Sustainable investing has never been more popular, especially among younger investors. A new survey from Morgan Stanley finds that 75 percent of all individual investors—and 86 percent of millennials—are interested in investments that reflect their values. That has driven an enormous flow of capital into socially responsible mutual funds and ETFs, with the bulk of that inflow going to equity vehicles. As of year-end 2017, $250 billion was invested in socially responsible investment funds (SRI) and ETFs, according to Sustainable Investment.com, and bond funds accounted for only about $16 billion of that total.
While investors are growing ever more comfortable with the concept of SRI investments, most are only applying these principles to one part of their portfolios, the equity allocation. Financial advisors who serve these clients can add value by introducing them to fixed income vehicles that complement their existing sustainable holdings. Consider fixed income the “other side” of SRI.
What kind of fixed income vehicles are sustainable? There are a couple of broad categories.
One is green bonds, or fixed income investments issued by companies, states, local governments and non-governmental organizations to finance environmentally beneficial projects like renewable energy, pollution prevention and conservation. Launched about a decade ago by the World Bank and the European Investment Bank, the green bond market has grown substantially. In 2017, $160 billion in green bonds were issued, according to the Climate Bond Initiative, almost double the $82 million issued in 2016. Individuals can invest in green bonds through a number of focused mutual funds and ETFs, though some experts caution that the relatively small pool of issues available makes these funds unnecessarily concentrated and exposed to risk.
But what if your clients have other sustainability issues that are important to them beyond environmental stewardship? What if they want to have an impact on lower-income and minority neighborhoods that surround them, providing opportunity to underserved communities via market-based solutions? For them, another form of fixed income investment, known as Community Development Finance Institutions or CDFIs, may be the right option.
CDFIs link low-income communities to sources of capital that have traditionally been closed to them, providing an alternative for financing housing, business development, health centers, schools and other institutions that support growth and opportunity. CDFI loan funds offer individual investors a number of compelling benefits:
Competitive Returns: CDFI loans provide attractive yields, even in the current low interest rate environment. For instance, Boston Community Capital’s Loan Fund now offers 3 percent returns on all loans with a 5-year maturity, 23 basis points higher than a 5-year Treasury, even though our default rates are extremely low and reserve levels are high. For BCC our loan loss rate over more than three decades is less than one-half-of 1 percent and no investor has ever lost a dime.
Flexible Minimums And Maturities: Your clients can invest a lot or a little in CDFI funds, with investment minimums as low as $1000. CDFI are available in a range of maturities ranging from one- to more than five years.
Choose Carefully: Not all CDFI funds are equal. To make sure your clients have the best chance of success, you should steer them towards well-established funds with a track record for good financial performance as well as positive social impact. Look for issuers with a low default rate and a proven record for generating above-market yields. Finally, people matter. Seek out funds with experienced, capable management teams and strong partnerships with local community organizations.
Positive Impact: CDFI funds invest to make a difference in communities that need it most. For instance, the BCC Loan fund recently provided more than half the financing for a $33 million loan to revitalize the former Swift Factory in North Hartford, one of Connecticut’s poorest communities. The 82,000-square-foot North Hartford development is expected to create an estimated 225 construction jobs and 150 permanent jobs and has already secured several anchor tenants, including a producer of food products for wholesale distribution to supermarkets and other retailers, and an indoor farming company that will grow fresh produce for the region. The project will also include a community health center, shared office space for local businesses, and an incubator with kitchen space for food businesses.