us to be part of this process.
Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.